Category: Balance Sheet

In this study to analyze the comparative balance sheet of Indian bank. A study to show the effect on increase of decrease of the balance sheet to compare with the previous and current year balance sheet. In this statement the various aspect of the balance sheet to effect changes was show in this study. The bank assets position for post three year the bank and whether the bank financial position is good.

Introduction

A comparative balance sheet usually has two columns of amounts that appear to the right of the account titles or other descriptions such as Cash and Cash Equivalents, Accounts Receivable, Accounts Payable, etc. The first column of amounts contains the amounts as of a recent moment or point in time. To the right will be a column containing corresponding amounts from an earlier date of the march month. The older amounts appear further from the account titles or descriptions as their amounts are important.

Review of Literature

Dr. Shivubhai C. Vala (2011) ‘A Comparative Study Of Profitability Vis-À-Vis Liquidity The Milk Co-Operative Dairy Of Gujarat State’. This research study is aimed for the finding out the performance and efficient level of the co-operative dairy and milk supply units in Gujarat State and also profitability and liquidity are the basic requirements for the survival of an enterprise and for the prosperity of employees and for the welfare of the customers and the society at large and also for the development of the economy.

Dr. Bhavsinh Dodiya (2012) has written an article on ‘Analysis of Liquidity in Indian Car Industry of Selected Companies’, which was published in Research Expointernational Multidisciplinary Research Journal in June -2012. He analyze liquidity and financial efficiency by using various ratios of the selected automobile companies.

Cunningham, Gandhara Ofswat & Peshwar (2016) also conducted a study on comparative financial statement and suggest the produces much sugarcane of which they make stone honey. He mentioned that, “Punjab (Pounatch) produces much sugarcane but no grapes”. He wrote: “This place harvests a large quantity of rice and some sugarcane”.

Research Methodology

Objectives of the Study:

• To study an comparative statement of balance sheet.
• To analyze the financial position of the bank.
• To analyze the performance of the bank with respect of assets and liability and capital.

Scope of the Study

Indian bank is located at Vadivaikal street Mahamaham branch at Kumbakonam.

Limitation of the Study

• Sources of funds was very limited.
• Customer rate of return was very lower level.

Analysis and Interpretation

As a result of the analysis and interpretation of the data, it was revealed that 2017-2018 to come fixed assets the position 2017 rather than increased to 2018.

Suggestion and Conclusion

The bank liquidity position is very high but borrowing and out flow of the cash is very high so the bank in future to maintain the good financial performance. In 2016 the shareholders fund is average the current liability potion is increase fixed assets is normal. liquidity position re change for previous year so the bank to concentrated with bank financial position.

References

1. https://www.accountingcoach.com/blog/what-is-a-comparative-balance-sheet
2. http://shodhganga.inflibnet.ac.in/bitstream/10603/71556/9/09_chapter%202.pdf
3. http://shodhganga.inflibnet.ac.in/bitstream/10603/44157/12/12_chapter%203.pdf

In this essay we’ll be deconstructing what a balance sheet is, and how to make and maintain your own.

There are three essential components that need to be listed on a balance sheet: assets, liabilities, and owner’s equity. Assets refer to what your business owns and their financial worth. Conversely, liabilities are what your business owes and how much. Finally, owner’s equity reflects the financial investments of yourself and any business partners you may have. This may all seem simple enough, but it can be difficult to know exactly what to write down on a sheet and how to categorize it. Moving through the categories one-by-one, you’ll learn exactly how to format your balance sheet.

Assets

Assets should always be listed first on your balance sheet.

1. Business’ cash account. Most businesses have cash on hand either to facilitate day-to-day transactions (any business with a storefront, for example) or they have cash on hand for emergency scenarios or situations where other forms of currency simply won’t suffice.
2. Accounts receivable, which is money owed to you by customers and clients. Obviously, this number will always be in-flux as you receive money from these individuals, or they accrue even higher debts with your business. The number reflected on you report is only expected to be accurate for the day it was created and by no means do you need to keep it up-to-date on a daily basis.
3. Inventory – the current value of the products you sell based on their market value and the quantity you possess.
4. Fixed assets are things your business owns and uses for operation including land, buildings, vehicles, and equipment. The nature of fixed assets is that they are generally big-ticket items; you don’t need to list every pencil and sheet of paper your company owns. Keep in mind that fixed assets generally depreciate over time. You can’t expect a company vehicle to hold the same value after several years of use, after all.

All of your assets will be totaled, which is the total value of everything your business owns.

Liabilities

This category is far less pleasurable to tally up than the previous one but still utterly necessary.

1. Accounts payable – the polar opposite of accounts receivable. It represents short-term debts you have with any suppliers or manufacturers you work with. Much like accounts payable, these fluctuate frequently are only expected to be accurate as of the day you publish your balance sheet.
2. The total amount of loans you’ve taken out. Unlike accounts payable, these are long-term debts, often from a bank that last for more than a year. Many businesses use loans to stay afloat or to accommodate expansion.

Equity

Equity is listed in the same category as liabilities as it is money invested into the business. It shows how much money has been invested by the owner as well as any other investors with a stake in the company. Both liabilities and equity are summed up. If the numbers are not balanced, then your balance sheet is not correct.

Balance sheet method is an approach used by salesperson to gain commitment from consumers by telling them to think the pros and cons of all alternative available. It is also called Ben Franklin Method.

Make two columns. List all the pros of the alternative in one column and all the cons in another. Then two conditions will arise:

1. Any one column will become longer than the other so that will clearly imply if pros of the alternative is more or cons accordingly the consumer can take the decision if he should go for that alternative or not.
2. If two columns are of same length then the list will help the consumer to become more familiar with the advantages and disadvantages of the alternatives available.

This will help consumers to get a clear picture of all the alternatives and help them to choose better alternative.

Working Process

First of all, make two columns and list all the pros and cons of the alternative in respective columns. Once the list is complete, analyse the list and give weightage to each item. Then compare the items in pros and cons with the same weightage. Strike out the items with the same weightage. After that remove from the list all items where one pro would equal in weight two cons. That eliminated three items. Then repeat the same in reverse way by removing all items where two cons equal three pros. That eliminated five more items. This process reduces the size of the list to manageable one and makes the decision making easier.

Advantages and Disadvantages

The main advantage of the balance sheet method is that decision making becomes easier because the outputs are clear. However, this method also has several disadvantages, including:

• Consumers might not be able to cover all pros and cons of an alternative; some of them might be missed.
• the process sometimes become cumbersome and confusing.
• time consuming process.

Example

Let’s consider a situation: Should I buy a car?

• Pros: saving money in long term; saving time in long term; convenience in going to distant places; more people can go at a time; can be used for commercial purposes.

  Cons: big upfront cost; maintenance and insurance; may not be used regularly; high monthly instalments.

Then give weightage to each item. After striking out the items with same weightage we can clearly see that the pros of buying a car outweigh cons of buying. So, the decision should be with buying a new car.

Question: 1

The introduction:

Treasury operation:

Everyone can recognize many of the businesses that operate around them providing goods and services for their needs. But most people are not familiar with what goes on behind the scenes in order for those businesses to function.

When discussing the treasury operations of a company, we are really talking about the ability of a company to pay its bills and to have the funds to support its operations and make the investments in assets necessary to grow the business. The treasurer is the person that has the responsibility to make sure that there is cash available to do the things that the company has planned.

As companies sell products and services, they generate revenue. This revenue is turned into cash. One of the primary roles of the treasurer is to have ready sources available where they can invest this cash short term in order to generate some interest income.

Businesses are not paid interest for cash that just sits in their checking accounts. Say Mike is a treasurer. If he can take this money and generate interest income until that cash is needed to pay bills, he can often add several percentage points of profit to the bottom line of the business.

Concepts and application:

The best practices in treasury operation with respect to cash holdings:

Treasuries are the custodians of cash in a business, they control this through 1) the amount held and 2) its liquidity. The two levers of this are through the sheer size of the balance sheet and the relative stickiness (liquidity) of assets and liabilities held. Their management of this enables the basic fundamentals of an organization: allowing teams to operate and conduct activities by ensuring that there is cash on hand, be it in the petty cash box or an opportunistic M&A raid.

In addition to enabling business-as-usual (BAU) activities, treasuries partake in the macro-financial direction of a company and oversee the execution of company-wide strategies. For example, if the board decides to buy a business or expand into new territories, Treasury will help to determine the fit of the company from a balance sheet perspective and find the cash (or issue stock) to purchase it ultimately.

Funds Transfer Pricing (FTP):

Treasuries are mini-banks for their own companies (or banks) and must price up the liabilities on hand for use in everyday asset-generating activities. The FTP reflects the cost of liabilities and is charged to a business unit when it wishes to originate a new asset. Unlike the widely-known cost of debt figure, which can be represented as a standalone loan or benchmark bond yield, the FTP represents a fully-loaded cost. By that, I mean that it is the overall weighted average cost of all liabilities plus the internally shared costs of the business minus treasury profit.

Trading and hedging:

The responsibilities of hedging company-wide interest rate and FX risk sits with the treasury function, who will use derivatives to balance the books. Depending on the sophistication of the business, these risk management strategies can range up from FX spot trades to long-term interest rate swaps.

Treasury Management Best Practices

1. Structure and Compensation:

Starting right at the top, a business must place its treasury in the correct area of the organization. An effective team must be:

• Impartial: Not allied or biased toward any commercial area of the business
• Empowered: Both in terms of human and capital resources and flexibility to “roam”
• Incentivized: In the absence of being a profit center, team members must have quantifiable goals.

Too many companies fail by having treasuries as operational offshoots of teams like accounting, working out of a back cupboard in the suburbs. Instead, they should report to the CFO directly and be relied upon as lieutenants in the business for their insight into the balance sheet. Similarly, all roles and functions should be contained within the same team. Trying to create a “cloud team” with roles scattered among the company will ultimately result in crossed wires and less effectiveness.

2. Get FTP Right:

Costing up a balance sheet is an arduous task and one that can become difficult if there is a high turnover of items and/or weak IT treasury management systems. Getting it right, though, will ensure that new business activities using the balance sheet are value-additive by ensuring that the mentality of fully-loaded margin is the minds of business units.

3. Communicate Effectively:

As the ears to the financial markets and the straddles of the balance sheet, the treasury management function is an important news source for the company. It should translate macroeconomic events into resultant risks, or conversely, opportunities.

Reporting the cash position of a business is a vital end-of-day reporting task, but it should not stop there. Reporting to the executive committee should be communicated in a concise manner, and not just a dump of mundane reports.

The conclusion:

Treasury Management also important from a performance mind-set to get compensation and incentives right. This comes optically from how the team is created and to literally where they are seated in the office. Treasuries interface externally, and thus must project confidence and the corporate image to external parties.

