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«Executive finance and strategy»

Links between published financial statements and financial strategyIncome statement - the P&L accountCash flow reports - illustrationEnhancing qualitative characteristicsRevision and learning pointersFuture developmentsMission statementsContent, order and logic of this chapterRecognition of assetsContent, order and logic of this chapterLeases where the lessee consumes or uses up part of the underlying asset (Type A leases)Accruals concept - a fundamental conceptAphorismsWhat underpins financial statements?Links between management accounting and financial strategyDepreciation costs are includedExample BAssetsExternal ratiosException reportingCosting models - definitionsWhat is meant by 'sensitive' - what levels of sensitivity can be tolerated?Structure of the chaptersSunk costsOrder and logicContent, order and logic of this chapterIFRS 12 Disclosure of Interests in Other EntitiesNon-discounted methods - accounting rate of return, ROCE or ROIExample CComparabilityOvertradingInvestment appraisal. Investment strategyOrder and logicInternal rate of return (IRR) or DCF yieldHow does management accounting support strategy?The dual approachEBITDALeasing and off-balance sheet financeCriteriaLeases where the lessee pays for the use of the underlying asset (Type B leases)Examples of published income statementsCash: the vital elementSubstance over formCosting models - costing to calculate full costsValuesCommon types of modelsAn incremental approachLinks between cash and financial strategyReporting overheads - overhead analysisGroup structuresOrder and logicMeasurement of the elements of financial statementsWorking capital ratiosMissionAn arithmetical proof of a high-return strategyMore detailed analysis is requiredLinks between investment and financial strategyStatement of cash flowsMateriality and relative amountsRisk identification and managementSales and costing definitions and modelsThere is no such thing as 'just a figure'Cash flow modelsThe difference between 'forecast' and 'budget'Methods of forecastingCash flow forecastsLower capital employed strategy - 'cheap is good!'MaterialityExample A - XYZ picConsidering relationships - analytical reviewRevision and learning pointersWhat do successful companies say?Foreign currency issuesWhy have accounting records? Why bother with bookkeeping?Time baseWhat extant accounting standards requireCreative accounting/aggressive accountingHow much analysis should be carried out?Budget modelsCorporate governance covers much more than ethicsTechniques for interpreting financial statementsOrder and logicFinancialPrudence and strategiesLinks between interpretation and financial strategyLinks between financial statements and strategyBasic financial reports and conceptsUK company law requirementsWhat is strategy? What does financial strategy mean?Going concern - a fundamental concept, also termed an underlying assumptionFuture reporting'One at a time' approachRecord keeping/bookkeepingMarket to book ratioLong-term views are encouragedThe wide scope of management accountingExamples of company cash flows and how they relate to strategiesRevenueStatement of financial position -the balance sheetContent, order and logic of this chapterLiabilitiesDividend coverTime value of moneySo how does all of this affect financial strategy?Objective of the standardOther UK company law that has a bearing on financial strategiesExpenses/costs/purchases/overheadsThe need for a consistent and robust processOrder and logicContent, order and logic of this chapterExternal auditThe strategic reportNon-discounted methods - paybackLogic and orderRevision and learning pointersGAAP, which may cause issues with strategiesCommentaryIn favour of purchasingRevision and learning pointersAcquisition 'run-out' strategyContent, order and logic of this chapterWhat successful companies sayWhere do budget objectives come from?Gearing or leverage ratiosThe pyramid of ratiosBudget cultureYou cannot do what you likeRecognition of incomeGLOSSARYOrder and logicNet present value (NPV) or present worthCapital cash flowsOperating activitiesGoing concern - a fundamental concept, also termed an underlying assumptionBudget reportsRevision and learning pointersLinks between the book's chapters and strategiesStructural or pure financial strategiesThe many uses of appraisal models(e) ModellingWhat does budgeting mean?Making a good return is the objective, but what exactly is ROI?Are your strategies co-coordinated and aligned?Random eventsIn favour of leasingBasic definitionsInterests in joint arrangements and associatesIncome/sales/revenueFinally, does ZBB work?Modelling the futureContent, order and logic of this chapterModelling operational structure, particularly costsManagement accounting. Internal reports and business modelsMethods of budgetingInterests in subsidiariesInvest and sell on a promise strategy - beauty is in the eye of the beholder (or the deceived or delusional!)Order of the chaptersCharts and graphsGoing concernNo need for provisions or contingenciesPublished or statutory accountsForecasting methodsPurpose of financial statements(d) Leading indicatorsProject appraisal - an integrated approachRatios - presenting one figure relative to anotherAlignSale and leasebackComparisons with past or budgeted performance or positionHedging strategiesAnalytics - can there be too much analysis?Revision and learning pointersBudgetingDevelopments in financial reportingTacticRecognition and measurementFinancing activitiesA checklist to assist with making clear, actionable reportsPublished statements of cash flowManagement reports - to assist with