Question

How do we reformat financial statements?

Answer 1

Reformatting of financial statements is done to separate the operating activities of the business from that of the financing activities. The purpose of reformatting is to value the operating performance separately from the financing activities. Operating activities create value to the firm while financing activities do not create any value . The steps involved in reformatting financial statements are:

1. Separation of liabilities in to financial liabilities and operating liabilities. Financial liabilities are usually used to finance long term business activities like term loans while operating liabilities are necessary for everyday activities of the business such as accounts payable.

2. Reformulating income and surplus is another step in reformatting. Shareholder payments and changes are excluded from the statement of profit or loss to depict the operating income. Only operating incomes and expenses in a reformulated income statement for internal business decision making.

3. The assets side of the balance sheet is segregated into financial and operating assets.

4. The cash flow statement is redone to include free cash flow i.e. cash flow from operations minus the cash investments in the business.