Because the team is not a profit centre (profits flow to the central company entity), there can be perverse incentives. For example, taking an ultra-high-risk policy of raising long-dated cash and lending it out short term is not a commercially sound practice, outside of severe market stress. But, if the treasury team is not incentivized, they may indeed take this option, because it’s safe and they will get paid regardless. Equally so, because the P&L is just swallowed by the company and performance is not related to it, this can lead to best execution policies going out the door.

Establishing suitable and compelling incentives for treasury staff reduces agency costs. I believe that variable compensation related to FTP movement is an interesting tool for measuring holistic team performance. Too many companies fail by having treasuries as operational offshoots of teams like accounting, working out of a back cupboard in the suburbs.

Question: 2

The introduction:

Foreign exchange:

Foreign Exchange (forex or FX) is the trading of one currency for another. For example, one can swap the U.S. dollar for the euro. Foreign exchange transactions can take place on the foreign exchange market, also known as the Forex Market.

The forex market is the largest, most liquid market in the world, with trillions of dollars changing hands every day. There is no centralized location, rather the forex market is an electronic network of banks, brokers, institutions, and individual traders (mostly trading through brokers or banks).

Key features:

• Foreign Exchange (forex or FX) is a global market for exchanging national currencies with one another.
• Foreign exchange venues comprise the largest securities market in the world by nominal value, with trillions of dollars changing hands each day.
• Foreign exchange trading utilizes currency pairs, priced in terms of one versus the other.
• Forwards and futures are another way to participate in the forex market.

The market is open 24 hours a day, five days a week across major financial centres across the globe. This means that you can buy or sell currencies at any time during the day.

The foreign exchange market isn’t exactly a one-stop shop. There are a whole variety of different avenues that an investor can go through in order to execute forex trades. You can go through different dealers or through different financial centers which use a host of electronic networks.

Concepts and application:

A short report on various exposures Sneha would be facing while handling foreign exchange transactions:

Foreign exchange exposure is said to exist for a business or a firm when the value of its future cash flows is dependent on the value of foreign currency / currencies. If a British firm sells products to a US Firm, cash inflow of British firm is exposed to foreign exchange and in a case of the US based firm cash outflow is exposed to foreign exchange. Why we are so sceptical about this exposure? Simple! It is because the exchange rates tend to change or fluctuate.

A firm has transaction exposure/ short-term exposure whenever it has contractual cash flows (receivables and payables) whose values are subject to unanticipated changes in exchange rates due to a contract being denominated in a foreign currency. A firm has economic exposure/ long-term exposure to the degree that its market value is influenced by unexpected exchange rate fluctuations. Such exchange rate adjustments can severely affect the firm’s position with regards to its competitors, the firm’s future cash flows, and the firm’s value. A firm’s translation exposure is the extent to which its financial reporting is affected by exchange rate movements.

Foreign Exchange Work:

The market determines the value, also known as an exchange rate, of the majority of currencies. Foreign exchange can be as simple as changing one currency for another at a local bank. It can also involve trading currency on the foreign exchange market. For example, a trader is betting a central bank will ease or tighten monetary policy and that one currency will strengthen versus the other.

Transaction exposure:

The simplest kind of foreign currency exposure which anybody can easily think of is transaction exposure. As the name itself suggests, this exposure pertains to the exposure due to an actual transaction taking place in business involving foreign currency. In a business, all monetary transactions are meant for profits as its end result. There are all the chances of that final objective getting hampered if it is a foreign currency transaction and the currency market moves towards the unfavorable direction.

Translation exposure:

This exposure is also well known as accounting exposure. It is because the exposure is due to the translation of books of accounts into the home currency. Translation activity is carried out on account of reporting the books to the shareholders or legal bodies. It makes sense also as the translated financial statements show the position of the company as on a date in its home currency.

Economic exposure:

The impact and importance of this type of exposure are much higher compared to the other two. Economic exposure directly impacts the value of a firm. That means, the value of the firm is influenced by the foreign exchange.

The value of a firm is the function of operating cash flows and the assets it possesses. The economic exposure can have bearings on assets as well as operating cash flows. Identification and measuring of this exposure is a difficult task. Although, the asset exposure is still measurable and visible in books but the operating exposure has links to various factors such as competitiveness, entry barriers, etc which are quite subjective and interpretation of different experts may be different.

The conclusion:

Foreign exchange (Forex or FX) is the conversion of one currency into another at a specific rate known as the foreign exchange rate. The conversion rates for almost all currencies are constantly floating as they are driven by the market forces of supply and demand.

There are some fundamental differences between foreign exchange and other markets. First of all, there are fewer rules, which means investors aren’t held to as strict standards or regulations as those in the stock, futures or options markets. That means there are no clearing houses and no central bodies that oversee the forex market.

Many factors can potentially influence the market forces behind foreign exchange rates. The factors include various economic, political, and even psychological conditions. The economic factors include a government’s economic policies, trade balances, inflation, and economic growth outlook.

Political conditions also exert a significant impact on the forex rate, as events such as political instability and political conflicts may negatively affect the strength of a currency. The psychology of forex market participants can also influence exchange rates.

The most traded currencies in the world are the United States dollar, Euro, Japanese yen, British pound, and Australian dollar. The US dollar remains the key currency, accounting for more than 87% of total daily value traded.

Question: 3(a)

The introduction:

Asset liability management:

Asset Liability Management (ALM) can be defined as a mechanism to address the risk faced by a bank due to a mismatch between assets and liabilities either due to liquidity or changes in interest rates. Liquidity is an institution’s ability to meet its liabilities either by borrowing or converting assets. Apart from liquidity, a bank may also have a mismatch due to changes in interest rates as banks typically tend to borrow short term (fixed or floating) and lend long term (fixed or floating).

A comprehensive ALM policy framework focuses on bank profitability and long-term viability by targeting the net interest margin (NIM) ratio and Net Economic Value (NEV), subject to balance sheet constraints. Significant among these constraints are maintaining credit quality, meeting liquidity needs and obtaining sufficient capital.

Concepts and application:

Importance of Asset liability management:

Implementing ALM frameworks can provide benefits for many organizations, as it is important for organizations to fully understand their assets and liabilities. One of the benefits of implementing ALM is that an institution can manage its liabilities strategically to better prepare itself for future uncertainties.

Using ALM frameworks allows an institution to recognize and quantify the risks present on its balance sheet and reduce risks resulting from a mismatch of assets and liabilities. By strategically matching assets and liabilities, financial institutions can achieve greater efficiency and profitability while reducing risk.

The downsides of ALM involve the challenges associated with implementing a proper framework. Due to the immense differences between different organizations, there is no general framework that can apply to all organizations. Therefore, companies would need to design a unique ALM framework to capture specific objectives, risk levels, and regulatory constraints.

Also, ALM is a long-term strategy that involves forward-looking projections and datasets. The information may not be readily accessible to all organizations, and even if available, it must be transformed into quantifiable mathematical measures.

Finally, ALM is a coordinated process that oversees an organization’s entire balance sheet. It involves coordination between many different departments, which can be challenging and time-consuming.

At its core, asset and liability management is a way for financial institutions to address risks resulting from a mismatch of assets and liabilities. Most often, the mismatches are a result of changes to the financial landscape, such as changing interest rates or liquidity requirements.

A full ALM framework focuses on long-term stability and profitability by maintaining liquidity requirements, managing credit quality, and ensuring enough operating capital.

The conclusion:

An insightful view of ALM is that it simply combines portfolio management techniques (that is, asset, liability and spread management) into a coordinated process. Thus, the central theme of ALM is the coordinated – and not piecemeal – management of a bank’s entire balance sheet. Although ALM is not a relatively new planning tool, it has evolved from the simple idea of maturity-matching of assets and liabilities across various time horizons into a framework that includes sophisticated concepts such as duration matching, variable rate pricing, and the use of static and dynamic simulation.

Question: 3(b)

The introduction:

ALM Technique:

Asset liability management (ALM) can be defined as the comprehensive and dynamic framework for measuring, monitoring and managing the financial risks associated with changing interest rates, foreign exchange rates and other factors that can affect the organisation’s liquidity. ALM relates to management of structure of balance sheet (liabilities and assets) in such a way that the net earnings from interest is maximised within the overall risk-preference (present and future) of the institutions.

Thus the ALM functions includes the tools adopted to mitigating liquidly risk, management of interest rate risk / market risk and trading risk management. In short, ALM is the sum of the financial risk management of any financial institution.

Concepts and application:

ALM Technique used in banks:

ALM is Standard Practice:

Liability management is not new, and at one time was just a theory, but it is now standard practice. Banks began to practice strategies of asset liabilities management in the 1960s by offering negotiable certificates of deposit, or CDs. Banks were then able to sell the CDs into the secondary market in order to raise additional capital.

In this sense, liability management goes all the way back to the U.S.’s first secretary of the Treasury, Alexander Hamilton, who had the U.S. assume all the debt from the Revolutionary War and then to resell the debt mainly to U.S. speculators. Promising a good rate on return, Hamilton then used the proceeds from selling shares of the debt to finance the new U.S. government.

Balance Sheet Management:

Balance sheet management is very important in a business sense; that is, without proper management of assets and liabilities, a financial institution would cease to exist. Banks, and other financial institutions, have the added burden regarding the fact that their assets and liabilities are essentially moving targets. That is, if banks have to suddenly pay more to borrow money, which as noted generally involves short-term loans, then their liabilities would increase markedly in comparison to their assets, mainly the outstanding loans on which they are collecting interest from borrowers.

But balance sheet management also has an important regulatory definition. Balance sheet management covers ‘regulatory policy for investment securities, Bank-Owned Life Insurance (BOLI), liquidity risk, and interest rate risk for national banks, as well as the assessment of interest rate risk and liquidity risk for the national banking system as a whole,’ according to the U.S. Treasury Department, which sets standards and rules for balance sheet management.

The conclusion:

ALM is a systematic approach that attempts to provide a degree of protection to the risk arising out of the asset/liability mismatch. ALM consists of a framework to define, measure, monitor, modify and manage liquidity and interest rate risk. It is not always possible for financial institutions to restructure the asset and liability mix directly to manage asset/liability GAPs. Hence, off-balance sheet strategies such as interest rate swaps, options, futures, caps, floors, forward rate agreements, stations, and so on, can be used to create synthetic hedges to manage asset/ liability GAPs. In order to enhance the loss in profitability due to such developments, financial institutions may be forced to deliberately mismatch asset/liability maturities in order to generate higher spreads.

a) Why could the new accounting standard trigger debt covenants (that is, create a technical default)?

Accounting standard can be alluded to as a typical arrangement of norms and standards or the strategies that plot the premise of the bookkeeping exercises and approaches.

