Cash Flow Forecasting

Chapter 2

Summary of financial

statements

Introduction

This is not a treatise on financial analysis, but rather a consideration of

the interrelations existing between the various components of the bal-

ance sheet and income statement and financial ratios which it is essen-

tial to understand in the preparation of cash flow forecasting.

In particular, we are concerned with the interrelationships existing between

the income statement, balance sheet, and various financial ratios summa-

rizing their interrelationships, and which can be manipulated with ‘cash

drivers’ to project key accounts.

We therefore touch upon these topics as they relate to the manipula-

tions required in effecting financial analysis.

The accounting process is divided into two basic elements, recording

and reporting of financial information. The emergence of the large-scale

limited liability company has been the single most important factor

stimulating the need for financial reports. The larger and more complex

the company, the more remote the management can become from day-to-

day operations, and the more reliant they have to become on account-

ing information. In addition, the company that borrows money will need

to demonstrate its financial solidity to its bankers, and financial state-

ments are used by bankers and others as part of the basis for lending

decisions.

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In recent years, there has been recognition that there may be a large

number of different parties with a legitimate interest in a company’s

performance:

■ the equity investors – existing and potential shareholders

■ the loan creditors – including existing and potential holders of deben-

tures and loan stock, and providers of short-term unsecured loans and

finance

■ the company’s bankers

■ the company’s employees

■ the analysts/advisers – this will include financial analysts and journal-

ists, economists, researchers, stockbrokers etc.

■ customers, trade creditors and suppliers

■ tax authorities, supervisory bodies, local authorities

■ the general public – including taxpayers, consumers, political parties,

and consumer and environmental groups.

Each of the groups will have a common interest in the financial statements

of a company, but will use the information as the basis for different types

Table 2.1 Comparison between continental European and Anglo-Saxon

accounting systems

Continental European Anglo-Saxon

Capital markets Mainly from banking sector Mainly stock markets

Culture State-focussed Individualistic

Legal system Law provides detailed Rules from standard

accounting rules setting bodies

Fiscal system Accounting/tax closely Accounting not

connected influenced by tax rules

Examples of Belgium Australia

countries Germany Great Britain

France Ireland

Italy The Netherlands

Japan Singapore

Switzerland USA

Users of information Creditors, taxman, investors Notably investors

Accounting principles Prudence True and fair principle

dominates

Summary of financial statements

9

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