King’s Fund - 13 January 2011 Dr. Tom Kirchmaier Manchester Business School

King’s Fund - 13 January 2011
Dr. Tom Kirchmaier
Manchester Business School
& Financial Markets Group
London School of Economics
• Learn how to use the information provided in
financial statements.
• Gain confidence in dealing with Finance
professionals on your board.
… and what not to expect:
• Become an accountant.
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(Your) Role on the Board
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Role of the Board
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Functioning of the Board
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Accounts provide a large
amount of independent
information about the
performance of any
organisation
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You don’t have to be an accountant to:
•
use accounts as a source of information
•
identify some underlying trends
•
get pointers for interesting questions
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How the accounts are presented to
you will determine how much you
can read out of it!
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1.
Balance Sheet

2.
Income Statement

3.
Also Profit and Loss Statement (P&L). Shows the profitability of the trust
Statement of Retained Earnings

4.
Shows the financial position of the trust
Shows the financial ‘buffer’ of the trust
Cash-flow Statement

Shows the cash position of the trust divided by operating, investing, and
financing activities
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
Shows the financial position of the trust at a point in time

Assets = Liabilities + Equity
The liabilities and equity sections show where the business gets its funds from while
the assets section shows how those funds have been used
 Long Term Assets
Requires careful monitoring as wrong long term investment may negatively affect organisation for
many year
 Debt and Equity
Main sources of funding
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ASSETS
Long term asset
•
Long term investments
•
Other intangibles
•
Property, plant and equipment
Current assets
•
Cash
•
Short term investments
•
Accounts receivables
•
Inventories
•
Other Current Assets
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LIABILITIES
Long term liabilities
•
•
Long term debt (due after one year)
Provisions
Current Liabilities
•
•
•
Short- term debt (due within one yr)
Accounts payables
Accrued expenses
Taxpayer’s EQUITY
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• Measures the profitability of the trust:
Income (Recognised when the product is delivered, not when the cash is
actually received)
./. Costs
1.
2.
Operating costs
Interest expenses - cost of financing the business
= Profit / Net income / Surplus (deficit) for the financial
year
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• Key indicators of profitability
1. EBIT (Earning Before Interest and Tax)
2. EBITDA (Earnings Before Interest, Tax,
Depreciation and Amortisation)
3. Net Income (Surplus (deficit))
Comparing financial performance
•
•
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To compare the performance (of all organisations), you
divide the surplus for the financial year through
equity.
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Total income
=
Operating costs
OPERATING PROFIT
+ Interest income / expense
=
SURPLUS / (DEFICT)
- Public Dividend Capital dividends
=
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RETAINED SURPLUS/(DEFICIT)
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What questions would you ask in this case?
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