Organizations with enormous armadas need to take a gander at the genuine effect on their business, composes Alexandra Cain. 10 years after the thought was proposed, it’s presumable another bookkeeping standard will expect organizations to perceive working rents on asset reports. Under existing bookkeeping norms, working leases are most certainly not recorded on asset reports. Welcoming these leases on asset report could trigger obligation contracts for associations with countless rented vehicles. This is on the grounds that welcoming working leases on monetary record could increment a business’ liabilities far beyond levels concurred with loan specialists.

Not at all like account rent contracts, under which responsibility for resource is moved to the resident toward the finish of the term, toward the finish of a working lease proprietorship stays with the lessor. Precisely how a working lease ought to be perceived on a accounting report is precarious, given the association that takes out the rent doesn’t really possess the advantage. The International Accounting Standards Board is relied upon to reissue an introduction draft in the not so distant future for a standard that manages acknowledgment of working leases on monetary records after it got a surge of reactions to its underlying proposition.

Some of the reasons of creating technical default are :

• The new bookkeeping measures could actuate obstructive clauses. This is on the grounds that, in such new gauges, the inhabitant will archive the working occupancy and report it in the bookkeeping books and record them as obligations. This will build the borrower’s obligation, which has expanding influences in all credit understandings. All things considered, the new bookkeeping norms will make specialized blemishes. In reality, a significant increment in the degree of obligation would debilitate the borrower’s approved container of obligations. This could trigger specialized deficiencies.
• There will be no a great deal influenced with the aid of the new accounting standards on rental companies. Tenant is required to apprehend the liabilities of an running lease. Thus, the lessor who in the past recorded operating leases in his accounting books will now not be influenced by way of the new accounting standards due to the fact they will not have changed. In preceding accounting standards, the lessor is viewed to have retained all the dangers as well as the advantages of the leased asset, which is why it usually maintains the leased asset in its balance sheet. As such, the new accounting requirements will not have an effect on the lessee, as he will have to account for the belongings leased under finance hire and operational contracts.
• The debt holders would opt for that more leases be kept off-balance sheet. Indeed, their recognition will lead to an expand in debt levels, which will restrict their borrowing capacity. As such, debt holders would decide on that their leases now not be recorded on their stability sheets, which would permit them to borrow more funds. This would permit them to improve their monetary steadiness in the market. Leases must, therefore, be kept off the balance sheet of lenders.

(b) Do you think the likelihood that this new accounting standard will be released would already be influencing the leases that companies would be entering?

The proposed bookkeeping guidelines may as of now influence the significant arrangement of the rent contract whether the organization enters into a rent contract. It is common for organizations and their advisors to plan exchanges in ways that utilize their escape clauses to discover escape clauses in particular accounting standards. For the most part, organizations favor to preserve obligation within the adjust sheet.

Mark Shying says, ‘Short-term leases won’t be required to be perceived on the balance sheet, but there should be clarification around what a short term lease is, as well as how alternatives to expand short-term leases will be managed with’.

HLB Mann Judd accomplice Simon James says one issue with recognition of working leases on adjust sheets is the recording of assets. ‘It’s simple to see how rent installments would work on the liability side, but it’s trickier on the resource side, given that the trade does not claim the asset. ‘Recognizing working leases as resources and liabilities on a balance sheet may trigger bank covenants,’ James says.

White says: ‘We exhort companies with numerous vehicle leases to begin arranging now. ‘They got to be prepared for the alter by guaranteeing collation of accurate rent information and they ought to consider the affect on lending covenants and the approach to any modern obligation renegotiations’.

Analyzing the saying of the different people we can definitely say that these new accounting standards released will have the influence of the lease on the organization entering.

(c) Do you think that debt holders would prefer that more leases be recognized and disclosed on the balance sheet, or be kept off balance sheet?

The Financial Accounting Standards Board (FASB) introduced a new accounting popular (ASU 2016-02) that requires organizations to apprehend running hire belongings and liabilities on the balance sheet. A contract, or a portion of a contract is that which passes on the correct to utilize an resource (the basic resource) for a period of time in trade for consideration…’. Off-balance sheet (OBS) items is a term for assets or liabilities that do no longer show up on a company’s stability sheet. Although not recorded on the stability sheet, they are nonetheless property and liabilities of the company. Off-balance sheet gadgets are typically those now not owned with the aid of or are a direct responsibility of the company. For example, when loans are securitized and bought off as investments, the secured debt is regularly saved off the bank’s books. An running lease is one of the most common off-balance items.

A company can lease property in one of two ways: capital leases or operating leases.

Capital leases successfully act as debt to personal the underlying asset leased. A simple analogy is taking out a mortgage to purchase a car or home; repayments are made periodically and, at the stop of the term, the asset is owned outright with the mortgage repaid.

Operating leases do no longer transfer ownership of the underlying asset, and repayments are made for usage of the asset. A easy analogy right here is leasing a car from a dealer; the lessee makes repayments for the proper to use the car, however does now not acquire equity in the vehicle itself and will not very own the auto at the end of the lease.

There have been no changes within the prerequisites for bookkeeping by lessors required by IAS 17 Leases. This implies that the refinement between working and fund rent resources will stay. There are different saying by different people. Like Mark Shying says that ‘Short-term leases won’t be required to be regarded on the balance sheet, however their wishes to be clarification about what a short term lease is, as properly as how choices to lengthen non permanent leases will be dealt with. HLB Mann Judd accomplice Simon James says one hassle with recognition of running leases on balance sheets is the recording of the assets. ‘It’s effortless to see how rent repayments would work on the liability side, but it’s trickier on the asset side, given that the commercial enterprise does not personal the asset.

Therefore prior to this new accounting standard, GAAP required the assets and liabilities associated with capital leases to be on a company’s balance sheet. Typically, these leases are in relation to property, plant and equipment (PP&E), so the capital rent belongings should be recorded in PP&E while the lease liabilities can be recorded in debt or other liabilities.

7.34 Read Accounting Headline 7.12, which discusses the accounting practices used at the Australian company Harris Scarfe. It has been shown that Harris Scarfe reported results that inappropriately overstated its assets and understated its liabilities. Discuss whether this is consistent with the opportunistic perspective provided by PAT and explain from a contracting perspective why an organization might want to overstate its assets and understate its liabilities.

Firstly, Accounting Feature 7.12 appears that not everything that’s written in daily papers is correct (obviously). As we are able see, the article of Harris Sacrfe states that finance leases exchange ownership of the resource from the lessor to the tenant at the conclusion of the rent term. This can be not correct. Some finance leases exchange proprietorship, but a few don’t . The exchange of proprietorship is not the premise for differentiating between an operating and finance rent, as the article asserts. Nevertheless, the article is adjust in that the proposed accounting standard will require many leases that were already considered as operating leases (and not perceived for balance sheet purposes) to be in this way included on the adjust sheet. This implies that both the recorded resources and liabilities will be expanded and this will have negative implications for different ratios, such as obligation to resources ratios, that are utilized within debt contracts. For case, in the event that a reporting entity has resources of $10 million, liabilities.

In any case, in case it were to rent a few resources, and the show esteem of the least rent installments is $4 million, and the rent is required to be perceived for adjust sheet purposes, at that point the assets will increment to $14 million and the liabilities will increment to $12 million (value will remain unaltered). Perceiving the leases will subsequently lead to a deterioration within the debt to resource ratio, with the ratio getting to be 69 per cent after the rent has been capitalized. Now turning our attention to the particular questions:

• As able to see over, the recognition of rented resources and rent liabilities will lead to a worsening of obligation to resource, or obligation to value ratios (applying the see that an increment in the ratios is considered to speak to a ‘worsening’ of the ratio). On the off chance that a company is near to breaching a particular obligation pledge, at that point the.
• It would be likely that the proposed accounting standard would as of now be influencing whether organizations will be entering leases, and the related terms of the rent contracts. It is common for organizations and their advisors to search for loopholes in particular accounting measures and after that plan transactions in a way that abuses those loopholes. In common, organizations will favor to keep obligation in the balance sheet.
• It would be likely that the proposed accounting standard would as of now be influencing whether organizations will be entering leases, and the related terms of the lease contracts. It is common for organizations and their advisors to explore for escape clauses in particular accounting guidelines and after that plan transactions in a way that abuses those loopholes. In common, organizations will incline toward to keep obligation to the balance she

References

1. Study.com. 2020. Why could the new accounting standard trigger debt covenants, that is, create a technical default? | Study.com. [ONLINE] Available at: https://study.com/academy/answer/why-could-the-new-accounting-standard-trigger-debt-covenants-that-is-create-a-technical-default.html. [Accessed 20 April 2020].
2. Investopedia. 2020. Off-Balance Sheet (OBS). [ONLINE] Available at: https://www.investopedia.com/terms/o/off-balance-sheet-obs.asp. [Accessed 22 April 2020].
3. David Trainer. 2020. Impact Of Operating Leases Moving To Balance Sheet. [ONLINE] Available at: https://www.forbes.com/sites/greatspeculations/2018/05/01/impact-of-operating-leases-moving-to-balance-sheet/#205486372c55. [Accessed 22 April 2020].
4. Deegan, C., 2012. Financial Accounting Theory. 4th ed. McGraw-Hill Education (Australia) Pty Ltd: Mc Graw Hill Education.
5. ReRRe2020. Why could the new accounting standard trigger debt covenants, that is, create a technical default? | Study.com. [ONLINE] Accessed 20 April 2020]..7

Introduction

Ⅰ. Analyze the effect central bank easing during the Great Recession had on global equity markets.

After 10 useless actions of federal funds rate cut from 5.25% to 0.25%, the Federal Reserve turned to quantitative easing for the first time in history. Under the high financial pressure caused by funding for several institutions that were on the verge of bankruptcy, the Federal Reserve announced the enforcement of QE1 “In late November 2008, the Federal Reserve started buying $600 billion in mortgage-backed securities. By March 2009, it held $1.75 trillion of bank debt, mortgage-backed securities, and Treasury notes; this amount reached a peak of $2.1 trillion in June 2010. ”[footnoteRef:1] After the introduction of QE1, the US economy recovered quickly. GDP growth rate rose from -8.9% in the fourth quarter of 2008 to the first quarter of 2010 of 2.3%. Over the same period, the United States also got out of the plight of deflation. CPI went from zero growth in December of 2008 to a positive change of 2.3% in March of 2010. With the rapid recovery shown by rises in economic indicators’ numbers, the effectiveness of QE1 in boosting the US economy was proved. [1: “Quantitative Easing”, last modified on 25 November 2019

https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1,_QE2,_and_QE3]

Dow Jones – DJIA – 100 Year Historical Chart

With QE1 providing liquidity in finance market, the US equity market recovered after February of 2009, driving better performance globally. The chart shows that the Dow Jones Industrial fell to the lowest soon after the start of 2009. However, the New York stock market recovered strongly over the next nine months with injected liquidity. From March 9, 2009 to December 24, 2009, the Dow Jones index rebounded from 6547.05 bps to 10520.10 bps, up 60.7%. There were obvious rises in other indexes as well. As a result of globalization, equity markets in other developed countries also made good performance since the lowest point at the beginning of the year.

