Burton Howard, CFA, is an equity analyst with Maplewood Securities. Howard is preparinga research report on Confabulated Materials, SA, a publicly traded company based in Francethat complies with IFRS. As part of his analysis, Howard has assembled data gathered fromthe fi nancial statement footnotes of Confabulated’s 2009 Annual Report and from discussionswith company management. Howard is concerned about the eff ect of this information onConfabulated’s future earnings.Information about Confabulated’s investment portfolio for the years ended 31 December2008 and 2009 is presented in Exhibit 1. As part of his research, Howard is considering thepossible eff ect on reported income of Confabulated’s accounting classifi cation for fi xed incomeinvestments.EXHIBIT 1 Confabulated’s Investment Portfolio (€ Th ousands)Characteristic Bugle AG Cathay Corp Dumas SAClassifi cation Available-for-sale Held-to-maturity Held-to-maturityCost* €25,000 €40,000 €50,000Market value, 31 December 2008 29,000 38,000 54,000Market value, 31 December 2009 28,000 37,000 55,000*All securities were acquired at par value.In addition, Confabulated’s annual report discusses a transaction under which receivables weresecuritized through a special purpose entity (SPE) for Confabulated’s benefi t. 794 International Financial Statement Analysis16 . Compared to Confabulated’s reported earnings before taxes in 2009, if Bugle had beenclassifi ed as a held for trading security, the earnings before taxes (in € thousands) wouldhave been:A . the same.B . €1,000 lower.C . €3,000 higher.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Burton Howard, CFA, is an equity analyst with Maplewood Securities. Howard is preparing
a research report on Confabulated Materials, SA, a publicly traded company based in France
that complies with IFRS. As part of his analysis, Howard has assembled data gathered from
the fi nancial statement footnotes of Confabulated’s 2009 Annual Report and from discussions
with company management. Howard is concerned about the eff ect of this information on
Confabulated’s future earnings.
Information about Confabulated’s investment portfolio for the years ended 31 December
2008 and 2009 is presented in Exhibit 1. As part of his research, Howard is considering the
possible eff ect on reported income of Confabulated’s accounting classifi cation for fi xed income
investments.
EXHIBIT 1 Confabulated’s Investment Portfolio (€ Th ousands)
Characteristic Bugle AG Cathay Corp Dumas SA
Classifi cation Available-for-sale Held-to-maturity Held-to-maturity
Cost* €25,000 €40,000 €50,000
Market value, 31 December 2008 29,000 38,000 54,000
Market value, 31 December 2009 28,000 37,000 55,000
*All securities were acquired at par value.
In addition, Confabulated’s annual report discusses a transaction under which receivables were
securitized through a special purpose entity (SPE) for Confabulated’s benefi t.
794 International Financial Statement Analysis
16 . Compared to Confabulated’s reported earnings before taxes in 2009, if Bugle had been
classifi ed as a held for trading security, the earnings before taxes (in € thousands) would
have been:
A . the same.
B . €1,000 lower.
C . €3,000 higher.
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