understanding strategy and its deliveryWhy budget?What (discount) rate should be used?InsolvencyFinancial position - the balance sheetDividends per share (DPS)Worked exampleIncome statements and other comprehensive incomeKPIs, dashboards and detailed analysisAutomating the interpretation - intelligent interpretationBudget stagesThe objective or purpose of financial statementsComparisons with external benchmarksTrading strategy - acquire and dispose of companiesEarnings per share (EPS)Weaknesses of traditional budgeting and how ZBB differsWhy we have to disclose ratiosWhat is meant by 'rate'?Determining controlOrder and logicThe simple truths from the tablesFinancial strategy. Why be in business?The acquisition strategy - investing cash, or better still little or no cash but rather issuing shares, to acquire businesses which may be a bargain or which you can turn aroundGross profitBackground to accounting standardsThe need for the most likely caseCosting models - costing for planningIncome statements - P&L accounts(c) Extrapolation methodsTheir place in financial statementsSources of fundsContent, order and logic of this chapterWhere cash appears in financial statementsReview question - interpreting P&L account profilesInitial measurementEarnings yield and dividend yieldThe ideas, customs, and social behaviour of a particular people or societyThe time value of money and required ratesValuing propertiesWhat is business strategy?Logic and orderLessee accounting - basic approachThe need for investment appraisalThe statement of cash flows - the three views of business cashThe academic 'accounting framework' definitionsThe structure of a statement of cash flowGoalNPV or IRR - which should be used?Zero-based budgetingInterests in unconsolidated structured entitiesUK full financial statementsFinancial position - the balance sheetContent, order and logic of this chapterFurther strategy-related definitionsHow you might use this bookAssessing control - investor assessmentOther reasons for internal controlWhat does the BT pic cash flow statement tell us?How does making a return on investment link with strategy?Notes to financial statementsPrudenceThe capital investment strategy - invest for a longer-term returnOrder and logicObjective(s)Appropriate design of reports is importantTargetWhat is the 'magic' of gearing?Cost of salesFurther considerationsExternal and internal audit - prevention of error and fraudSubstance over formHigher sales/volume strategyAnalytical reviewArithmetic of appraisal - discounting cash flowsThe extractive strategy(f) Guaranteeing the figuresWhy the emphasis on 'useful in making economic decisions'?Bookkeeping examplesAccounting 'rules'. How accounting theory and rules affect the strategic numbersAlternative balance sheet layoutsWhat is the objective of financial strategy?Interpreting financial statementsMore practicePrincipal accounting concepts -going concern and accrualsPrice to earnings ratio (P/E ratio)Lower margin/higher sales volume strategyWhy be in business?The mundane money-making strategy -cash generation for everNeed for a defined modelCompany law and directors' responsibilitiesStrategyLease versus buy(a) Incremental budgetingLeasesUses of analytical reviewsIAS 7 Statement of cash flowsCompletenessVisionCash-flow-focused strategiesBalance sheets - statements of financial positionCash flows for trading - working capitalInvesting activitiesAccounting systemsAsset lightLiabilitiesInterpreting financial statementsContent, order and logic of this chapterLife-cycle costing/whole-life costing strategyLinks with strategyWhy does the management report exist?Terminology used in this bookInsolvency - going concern - overtradingHow to budgetOrder and logicUnderstandability (this word does not pass spell checkers!) and the existence of accounting phenomenaProblems in implementing a ZBB systemCash flow modelsRevision and learning pointersCautionary words on modellingCompounding and discountingThe probability of future economic benefitLinked parametersContent, order and logic of this chapterA simple balance sheet and a layout used for management purposesStrategicCurrent ratioSensitivity analysisCommon errors in appraisal cash flowHow the concepts impact on the figures (and restrain some behaviour)Special purpose vehicles or entities -off-balance sheet activities'Reading' the balance sheetHow might materiality impinge on strategy?Recognition of liabilitiesOrder and logicInternal controlsFurther Companies Act 2006 sections of which executives should be awareCorporate governanceAsset strippingRevision and learning pointersRevision and learning pointersInterest and loan repayment are includedCommon appraisal measuresWhat do GAAP, FASB, IASB and IFRS mean?EquityEquityA food producer and an engineering companyBedrock conceptsThe attitudes and behaviour characteristic of a particular social groupRatio analysisWhat do balance sheets reveal about a business?Content, order and logic of this chapterThe importance of cash records and reportsShare valuesInternal controls - accounting systems and procedures - prevention of error and fraudCompany law requirements re storage and access to recordsThe base modelAccruals or matching conceptGearing or leverage and the 'magic' of gearing(b) Researching Definitions of 'financial', 'strategy' and 'strategic'Why have detailed internal management reports?BT plc Group balance sheetStrategic drivers of ROIHigh gearing strategyLiquidity ratio/quick ratio/acid test ratioMotiveA higher margin (selling price)/lower operating cost strategyHow you might forecastRecognition of expensesAssetsAudit functionCost of capital
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