At the beginning of 2009, the British economy were in deep recession, and the decline of the London stock market did not stop. In early March, the FTSE 100 in London hit a six-year low of around 3,530 bps. Since then, the London stock market has recovered gradually. By the end of the first half, the FTSE 100 had risen to about 4,250 bps, having recovered much of the depression since the start of the year. As the economy gradually improved, the stock market acted positively. On December 24, it closed at 5,402.41 bps, increased 18.4% from the start of the year and nearly 50% from the lowest in early March.

In continental Europe, French stocks have experienced a drop and rebound. Affected by the subprime crisis, the French economy experienced four consecutive quarters of contraction from the second quarter of 2008, and the decline of the CAC 40 continued until the beginning of March 2009. The French economy began to show signs of recovery in April, and its stock market began a huge rally lasting more than half a year, up about 50%.

However, as the Federal Reserve continued its quantitative easing, Asian countries are showing signs of overheating. It seemed like that bubbles occurred in real estate and equity markets. The Nikkei 225 stock average closed at its lowest level in more than 26 years on March 10th, before slowly recovering. The equity market in Tokyo has rebounded on the back of the government’s regulation and the improving global economic environment. In China, the SSE Composite index had fallen to 1,664.93 bps at the end of October 2008. Later, Chinese stock market experienced the sharp rise in 2009. By early August, the SSE Composite index had reached 3478.01 bps, which was a rise of more than 100%.

Through the equity market data of various countries after the Federal Reserve carried out easing operations in the United States, it can be summarized that the recovery in US equity market under the effect of QE1 stimulated the growth in global equity market as well. The reasons laid under international trades and investments. As an unconventional monetary tool, central banks’ quantitative easing was basically an operation that injects money into the economy to provide liquidity, in ways of purchasing financial assets and increase the length of balance sheet. Because of the implementation of quantitative easing, the increase in the money supply had led to a depreciation in the dollar, which was helpful to stimulate US exportation. With weaker dollars, it became easier for the United States to reduce its trade deficit and unemployment rate, thus provide acceleration to economic recovery. The US equity market was boosted with super low interest rates brought by QE1. As the world’s largest economy with the global reserve currency, implementing the quantitative easing monetary policy in the United States quickly mitigated the impact of economic crisis. If without this position, quantitative easing would either be useless or force the country’s economy into the other extreme of severe inflation.

To other countries, the action also had impacts on global capital flow and import-export trades, influencing equity markets all over the world. Investors who owned shares of US companies profited from the US equity market surge, and the money earned was brought back to their own countries. Although depreciation made it beneficial for US to export to the rest of the world, countries that exports necessities to the United States could still profit because of the equity market growth. A surge in stock market meant more consumer spending and business investment.[footnoteRef:2] Those companies earned more because of US consumers’ spending, and the profit they earned contributed to their home countries’ stock market growth. Thus, QE1 during the Great Recession caused the upsurge in both US stock market and equity markets all around the world. [2: “Market is Up”, Updated June 28th, 2019 https://www.investopedia.com/terms/m/marketisup.asp]

Ⅱ. What does the unwinding of central bank balance sheets imply about equity markets for the coming years?

Balance sheet unwinding is the act of a central bank reducing the size of its balance sheet. By selling the loans it held or stopping reinvesting maturing debts, the Federal Reserve can withdraw money directly from US economy. Unwinding is a more effective tightening than raising interest rates. The balance sheet of the Federal Reserve began to expand significantly after the implementation of QE at the end of 2008, from $2.12 trillion to the end of October 2014, when it withdrew the easing. The balance sheet reached a peak of $4.47 trillion. Reducing the length of balance sheet means the release of long-term high-quality assets and the absorption of speculative funds, stabilizing the financial system. The unwinding action can flexibly affect the long-term interest rate and lead to the upward movement of the yield curve. It will help to restore the credibility of the dollar and reduce the negative externalities of the Federal Funds rate hikes. Also, it can provide high-quality US dollar denominated assets to the world, helping to alleviate the shortage of safe haven assets in Europe, Japan and other countries. It will mitigate the impact of Federal Funds rate hikes on countries with easing monetary policy as well.

[image: https://wolfstreet.com/wp-content/uploads/2018/11/US-Fed-Balance-sheet-2018-11-01-overall.png]

According to the expected balance sheet unwinding started from 2017, there will be less than half of the amount of dollars in the market and demand will exceed supply. The dollar will become more valuable, having more purchase power. At the same time, the interest rate rise will absorb dollars back to the United States, as foreign market began to hold less dollars. The dollar appreciates, and other currencies depreciates.

The Federal Reserve uses QE to signal to the market that interest rates will remain low in the future and uses balance sheet reduction as the opposite signal of raising interest rates. Unwinding the balance sheet is a disguised interest rate increase to attract funds into US stocks and bonds markets, which is negative for gold. Historically, balance sheet shrinking had a great impact on the US economy, as well as its stock market. In 2008, an author analyzed that “fears about rising prices, combined with threats of trade wars, has Wall Street acting nervous. The S&P 500, after hitting record levels in January, is down 1.5 percent on the year.”[footnoteRef:3] With fear in the market, the stock market changes cannot be unknown exactly, but surely negative. The high interest environment might hurt investors with increased volatility in equity market, making them less willing to put capital in risky assets. The downward sloping of stock market was proved with this decrease in S&P during latter part of 2018. [3: Taylor Tepper, “The Fed’s balance sheet is shrinking. How does it affect you?”, April 6th, 2018]

[image: “us stock market 2019”的图片搜索结果]

Thinking further into the future, the unwinding of balance sheet will be stopped when severe down turn occurs. The hiking of overnight bank funding rate on September 17th this year was a result of the lack of liquidity in US financial market. It indicated how close US economy was to another economic crisis, and the Federal Reserve injected 5,225 billion dollars to aid the repo market. It proved that the Federal Reserve had stopped shrinking its balance sheet at that time, due to the bad economic condition. With negative expectations of the market, the equity market may not grow as fast. A stop of unwinding could help the equity market bounce back.

Ⅲ. Document the actual increase in central bank liquidity and the shrinking of balance sheets which is now underway in many countries.

Unlike the United States that eases with QE and tightens with balance sheet reduction, some countries in the world increases market liquidity with its unwinding balance sheet. A good example would be China. In October of 2019, the balance sheet of the People’s Bank of China slightly reduced in size. However, the shrink of its assets is fundamentally different from that of some foreign central banks, which cannot simply apply international experiences to determine monetary policy effects through the size of the central bank’s balance sheet.

At present, the People’s Bank of China has a large difference in the balance sheet structure from the Federal Reserve. The balance sheet of the China mainly reflects the relationship between the central bank and the commercial banks, also the reserves of the assets and loans the central bank owns. The liability side includes the People’s Bank of China debts and cash. During the period, China is implementing conventional monetary policy, the reserve requirement rate has acted as an important tool. It led to a significant difference between the effects of the balance sheet reduction of People’s Bank of China and the Federal Reserve.

Since 2015, the growth rate of the balance sheet of the People’s Bank of China has slowed down significantly, and its structure has undergone major adjustment. For some time, the amount of funds outstanding for foreign exchange fell rapidly, and the People’s Bank of China made up for the decline by means of medium-term lending facility, supplementary mortgage loan and other monetary instruments. At the same time, it lowered the required reserve ratio to hedge against the need for bank, in order to fulfill the required reserve due to the increase in deposits. Indeed, the RRR cuts did not change the size of the central bank’s balance sheet, only the structure of the liabilities. But given that the drop was a strong operating tool, the central bank would also reduce the reverse repurchase and MLF operations to ensure the abundant liquidity in the banking system. The commercial banks also reduced their debts to the central bank according to business needs. The central bank balance sheet would experience growth decline or contraction, mainly appear in the month or the next month. Nevertheless, in the long run, the monetary policy operation of lowering the required reserve ratio will loosen the liquidity constraint of bank loans to create deposits, plays a hedging role in the context of credit contraction and keeps the financial conditions generally stable.

Introduction

The main goal of enterprise management is to ensure the survival of the enterprise in the market and improve its well-being. An important role in the implementation of this task is given to the financial analysis of the enterprise.

Financial analysis helps to develop the strategy and tactics of improvement of the enterprise, to make management decisions, monitor, identify reserves for improving production efficiency, assess the performance of the enterprise and its divisions. One of the main criteria for financial analysis is an analysis of the liquidity and solvency of the company.

Solvency and liquidity are the main characteristics of the financial condition of the organization. These indicators ensure the survival of the company in the market.

The liquidity of the balance sheet is the ability of a company to cover its liabilities to creditors with the help of its assets. The liquidity of the balance is one of the most important financial indicators of the enterprise and directly determines the degree of solvency and the level of financial stability. The higher the liquidity of the balance, the greater the rate of repayment of debts of the enterprise. Low balance sheet liquidity is the first sign of bankruptcy.

The main purpose of this essay is to determine the role of liquidity and solvency indicators in assessing the financial condition of an organization.

The first part of this essay presents the theoretical aspects of the analysis of solvency and liquidity. The second part presents an analysis of the financial condition of the Limited Liability Company “Track Test Systems” using groups of solvency and liquidity ratios.

Theoretical aspects of the analysis of solvency and liquidity

Solvency and its impact on the company

Solvency is a company’s ability to pay its debts as they become due. A company’s solvency determines its ability to service debts and achieve long-term growth and profitability. A business that is completely insolvent is unable to pay its debts and will be forced into bankruptcy. Investors should examine all the financial statements of a company to make certain the business is solvent as well as profitable.

Solvency analysis is necessary not only for an enterprise to assess and forecast financial activities, but also for external investors (banks). Before issuing a loan, the bank must verify the creditworthiness of the borrower. The same must be done by enterprises that want to enter into economic relations with each other. It is especially important to know about the financial capabilities of the partner, if the question arises about giving him a commercial loan or deferring payment.

The main sources of information for analyzing the solvency and creditworthiness of an enterprise are the balance sheet (Form No. 1), the profit and loss statement (Form No. 2), the statement of capital movements (Form No. 3) and other forms of financial statements.

There are a number of ways to analyze a company’s solvency. One key test is to look at the solvency ratio, which measures a company’s ability to meet its debt and other obligations. It is calculated by adding net income (or after-tax profit) to depreciation and then dividing that by a company’s short-term plus long-term liabilities. The lower the solvency ratio the more likely a company will default on its debt in the future.[footnoteRef:1] [1: Official website of The Motley Fool ( is a multimedia financial services company) https://www.fool.com/]

When a company can no longer meet its financial obligation that company has become insolvent. This often leads to insolvency proceedings in which legal action is taken to liquidate a company’s assets to pay down its debt.

