My journey with Prof. Akintola during his Corporate Financial Accounting (CFA) Executive MBA class at the Lagos Business School has indeed been an enlightening and interesting one. Starting off with an encounter with Mr. T, and then analyzing the financial statements of large organizations, one would think I had become a financial accounting expert.
This week, we commenced work on our CFA Capstone project meant to test our knowledge of everything we had learned. The professor gave the task of analyzing and comparing the financial report of Berger Paints and Bua cement, two big players in the industrial Goods industry, with a bid to make recommendations to senior management.
Prior to the commencement of the MBA program, I could barely make sense of financial reports. Interestingly, the health of a company can be known through its financial statements. This knowledge can help potential investors decide whether to invest in the company or not as the report provides information about the company’s revenue, profitability, expenses, and debt.
In order to evaluate the performance of these businesses, we started off with a horizontal analysis of the companies. This was done by first stating the background and history of the companies and then analyzing them. The purpose of the horizontal analysis was to understand and detect the growth trends of the companies within a specified period of time.
Secondly, we embarked on the vertical analysis which is the comparison of the financial statements (the income statement, balance sheet, and cash flow statement). These statements provide information on a company’s financial performance, solvency, and liquidity.
For ease of understanding and analysis, the first step on the financial statements is to create common-size statements of the balance sheet, income statement and cash flow statement. In the common-sized statements, each item value is listed as a percentage of the overall value.
On the balance sheet, to show the relative importance and diversity of assets, each item is listed as a percentage of the overall asset. Every expense and income on the income statement could be broken down into a percentage of the overall income. This demonstrates how each type of revenue contributes to the total and the diversification of income. It illustrates the impact of each item on overall revenue or the amount of income required to cover each expense. Each cash flow can be reported on the cash flow statement as a percentage of the overall positive cash flows, demonstrating once more the relative importance and diversity of the sources of cash as well as the proportional weight of each cash usage.
It is important to note that these statements are related. For instance, changes in the income statement and cash flow statements are represented on the balance sheet because they have an impact on the asset values, debt values, and net worth through profits, costs, and other cash flows. A negative cash flow may result in an increase in assets since funds may be used to buy assets. A negative cash flow may reduce liabilities since money may be used to pay down debt. A decrease in assets may result in positive cash flow since cash may be received when an asset is sold. As money is borrowed, cash may be received, hence an increase in liabilities can result in a positive cash flow.
Finally, we did a ratio analysis and comparison on some of the key components of their financial statements. These financial ratios such as the “Net income Margin”, “Return on Asset”, and “Cash Flow to Income”; made us understand how much income is being used up by the expense, if and how big the assets are being supported by the income and how much income to use for investing and financing.
This exercise was very tedious, eye-opening, and practical. It will surely help inform my decisions in the future.
The CFA Capstone ProjectMy journey with Prof. Akintola during his Corporate Financial Accounting (CFA) Executive MBA class at the Lagos Business School has indeed been an enlightening and interesting one. Starting off with an encounter with Mr. T, and then analyzing the financial statements of large organizations, one would think I had become a financial accounting expert.
This week we commenced work on our CFA Capstone project meant to test our knowledge of everything we had learned thus far. The professor gave the task of analyzing and comparing the financial report of Berger Paints and Bua cement, two big players in the industrial Goods industry, with a bid to make recommendations to senior management.
Prior to the commencement of the MBA program, I could barely make sense of financial reports. Interestingly, the health of a company can be known through its financial statements. This knowledge can help potential investors decide whether to invest in the company or not as the report provides information about the company’s revenue, profitability, expenses, and debt.
In order to evaluate the performance of these businesses, we started off with a horizontal analysis of the companies. This was done by first stating the background and history of the companies and then analyzing them. The purpose of the horizontal analysis was to understand and detect the growth trends of the companies within a specified period of time.
Secondly, we embarked on the vertical analysis which is the comparison of the financial statements (the income statement, balance sheet, and cash flow statement). These statements provide information on a company’s financial performance, solvency, and liquidity.
For ease of understanding and analysis, the first step on the financial statements is to create common-size statements of the balance sheet, income statement and cash flow statement. In the common-sized statements, each item value is listed as a percentage of the overall value.
On the balance sheet, to show the relative importance and diversity of assets, each item is listed as a percentage of the overall asset. Every expense and income on the income statement could be broken down into a percentage of the overall income. This demonstrates how each type of revenue contributes to the total and the diversification of income. It illustrates the impact of each item on overall revenue or the amount of income required to cover each expense. Each cash flow can be reported on the cash flow statement as a percentage of the overall positive cash flows, demonstrating once more the relative importance and diversity of the sources of cash as well as the proportional weight of each cash usage.
It is important to note that these statements are related. For instance, changes in the income statement and cash flow statements are represented on the balance sheet because they have an impact on the asset values, debt values, and net worth through profits, costs, and other cash flows. A negative cash flow may result in an increase in assets since funds may be used to buy assets. A negative cash flow may reduce liabilities since money may be used to pay down debt. A decrease in assets may result in positive cash flow since cash may be received when an asset is sold. As money is borrowed, cash may be received, hence an increase in liabilities can result in a positive cash flow.
Finally, we did a ratio analysis and comparison on some of the key components of their financial statements. These financial ratios such as the “Net income Margin”, “Return on Asset”, and “Cash Flow to Income”; made us understand how much income is being used up by the expense, if and how big the assets are being supported by the income and how much income to use for investing and financing.
This exercise was very tedious, eye-opening, and practical. It will surely help inform my decisions in the future.
