Question

Identify the financial statements that need to be reformatted and the new classifications arising from the reformatting. Explain why financial statements need to be reformatted.

Answer 1

Reformatting the finanacialstatements” Splitting financial statements into operating/investing and financing activities2.)What is required in reformatting the financial statements?Identify CSP (Clean surplus profit), looking for total comprehensive income net Profit+/- Dirty surplus items= Total comprehensive income , Split Income StatementSplit Balance sheetFCF (Left over Free cash flow) = Net operating Profit after tax (NOPAT) – Net operating assets.

Classification of reformulated balancesheet

The reformulated statement is on comprehensive basis so it includes “other comprehensive income”

• Operating item is seperated from financing items.
• Ooerating income from sales is seperated from other operating income
• Tax is allocated to operating and finanacing components of the statements
• Reformulated statements shows how the firm’s strategy generates earnings
• Reclassify the GAAP income and expense item in to core operating, non core operating, and financing activity
• read footnotes carefully for income and expense item to find any non core activityies incorrectly classified under core activity.
• Account for tax effects in reclassifying income and expense item to make them after tax basis

FCF = Net financing expense after tax (NFEAT) – NFO + D (Distributions)(Net transaction to share holdersoBoth these 2 points (FCF) need to equal the same3.)Identify and explain some reasons why reformatting the financial statement inprove analysis.

Hepl with comparability, help with ratio analysis, operating/investment creat value