Liquidity and its impact on the company

It is important to note that despite the fact that the concept of liquidity and solvency are closely interrelated, they are not identical.

Liquidity ratios are an important class of financial metrics used to determine a debtor’s ability to pay off current debt obligations without raising external capital.

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.

Liquidity ratios are calculated as the ratio of assets to liabilities. There are two main financial ratios used to measure a company’s liquidity ratio.

1. Current ratio equals current assets divided by current liabilities. This should have a target ratio of 2 to 3, which indicates you have adequate liquid funds to pay your current obligations.
2. Quick ratio equals current assets (less inventory) divided by current liabilities. This should have a target ratio of 1 to 2, which indicates your liquid funds without selling your inventory.

Liquidity ratios are financial analysis tools commonly used to gauge a company’s ability to repay short-term creditors out of its cash fund. Liquidity ratios measure a company’s liquid assets against its short-term liabilities. In general, the more liquid assets you have to cover short-term liabilities, the more likely it is that you’ll be able to pay debts as they become due without running out of funds to support ongoing operations. Companies with low liquidity ratios have a higher risk of encountering difficulty meeting obligations. Liquidity ratios basically allow you a way to gauge your paying capacity on a short-term basis.

For a better understanding, let’s consider liquidity ratios on the example of the company STS LLC.

An analysis of the financial condition of the limited liability company “track test systems”

Description of the company

Limited liability company STS (Tracking Test Systems) is an engineering company. The main activities are development, production and application of technology systems prestressing structures in the construction of buildings and structures.

STS sees its mission in providing modern building structures with reliable and efficient technological solutions

STS carries out the development and production of materials, systems and equipment for prestressed reinforced concrete, develops design and technological solutions, regulatory and technical documentation, and also performs construction and installation work. The main strengths are:

• “STS” is the sole Russian constructor and manufacturer of prestressing systems
• Is a manufacturer of unique products, equipment and services
• The scientific and technical potential of the company makes it possible to be ready to implement the most complex technical solutions in a short time.

Analysis of balance sheet liquidity on the example of LLC ‘STS»

According to the company’s balance sheet and financial statement, an analysis of the organization’s financial performance was carried out.

In this section, we analyzed the liquidity ratios of the organization in the period from 2014 to 2017. Indicator – the absolute liquidity ratio, which is of the greatest interest to the management of the company, does not correspond to standard values.

The organization has a large amount of accounts payable, compared with cash and short-term financial investments. However, as can be seen in Table 1, the positive dynamics of this indicator can be traced. If in 2014 the organization repaid 0.004% of its short-term liabilities daily, over the past 2 years the figure is in the range of 1-3%/

Table 1

The absolute liquidity ratio 2014-2017 [footnoteRef:2] [2: Compiled by the author on the basis of calculations according to the balance sheet and the report on financial results]

2015

2016

2017

standard

The absolute liquidity ratio

0.00005

0.03211

0.01256

>0.2

The quick ratio (Figure1), which is of the greatest interest for banks, corresponds to the standard values ​​(0.7-1).

Figure 1. The quick ratio 2014-2017 [footnoteRef:3] [3: Compiled by the author on the basis of calculations according to the balance sheet and the report on financial results]

Compliance with the norm means that the company will be able to respond to its obligations if the situation becomes critical. However, it is worth noting that a large proportion of liquid funds in calculating the ratio is accounts receivable, which will be difficult to recover. Therefore, management should take measures to manage receivables and reduce their share.

The current liquidity ratio, which shows the company’s ability to repay current liabilities at the expense of current assets only, slightly below the recommended values. From Figure 2, we see that in 2014 the value was below 1, which indicates a high financial risk and suggests that the company is not able to consistently pay its current accounts. Since 2015, the company has rehabilitated – over the past 3 years, the coefficient under consideration is higher than 1.

Figure 2.The current liquidity ratio 2014-2017 [footnoteRef:4] [4: Compiled by the author on the basis of calculations according to the balance sheet and the report on financial results]

Next, we will analyze the solvency ratios.

Figure 3 presents the value of the coefficient in the period from 2014 to 2017. In 2014, a crisis situation was observed, as evidenced by the coefficients discussed above. Since 2015, there has been a positive trend. The recommended value of the indicator is 0.5-0.7. In 2017, the highest coefficient is 0.21, however, we see that, despite the positive dynamics, the values ​​do not correspond to the recommended ones. It is worth noting that in some cases, the company can maintain a stable financial position even if the solvency ratio is below 0.5.

In this case, the analyzed company:

• marked by stable demand for products
• has established supply and sales channels
• in 2017, there is an increase in more than 5 times compared with 2014, asset turnover (2017 – 3.56, 2014 – 0.65) and turnover of current assets (2017 – 4.11, 2014 – 0.76)

Figure 3. Total degree of solvency of the company for 2014-2017 [footnoteRef:5] [5: Compiled by the author on the basis of calculations according to the balance sheet and the report on financial results]

Let’s analyze the indicators of financial independence of the company. The autonomy coefficient (Figure 4) does not match the recommended values ​​(more than 0.5). However, there is a positive trend.

Figure 4. Coefficient of autonomy 2014-2017 [footnoteRef:6] [6: Compiled by the author on the basis of calculations according to the balance sheet and the report on financial results]

The value of the coefficient below 0.5 means that the assets of the company are mostly formed from borrowed sources. The company is dependent on external sources of financing. Positive dynamics indicates an increase in the financial strength of the company. This coefficient can be considered together with the independence coefficient (Figure 5).

Figure 5. The independence coefficient 2014-2017[footnoteRef:7] [7: Compiled by the author on the basis of calculations according to the balance sheet and the report on financial results]

The recommended value is less than 1. In the company being analyzed, this indicator significantly exceeds the recommended value. This means that the ratio of own and borrowed sources of financing has been broken. Borrowing sources prevail in the financing of the company.

Figure 6. The coefficient of financing 2014-2017 годы[footnoteRef:8] [8: Compiled by the author on the basis of calculations according to the balance sheet and the report on financial results]

The values ​​of the coefficient of financing of the company ‘STS’ (Figure 6) indicate that borrowed funds are not covered by their own sources of funding. Recommended values ​​are greater than one. Since 2015, there has been a positive trend, and, in 2017, the company was able to cover 21% of its borrowed funds with its own capital.

Consider another factor from the group of indicators of financial independence of the company (Figure 7).

Figure 7. The concentration ratio of attracted capital [footnoteRef:9] [9: Compiled by the author on the basis of calculations according to the balance sheet and the report on financial results]

The recommended value is below 0.4. Exceeding the recommended value, as evidenced by the diagram, means that the largest share of funds invested in the company “STS” is borrowed funds.

[bookmark: _Toc6329588]Conclusions on the results of liquidity analysis and assessment of solvency of LLC ‘ STS»

Thus, by calculating the financial and economic indicators of the company on the basis of the balance sheet and the statement of financial results it can be concluded that for many indicators there is a discrepancy between the normative values.

However, this discrepancy does not mean that the company is in critical condition. According to the chief accountant, the existing standards for many indicators are too high, and sometimes unrealistic for Russian companies. The company has recently moved from small to medium-sized businesses, it is intensively increasing sales. Especially noticeable is the jump in 2017, as shown in figure 8.

Figure 8. The revenue of OOO ‘STS’ 2014-2017[footnoteRef:10] [10: Compiled by the author on the basis of calculations according to the report on financial results]

This strong growth was due to the high level of variable costs in 2017. That is, over the past year, the cost of production and services has been very high, as shown in figure 9.

Figure 9. Cost of sales of LLC ‘STS’ 2014-2017[footnoteRef:11] [11: Compiled by the author on the basis of calculations according to the report on financial results]

Gross profit (figure 10), which represents the gross revenue cleared of variable costs, was the highest in 2017 for the last 4 years (despite the high cost price).

Figure 10. Gross profit of LLC ‘STS’ 2014-2017[footnoteRef:12] [12: Compiled by the author on the basis of calculations according to the report on financial results]

The final result of the company’s activities is the net profit, the dynamics of which is shown in figure 11. Despite the high gross profit, net profit for the last 4 years in 2017 was at the lowest level.

Figure 11. Net profit of LLC ‘STS’ 2014-2017[footnoteRef:13] [13: Compiled by the author on the basis of calculations according to the report on financial results]

This can be explained by the fact that in 2017 the company had the highest volumes of management expenses and current income tax for the period under review (the dynamics is shown in figures 12).

Figure 12. Commercial and management expenses of LLC “STS”[footnoteRef:14] [14: Compiled by the author on the basis of calculations according to the report on financial results]

We can say that in 2017, the company’s net profit was at the level of the crisis year 2014. Compared to 2015, the profit decreased slightly more than 3 times. However, the decrease in net profit does not indicate a deterioration in financial and economic indicators. In terms of liquidity, profitability and solvency, the company’s activity shows positive dynamics, despite non-compliance with regulatory values.

As noted by the chief accountant, compliance with regulatory values is not their main goal. The company adheres to an aggressive financial policy and seeks to increase its market share. The company actively uses borrowed funds. Especially often resort to loans – overdrafts.

Conclusion

Analysis of the liquidity of the balance sheet is an important task of the company to maintain the normal state of assets and liabilities, as well as the ability to timely and fully settle its obligations to borrowers. The higher the liquidity of the balance sheet, the higher the solvency of the company and the lower the risk of bankruptcy. When assessing the solvency of the enterprise, it is necessary to analyze the coefficients in dynamics and in comparison with the average values for the industry. This will identify possible threats to the risk of bankruptcy.

The use of solvency and liquidity indicators plays an important role not only in the analysis, but also in the implementation of all other management functions. Planning, day-to-day management and control in financial management are aimed at maintaining the ability of the enterprise to meet its payment obligations on time and in full in such a way as to achieve the established strategic goals and operational targets in the most efficient and effective way.

In this course work were considered indicators of solvency and liquidity on the example of LLC ‘STS’. By calculating the financial and economic indicators of the company on the basis of the balance sheet and the report on the financial results, it was concluded that many indicators are inconsistent with regulatory values.

However, this discrepancy does not mean that the company is in a critical condition, as the existing standards for many indicators are too high, and sometimes unrealistic for Russian companies.

Bibliography

1. MacKenzie I.. Student’s Book: Professional English in Use Finance. Cambridge, 2010
2. The balance sheet and the income statement 2014-2017 OOO ‘Test Tracking system’ (form No. 1 and form No. 2)
3. Documents and presentations provided by the chief accountant of LLC ‘ Tracking test systems»
4. Official website OOO ‘STS’: http://www.sts-hydro.ru/
5. Official website of The Motley Fool (a multimedia financial services company). Mode of access: https://www.fool.com/
6. Official website FINAM. [Electronic resource.] – Mode of access: https://www.finam.ru/
7. Official website of CBONDS financial information. [Electronic resource.] Mode of access: http://ru.cbonds.info/news
8. Internet-project ‘Corporate management’. [Electronic resource.] Mode of access: https://www.cfin.ru/finmarket/

Section A: Importance of accounting information in managerial tasks

1. Planning- accounting information helps in business planning for long term and short term. It helps to make plan before business operation. Previous accounting information tells that where and how they can improve it in the future.
2. Budget- Business managers often use accounting information to make budget for the company. They can check that previously where they have spent money for business operations. They can make sure that the company should not face any fund problems in future.
3. Decision- it helps to management or owner to make the important decision of business. The income statement describes the current position of business. Management can take decisions regarding purchasing new equipment or cut down employee wages and benefits to control operating expenses.
4. Measurement – it helps to measure the performance of the business. A manager can compare his own company performance with other companies that are in same business. It helps to improve company policy regarding product price and market trend.

Following are four Users of financial reports

1. Investors- investors are external users of financial information and they are main source of business capital. They always keep eye on financial reports to ensure that their investments in the business are safe. They are interested to know that how the business will perform in future so they can take decision regarding investment for buy, sell or hold.
2. Owners- owners are internal users of financial data. They invest capital to run business for profit. They are interested in financial data to know that how much they earn or lose during a particular period. So they can make a decision that they should expand or close business in future. They want to know how stable their business for the particular time period.
3. Manager- Manager is an internal user of financial reports. This information helps him in future planning, decision making and controlling on business. Managers can do a comparison between the current and previous performance of business. It helps him in making effective budget for achieving a business goal. They are interested to know that where they are spending more money so they can control in future.
4. Employees- employees, they do not directly involve in management so they considered external users of financial reports. They always examine the financial reports to check that how the business performing. Business success and profitability secure their job, give better remuneration.

Sec-B Profitable business structure

(1) Sole Proprietorship- this form of business run and operated by one person. He/she responsible for his/her business activities such as debts and liabilities.

Accounting implications for sole proprietorship:-

• (A) No legal entity- this form of business has not a legal entity. The sole business not separate from the business owner.
• (B) Unlimited liability- the owner of sole proprietors has unlimited liability. He/she is personally responsible for all debts of business. He is liable to pay business debts from his own money.
• (C) Financial regulation- sole proprietor business not separated from his owner for tax and legally. So owner is responsible to pay individual tax. He will show sole proprietorship income in his personal income tax return.

(2) Partnership- this is an economic activity where two or more people start or run a business for profit. They are co-owner of a partnership business.

Accounting implications for partnership

• (A) Unlimited liability- all partners has unlimited personal liability. They are personally responsible to pay all losses, liabilities and debts of the business.
• (B) Legal entity – The partnership is not separate from his partner. All partners are responsible to pay liabilities, losses and debts of business from their personal income.
• (C) Partnership regulation- all partner share the profit and loss of business. They will adjust the partnership profit or loss in a personal income tax return and they can deduct business expenses under individual return.

(3) Limited company- it is distinct from the owner and the company has its own legal entity.

The owners and shareholders are not responsible to pay any losses, liabilities, and debts of the company. They have to pay what they have invested in the company. A company is a legal person and it has name and seal. For example, Auckland international airport limited.

Accounting implication for the limited company:

• (A) Limited liability- the business has its own GST number. The owner has limited liability up to they have invested in the business.
• (B) Legal entity- Company is a separate legal person according to the company act. It has a registered name and it can buy and sell products on his name.
• (C) Accounting entity- the company has to pay it own tax. It is liable to pay tax on company profit. Owner will fill their own individual income tax return IR3.

Sec-C comprehensive income statement

Following are the main elements of the income statement and characteristics

1. Income- income is the growing economic benefits of the organization. Income can make an effect on increasing assets and decreasing the liability of an organization and more income will help to increase the equity of the entity.
2. Expenses- it is reducing economic benefits of the organization. Expenses put negative effects on assets. It decreases the value of assets and increases the liability of the organization. It can decrease equity.

Accounting concepts to prepare a financial income statement

1. Accounting period- income statement source of financial information and performance of a company for the particular time period. Normally accounting period for any company for twelve months. Some organizations issue quarterly or half-yearly. It helps to recognize expenses and income for a specified period.
2. The matching concept- it is most important principle of the income statement. According to concept, all expenses should be relating with revenue for a specified period in which that revenue is generated due to that expenses. For instance, if we entered revenue from sale of goods sold than we should enter cost of goods for the same period.
3. Realization- this principle allows to identify sum of income that should be entered at low price than selling or service price. Amount should be entered after discount.
4. Consistency- Company has to select one accounting method for all transactions, income statements and balance sheet. If Company changes accounting methods regularly than it will be difficult to do a comparison between two periods. The company should have a valid reason to change its accounting method.

Purpose of the income statement

1. Measure Profit/lose- income statement help to measure how much profit or lose is generated during a specified period. Management can compare the current year earning with last years. If a company under lose so they can make a better planning to get profit in future.
2. Comparison with others- financial position statement helps to compare with other competitors in same industry. For example, company discount policy and cost of goods purchase.
3. Expenses- it helps to check, how much you have spend on operating expenses such as salary. Benefits. Advertising etc. if operating expenses increasing rapidly than profit. You should control expenses and compare your budget with actual performance.

Sec- D Purpose of balance sheet

Balance sheet provides the financial position of an organization for a specified time. It reveals that how much a company has assets and liabilities. It also shows investment (equity) of company. The purpose of balance sheet different for every user and they want to know that how is the company performing.

Main elements of balance sheet and its characteristics

1. Assets- as result of previous transactions or events, company obtained or controlled something that is for future economic benefits. Assets should be measurement in money value. Assets can be divided into two categories, current assets and non-current assets. Assets can be intangible, for example patents or trademarks.
2. Liabilities- liabilities are existing contract between two entities from past transactions or events. Liability must be measurement in monetary term. Entity has to pay service, money or goods in future. Liabilities can be divided into two category current liability and non-current liability.
3. Equity- it is residual interest of any entity after liabilities deducted from assets. It has main two type’s common stock and preferred stock.

Accounting equation- accounting equation means entity total assets equal to total liabilities and equity. According to accounting equations, balance sheet should be remaining balanced.

Assets = liabilities + equity

For example, balance sheet of Auckland international airport limited

As on 30 June 2018 $ (m)

Non-current assets 8081.4

Current assets 178.4

Total assets 8196.8

Non-current liabilities 2185.6

Current liabilities 329.1

Total liabilities 2514.7

Total Equity 5682.1

Assets = liabilities + equity

8196.8 = 2514.7+5682.1

8196.8=8196.8

Accounting concepts to prepare balance sheet

1. The business entity- balance sheet entered the information of entity for a specified period and it is separated from its owners and employees
2. istorical cost- assets must be recorded in account book on actual value paid of assets and not on current value or market value.
3. Prudence concept- profit and revenue should be recorded in balance sheet when they are recognised and liability can be included when it is arise.
4. Accounting period- Company follow a specified time to prepare a balance sheet. Usually it is for twelve months. It records only that transaction incurred during that period.

Sec-E purpose of cash flow statement-

it describes the cash position of an entity and provides information, how cash produced and where it is spent for a particular time.

Major activities of cash flow statement

1. Operating activities- it includes all cash collected and spent while business common operating activities. It makes change in value of current assets and current liabilities. For instance, account payable, sale.
2. Investing activities- it includes sale and buy of property, machinery, plant and all long term investments.
3. Financial activities- it provides the information regarding company financial activities. It includes pay dividend, issue or buyback stock.

The income statement, cash flow and balance sheet are connected and depend on each others. Net earnings or loss from income statement connected to balance sheet and cash flow statement. Net earnings will be added in shareholder equity in balance sheet and cash flow statement. Closing cash balance of cash flow statement will be added on assets side in balance sheet.

Task 2.

Section A

Serial no. Measures formula 2018 2017 2016

1 Growth in sale Current sale – previous year sale/ previous year sale * 100 683.9-629.3/629.3*100

= 8.68 % 629.3-573.9/573.9*100

= 9.65 % 573.9-508.5/508.5*100

=12.86 %

2 Operating profit margin Operating profit/sale *

100 883.1/683.9*100

= 129.13 % 509/629.3*100

=80.88 % 416.9/573.9*100

=72.64 %

3 Net profit margin Net profit after tax/sale *100 650.1/683.9*100

= 95.06 % 332.9/629.3*100

= 52.90 % 262.4/573.9*100

=45.72 %

4 Return on assets Earnings before interest and tax / average total assets*100 883.1/(8196.8+6503.5/2)*100

=883.1/7350.15*100

=12.01% 509/(6503.5+6141.5/2)*100

=509/6322.5*100

=8.05 % 416.9/(6141.5+5101.5/2)*100

=416.9/5621.5* 100

= 7.42%

5 Age of account receivable Average account receivable/credit sale*365 (71.5+55.5/2)/683.9*365

=63.5/683.9*365=33.89 days (55.5+42.3/2)/629.3*365

=48.9/629.3*365

=28.36 days (42.3+36.6/2)/573.9*365

=39.45/573.9*365

=25.10 days

6 Total assets turnover Net sale/total assets 683.9/8196.8

= 0.08 times 629.3/6503.5

= 0.10 times 573.9/6141.5

= 0.09 times

7 Fixed assets turnover Net sales/ fixed assets(P.P.E) 683.9/6378

= 0.11 times 629.3/4947.8

= 0.13 times 573.9/4708.1

= 0.12 times

8 Cash flow from operation ration Operation cash flow / current liabilities 321.2/329.1

= 0.98 times 307.1/563.5

=0.54 times 270.5/492.2

=0.55 times

9 Current ration Current assets/ current liabilities 178.4/329.1

= 0.54:1 104/563.5

=0.18:1 102.9/492.2

=0.21:1

10 Quick ratio Current assets-(inventories + prepayments)/ current liabilities 178.4-(0.2+18) / 329.1

= 178.4-18.2 / 329.1

= 0.49:1 104-(0.1+11.6) / 563.5

= 104-11.7/ 563.5

=0.16:1 102.9-(0.1+10.4)/ 492.2

=102.9-10.5/492.2

=0.19:1

11 Gearing ratio Long term liabilities / share capital+ reserves+ long term liabilities 218.6/ 404.2+ 4296.6 + 2186.6

=2185.6/6886.4

= 0.32:1 1911/348.3 + 3100.1+1911

=1911/5359.4

= 0.36:1 1768.6/332.7 + 3075.6+1768.6

=1768.6/5176.9

=0.34:1

12 Interest cover ratio Earnings before interest and tax / interest 883.1/77.2

= 11.44 times 509/72.8

= 6.99 times 416.9/79.1

=5.27 times

Profitability

Profitability ration disclose the success of any business and percentages of profitability ratio shows the earning by using main figures in financial statements and other business resources. In Auckland international airport ltd, the growth of sale was 12.86 % in 2016 and increased up to 9.65 % in 2017 and it is also slightly grew up to 8.68 % in 2018. As positive result in growth of sale, company doing well in getting good net profit percentages was 45.72 % in 2016, 52.77% was in 2017 and it dramatically increased up to 95.06 % in 2018. Operating profit margin also increased every year, it was 72.64% in 2016, 80.88% in 2017 and it highly increased up to 129.13% in 2018. A rich net profit margin means that company has ability to converting sale in to actual profit. Auckland international airport Ltd gave returns to the shareholders from 2016 to 2018 because company got enough profit for three years. They paid final dividend 11 cents per share for the year ending 30 June, 2018. It all depends on selling price of tickets or service and control on expenses. According to the income statement of Auckland international airport Ltd, operation expenses also increased up to 13 % in 2018 as compare to 2017. They should control the expenses to get more net profit in future.

Management efficiency

Management efficiency ratio computes the capability of a business to utilize assets and liabilities to produce sale. Fixed assets and total assets ratio improved in 2018 as compared to previous year. But age of account receivable ratio increased badly in 2018, it was 25.10 days in 2016 and 28.36 days in 2017 but it increased up to 33.89 days in 2018. So it takes approximately 34 days to recover money from customers. It means, it restricts the fund and it is not available for business purpose and it also increase the cash flow issue. Cash flow from operation ratio was remaining steady in 2016 and 2017 but it has increased to 0.98 times in 2018. It means business generating more money to pay its liabilities. Fixed assets ratio tells that how much sale producing by using fixed assets of business. Fixed assets ratio was 0.11 times in 2018. It shows that fixed assets producing fewer sales. Auckland international airport getting enough profit and cash flow operation ratio increased in 2018 that reduce the cash flow problem. Auckland airport should review their credit policy to reduce age of account receivable ratio problem.

Liquidity and gearing ratios

Liquidity ratio describe that how much business has cash and how they can easily convert currents assets in cash to pay off all current liabilities and obligations. The current ratios of Auckland international airport not up to benchmark. It was 0.21 in 2016 and 0.18 in 2017 but it slightly increased to 0.54 in 2018. It showing that business has more current liabilities than current assets. In event of emergency, business cannot pay their current obligation and it will not be easy to convert current assets into cash. Overall, it is means business has illiquidity problem. Gearing ratio helps to calculate risk and fitness of a business. According to the gearing ratio of Auckland international airport, they have low risk level. Business has taken fewer funds from creditors as compare to the owner’s capital. Interest cover ratio also improved just because of low gearing ratio. It was 5.27 and 6.99 respectively in 2016 and 2017. It increased to 11.44 in 2018. It shows that business has enough profit to pay his interest after deducted operation expenses.

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The global beverage industry has an annual worth of $1.4 trillion with a 2.6% expected increase each year. It consists of many market segments including soft drinks, energy drinks, tea and coffee, natural and organic beverages, alcohol, and bottled water. As long as thirst exists, there will be a market for beverages. One big trend is the growing popularity of bottled water. Consumers are seeking healthier ways to stay hydrated, making bottled water a popular choice. The beverage industry has seen an upward trend of health and wellness products as well. While sales of traditional drinks are declining, sales of alternative products like natural and organic beverages continue to see growth. Convenience has also driven growth in the market, with companies that cater to consumer behavior and consumption patterns performing best. In our research we discovered the soft drink market is being challenged by soda alternatives like ready-to-drink coffee. The demand for functional beverages, such as relaxation drinks, energy drinks, or ready-to-drink coffee is gaining popularity due to lower sugar and calorie contents. We chose to examine The Coca-Cola Company and Starbucks Corporation to investigate this further. With 10-ks and health measurements, we will assess each company and conclude which company is healthier.

The Coca-Cola Company controls nearly 40% of the global soft drink industry. Coca-Cola owns 500 brands and produces over 3,900 beverages and has four major industries: the sparkling soft drinks industry, the tea and coffee industry, the juice, dairy and plant-based beverages, and the water, enhanced water and sports drinks industry. Its beverage products are sold in more than 200 countries and territories. Approximately 61 billion beverages are consumed in the world every day. More than 1.9 billion are beverages containing trademarks owned by or licensed to Coca-Cola. The Coca-Cola Company has two types of ownership: public shareholding and institutional shareholding. Coca-Cola is a public company that trades its shares on the New York Stock Exchange, and its stock is owned by thousands of shareholders and investors worldwide. The company is also owned by FEMSA, which is a Mexican beverage company. FEMSA owns about 3 billion shares, which comprise about 70 percent of the company’s total shares. The Coca‑Cola Company has adopted C corporation status. This means there are no limit on the number of shareholders, foreign, or domestic, and it has unlimited growth potential. Because Coca-Cola is owned by shareholders around the world and runs a multinational corporation, shareholders don’t have to be citizens of the United States, which means Coca-Cola can do business with unlimited foreign owners.

Starbucks Corporation is a retailer that depends on consumer discretionary spending. It operates mainly in the retail coffee and snacks store industry. It is a public company that trades its shares on the NASDAQ. As of November 2018, Starbucks had approximately 18,100 shareholders. In fiscal 2018 it performed below the NASDAQ and S&P average, though it has performed higher in previous years. It saw most sales growth in the Americas. The most company-operated stores were opened in China and the Asian pacific area, though the Americas still held more open stores at the end of the fiscal year. Total net revenues increased 10% in 2018. Total net revenues were reported at 24.7 billion compared to 22.4 billion in the previous year. Earnings per share increased to $3.24, compared to an earnings per share of $1.97 in 2017. This increase was primarily driven by gains from the acquisition of an East China joint venture and the sale of its Tazo brand. The net favorable impact from the Tax Act also contributed to the increase. Cash flows from operations were $11.9 billion in 2018, compared to $4.3 billion in 2017. The change was mostly due to receipt of upfront payment from Nestlé in relation to the Global Coffee Alliance.

Property, Plant and Equipment

Coca-Cola’s property, plant, and equipment account is shown on the balance sheet on page 73, titled Property, Plant and Equipment, net. It’s also shown on the statement of cash flows on page 74, as Purchases of property, plant and equipment and Proceeds from disposals of property, plant, and equipment.

Starbucks’ Property, plant and equipment account is shown on the balance sheet on page 50. Starbucks uses the account title Property, plant and equipment, net as well. Property, plant and equipment, net is also listed on page 73 as part of the Supplemental Balance Sheet Information. Additionally, the Statement of Cash Flows on page 51 has a section for Additions to property, plant and equipment.

Plant Assets

Coca-Cola does not list specific types of property, plant and equipment on the financial statement. It is listed under the notes on page 105 as land, buildings and improvements, machinery, equipment and vehicle fleet. Coca-Cola had $8,232 million in property, plant and equipment at the end of fiscal 2018. This was calculated by taking the company’s property, plant and equipment of $16,245 million minus the company’s accumulated depreciation of $8,013 million.

Starbucks has property, plant, and equipment accounts listed on the supplementary balance sheet: land, buildings, leasehold improvements, store equipment, roasting equipment, furniture, fixtures and other, work in progress, property, plant and equipment, gross, and accumulated depreciation. At the end of fiscal 2018, Property, plant and equipment, net had $5,929.1 million. Starbucks had an Accumulated depreciation of $7,268.0 million.

Property, Plant and Equipment, Notes

As shown on page 80 of the notes, Coca-Cola uses the straight-line method over the estimated useful lives of assets to record depreciation. Buildings and improvements have 40 years or less range, machinery, and equipment and vehicle fleet have 20 years or less range. Coca-Cola’s land is not depreciated because it has an unlimited useful life.

Starbucks’ notes on page 58 reveal that Property, plant and equipment includes all accounts listed on the balance sheet, as well as assets under capital leases. All Property, plant and equipment except land are carried at cost less accumulated depreciation. Cost includes all costs necessary to acquire and prepare assets for use, including internal labor and overhead. Starbucks uses straight-line depreciation. Depreciation ranges from 2 to 15 years for equipment and 30 to 40 years for buildings.

Return on Assets

At the end of the 2018, Coca-Cola had net income of $6,476 million and average total assets of $85,556 million. The company’s return on assets was 7.56%. This ratio shows how much profit Coca-Cola generated from its assets. Generally an ROA over 5% is good, so Coca-Cola is considered good.

Starbucks had a 22.6% return on assets in 2018, which is also good. A 22.6% ROA shows that Starbucks is able to earn more money with less invested capital than Coca-Cola.

Intangible Assets

The notes on page 38 gives Coca-Cola’s intangible assets: trademarks, bottler franchise rights, goodwill, and other intangible assets. The company classifies intangible assets into three categories: intangible assets with definite lives subject to amortization, intangible assets with indefinite lives not subjects to amortization, and goodwill. These intangible assets are recorded at fair value and amortized over their useful lives ranging from 1 to 20 years.

Starbucks has three intangible asset types as well: goodwill, finite-lived tangibles, and indefinite-lived tangibles. Starbucks’ notes on intangible assets begin on page 59. Goodwill is reported at $3,541.6 million on the balance sheet. The account other intangible assets is also listed on the balance sheet and reported at $1,042.2 million. Other intangible assets include finite-lived and indefinite-lived intangible assets. Starbucks’ finite-lived assets are: acquired and reacquired rights, trade secrets, licensing agreements, contract-based patents and copyrights. The assets are amortized over their estimated useful lives. Indefinite-lived tangibles, trade names and trademarks, are tested periodically, usually during the third fiscal quarter. Starbucks then calculates the estimated fair value of intangible asset groups. Fair value is the amount a buyer is willing to pay for the asset. There were not any significant Other intangible asset impairment charges during 2018.

Current Liabilities

The Coca-Cola Company’s current liabilities are shown on page 73 on the balance sheet. The company’s current liabilities include account payable, accrued expense, loans, notes payable, current maturities of long-term debt, accrued income taxes, liabilities held for sale, and liabilities held for sale-discontinued operations.

Starbucks’ current liabilities are found on the balance sheet on page 50. Current liabilities include accounts payable, accrued liabilities, insurance reserves, stored value card liability and current portion of deferred revenue, and current portion of long-term debt.

Contingent Liabilities

Coca-Cola’s contingent liabilities are mainly related to customers, bottlers, vendors, and container manufacturing operations, owned by third parties of $600 million. Coca-Cola has also established contingencies for legal proceedings when they determine that there may be adverse consequences. Information on contingent liabilities is shown under the note on page 110.

Starbucks’ contingent rent liability is listed on page 61 of the notes. This liability was disclosed in the notes, indicating it was deemed reasonably possible to occur. However, the notes also state if a contingent rent liability is deemed probable, it is recorded in accrued occupancy costs, located in the accrued liabilities section on the balance sheet. It is also recorded on the corresponding rent expense. Contingent rent was included in the Leases section for 200.7 million.

Long-term Liabilities

Coca-Cola’s long-term liabilities are shown on the balance sheet on page 73. The long-term debt account reports $25,362 million. The notes on page 108 show Coca-Cola’s long term debt includes U.S. dollar notes due 2019-2093, U.S. dollar debentures due 2020-2098, U.S. dollar zero coupon notes due 2020-2024, Euro notes due 2019-2036, Swiss franc notes due 2022-2028, other, due through 2098, and fair value adjustments. These long-term debts are shown with amount and average rate, which represents the weighted-average effective interest rate. The adjustment for weighted-average maturity as of December 2018 was approximately 19 years. Amortization of these fair value adjustments will result in a decrease in interest expense in future periods.

Starbucks’ long-term liabilities are located on page 50 on the balance sheet. Starbucks has the following long-term accounts: long-term debt, deferred revenue, and other long-term liabilities. The notes on page 76 show the company has issued multiple senior notes this year. There are long-term notes due in 2020, 2023, 2024, 2025, 2028, 2047 and 2048. Starbucks pays interest semi-annually. The company has a large amount of deferred revenue this year due to an upfront payment from Nestlé.

Debt Ratio

Coca-Cola’s debt ratio for 2018 and 2017, is 0.80 and 0.81 respectively. This is calculated using Coca-Cola’s total liabilities of $66,235 million, divided by total assets of $83,216 million, for 2018, and total liabilities of $70,824 million divided by total assets of $87,896 million for 2017. The lower the debt ratio is, the better it is for the creditors. Coca-Cola’s ratio for 2018 was worse than 2017.

Starbucks’ 2018 debt ratio was .95, calculated by taking total liabilities of 22,980.6 million divided by total assets of 24,156.4 million. For 2017, total liabilities of 8,908.6 million divided by total assets of 14,365.6 million gives a ratio of .62. Considering creditors would prefer a lower debt ratio, this does not look good that the ratio number went up in fiscal 2018. Perhaps this is due to all the long-term debt issued this year. Coca-Cola had a lower ratio comparatively.

Times-Interest-Earned Ratio

Coca-Cola’s times-interest-earned ratios for the 2018 and 2017 are 9.813 and 9.137 respectively. The calculation uses the company’s net income plus income tax expense plus interest expense, divided by interest expense. Because this ratio measures the company’s ability to pay its debt obligations, the ratio of 2018 is better than the ratio of 2017.

Starbucks’ times-interest-earned ratio takes a company’s earnings before interest and taxes, and divides it by their interest expense. The times-interest-earned ratio for 2018 and 2017 are 34.942 and 47.674 respectively. A higher times-interest-earned ratio is favorable because higher numbers means the company poses less of a risk to investors and creditors. Although the ratio decreases from 2017 to 2018, the numbers are still higher than Coca-Cola’s.

Stockholder’s Equity

Coca-Cola’s stockholders’ equity section on the balance sheets is found on page 73. The company has authorized and issued common stock and treasury stock. At the end of 2018, Coca-Cola has 11,200 million shares authorized, 7,040 million shares of common stock issued and 7,040 million shares of treasury stock issued. Treasury stock can never be outstanding so that leaves 4,268 million shares of common stock outstanding.

Starbucks’ stockholders’ equity section is found on page 50 on the balance sheet. Starbucks has authorized and issued Common Stock. For the most recent balance sheet, Starbucks has 1,309.1 million shares issued and 1,431.6 million shares outstanding. Both Coca-Cola and Starbucks report their numbers in millions, which allows for greater precision. The less rounding of millions and billions, the more accurately the numbers can be represented.

Statement of Stockholders’ Equity

Coca-Cola’s statement of stockholders’ equity is located on page 75 and titled The Coca-Cola Company and Subsidiaries Consolidated Statement of Shareowners’ Equity. There is no information about how many shares Coca-Cola purchased during 2018 on the statement of stockholders’ equity. Also, on the balance sheet, the number of common stocks from 2017 to 2018 did not change. However, under the note on page 63, Coca-Cola repurchased $1.9 billion of the company’s stock in 2018. The cost of the treasury stock in 2018 was $51,719 million. With 2,772 million shares, this comes out to $18.66 per share. Coca-Cola received $1,476 million for issuances of stock in 2018. Since Coca-Cola’s balance sheet shows $0.25 par value, Coca-Cola issued 5,904 million shares in 2018. Coca-Cola declared cash dividends of $3,672 million in 2018. This can be calculated by taking beginning retained earnings of $60,430 million minus ending retained earnings of $63,234 million which gives $2,804 million. Net income of $6,476 million minus $2,804 million equals $3,672 million.

Starbucks’ Statement of Stockholders’ Equity is located on page 52. It is titled Consolidated Statements of Equity. Starbucks re-purchased 131.5 million shares of common stock during fiscal 2018. For whatever reason, treasury stock is not listed on this statement or on the balance sheet. At $0.001 par value per share, treasury stock would come out to $131,500. There was no indication of stock issuances either. On the balance sheet, it shows common stock decreased from 1.4 million to 1.3 million shares in 2018. Starbucks declared cash dividends at $1.32 per share, paying $1,743.4 million.

Return on Equity Ratio

Coca-Cola’s return on equity for fiscal 2018 was 33.98%. This was calculated using Coca-Cola’s net income ($6,476 million) divided by shareholders’ equity ($19,058 million).

Starbucks’ return on equity was calculated using net income (4,518.3 million) divided by total shareholders’ equity (1,169.5 million). Starbucks had an ROE of 386.34% for fiscal 2018. Anything over 15% is considered good. 386% seems unreasonably high, but the numbers have been checked.

Internal Control

Coca-Cola conducts training programs such as in-house workshops and e-learnings where appropriate. A process has been introduced to ensure that employees understand the Code of Business Conduct and compliance with each vision, and all employees are required to prove compliance. In addition, Coca-Cola established a universal consulting service (KO Ethics Line) that allows employees to report anonymously by phone or email if they find a violation of the Code of Business Conduct. This proves that Coca-Cola strives to comply with ethics and laws.

An example of internal control at Starbucks is separation of duties. In every Starbucks store, at least one person in the operations department will be in charge of collecting and confirming cash received. The cash will then get sent to the accounting department where it can be recorded in the books. This is important to reduce the likelihood of theft. Retailers lose nearly $50 billion annually to theft, so strict separation of duties is important. With proper separation of duties, no single person will have control over the entire cash process.

Auditor’s Letter

Ernst & Young LLP audited The Coca-Cola Company in accordance with the PCAOB (the Public Company Accounting Oversight Board). Ernst & Young reported that Coca-Cola maintained internal control, and that the company’s financial statements were presented adequately. Ernst & Young found Coca-Cola provided reasonable and reliable details. This report is located on page 149.

Deloitte & Touche LLP (in accordance with the PCAOB) audited Starbucks and reported their financial statements and notes to be presented fairly and in conformity with generally accepted accounting principles. Deloitte & Touche found Starbucks’ system of internal controls to be adequate. This report can be found on page 89.

Statement of Cash Flows

Coca-Cola’s statement of cash flows is found on page 74. Coca-Cola used the indirect method to report cash flows from operations because it starts with net income as the base and uses adjustments including depreciation and amortization. Coca-Cola bought less plant assets in 2018. The amount of purchases of plant assets in 2018, 2017, and 2016, are $1,347, $1,675, and $2,261 million respectively. The amount of proceeds from disposals of plant assets in these years are $245, $104, and $150 million respectively. This shows Coca-Cola sold more plant assets in 2018 comparatively. Coca-Cola bought back its own stock of $1,912 million for treasury and paid dividends of $6,644 million ($1.56 per share) in 2018. This is information can be found on page 63.

Starbucks’ statement of cash flows is located on page 51. Starbucks used the indirect method to report cash flows from operations. By starting with net earnings and adjusting to net cash, this indicates Starbucks uses the indirect method. This information can be found on the statement of cash flows. Starbucks bought more plant assets in 2018 than in 2017 and 2016, 1,976.4 million compared to 1,519.4 million, and 1,440.3 million respectively. Starbucks paid 7,133.5 million to buy back its own common stock, and paid 1,743.4 in cash dividends.

Statement of Cash Flows Conclusions

Financing activities generated the most cash flows for Coca-Cola. Financing activities are involved in long-term liabilities and equity including issuing stock, paying dividends, and buying and selling treasury stock. Coca-Cola paid $30,568 million for debt and $6,644 million for dividends in 2018. Coca-Cola spent a large amount of cash on paying off liabilities. This section also shows investors that Coca-Cola returns capital to them in the form of cash dividends.

Operating activities generated the most cash flows for Starbucks. This shows the company spent net cash on manufacturing and selling goods, and providing services. A big contributor to this was deferred revenue. Starbucks received an upfront payment from Nestlé for roughly $7 billion. The payment was recorded as a liability and is recognized as other revenue on a straight-line basis.

Overall Analysis

We believe Starbucks Corporation is healthier than The Coca-Cola Company. On first inspection, Coca-Cola seems healthier because it is the largest beverage company worldwide. Also, if we compare net incomes, Coca-Cola’s is higher (6,476 million compared to 4,518.3 million). However, when we examine the companies’ health measurements, including ROA, ROE, debt ratio, and times interest earned, the numbers show Starbucks to be healthier. Coca-Cola and Starbucks’ ROA in 2018 were 7.56% and 22.6% respectively, which tells us that Starbucks has a much greater capacity to generate capitals and profits. Coca-Cola and Starbucks’s ROE in 2018 were 33.98% and 386.34% respectively; telling us Starbucks can manage and capitalize its equity more efficiently.

We would be more likely to invest in Starbucks. The times-interest-earned ratio for Coca-Cola and Starbucks in 2018 was 9.813 times and 34.942 times respectively. This ratio can measure a company’s ability to pay off debts and usually means it poses less of a risk to investors. Because Starbuck’s number is higher, it means Starbucks has a higher ability to pay off debts. The debt ratios for Coca-Cola and Starbucks in 2018 were 0.80 and 0.62 respectively. This ratio shows how much debt a company has, and tells us Coca-Cola has more debts. Finally, we looked at their statement of cash flows. Coca-Cola spent its net cash on paying off debts. Starbucks spent its net cash on manufacturing and selling goods, and providing services. With all this information we can safely conclude that Starbucks offers a better business and would be a steady, reliable investment for investors.