Financial Reporting and Analysis - Essay Example

?Running Head: FIANANCIAL REPORTING AND ANALYSIS Case 4-5 Celtics a) Amortisation can be briefly defined as the allocation of the cost of the intangible assets. Lessing and residual value that has been projected to periods in which the asset is expected to contribute to the organization’s revenue generating activities estimated, capitalized cost is allocated less. NBA franchise and other intangible assets have a value of $164,703 $164702 and $165 035 in years 1996, 1997, and 1998 respectively. This shows that the method of amortisation reflect the pattern of the usage of assets in generation of income. NBA intangible assets are defined in cost less amortisation that has accumulated. Straight line method spread over the useful estimated lives of the intangible assets which is generally 3-7 years provides the amortisation. b) Discontinued operations are referred to as parts of an entity that has been sold or has been put into held for sale grouping. While evaluating the future success prospects of an organization, an investor who has existed or a potential investor who will invest in future would remove the discontinued operations from consideration because these items have no bearing or effects on the future. The concern of the management is that some operations are discontinued to improve the results of the continuing operations. The operations and cash flows of the part has been removed from the ongoing operations and the entity will not have a significant involvement in the operations of the discontinued part after the transaction of disposal is made. c) Team costs and expenses increased between 1996 and 1997 from $27,891,264 to $40,941,156. This is because of after discontinuing some operations, it would require a major effort to re-establish the operation and requires significant effort and budget to continue the operations as before. This may need extra marketing, extra staffing. There can be a possibility of increase in the cost of living between the two years which would subsequently raise the amount of team costs and expenses. d) Net income was $420,306 and $12,267,317 in year 1997 and 1998 respectively. This was a hefty rise in the value of income. This is because of higher revenue that was gained. Higher revenue resulted from ticket sales and also from Television and radio broadcasting fees in 2008. By constant winning of games, heavy promotion and advertisement through the television and broadcast and also through reaching a wide fan base by selling many tickets resulted to the higher income. Through maintaining lower expenses such as team costs and expenses, selling and promotion, general and administrative in the year 1998 resulted to an increase in net income. e) Noting that net income was higher in 1996, distributions declared were higher in 1998 than in 1996, with $0.50 per unit. Distributions are that portion of corporate profits that is made by a corporation to its shareholders. Net income can either be re-invested in the business or distributed to stockholders. In 1996, the main source of the net income was from the discontinued operations income. This income was better invested back to the business instead of distributing it to the shareholders. This would help avoid double taxation and be realised as capital gains. Case 10-7 Cash movements and Periodic Income Determination a) Income determination is not an exact science. It is the best estimate of determination of what will be the base of individuals’ income on the evidence the individual presents. The base period can be the month for which revenue verification and identification of an individual is a requirement. Month’s income is used for the projection of income. Income averaged and a conversion factor can be used to reach at a quantifiable monthly income. b) Cash flow estimation is the prediction whose main purpose is the anticipation of the disbursements and receipts of cash. It is a fixed amount of time that it covers. Cash sensitivity and aggressiveness determines the penetration into the future the organization can be forecast able and how long and also how many times you use. Cash flows should be estimated using discounted cash flow model. This model is used to estimate the expected future cash flows the underlying firm is going to generate and produce. The variables or factors used in estimating cash flows are future growth of sales and profits margins in the future. Some factors that are considered while predicting a company’s revenue growth include industry trends, competitive advantage of a company and economic data. In order to determine the company’s future operating profits, it entails looking at the company’s cost. Some companies’ gains from operating leverage and that is, a company is able to spread its fixed costs across production base. In estimating cash flow, uses the operating cash flows minus the expenditures that is capitalized c) In the long run, cash receipts from operations are equal to revenues from operations. The accountant normally has the problem of reconciling cash receipts with the revenues. For revenue recognised but not received in cash during the current period, an asset of equal value must be recorded or a liability must be amortised. Revenue from the operations of a business comprises all amount of money the business makes within its operations. It is a recurring type of profit that is as a result of transactions with the customers. Cash receipts are the money the business has already received from its operation. The business needs cash receipt and also revenue income to thrive. They do not always match in the short run especially in business with large revenue receipts. An example is a situation where the customer may pay the price in the transaction only half way and intend to pay the balance in instalments later. This will cause the revenue from operations to reflect a different profit amount. In the long run, cash receipts and revenue receipts will be equal since like in the above example the customer will finally make the payment even if it will be delayed. d) Cash flow refers to the amount of money that is remaining after all the money that is going out that is, cash outflow is subtracted from all the money that comes in that is, cash inflow. If a company is having a negative cash flow, a way should be found to make up the short fall. Cash outputs prior to the shortfall period should be assessed to see whether thee is a way to hold more cash to help in the covering up of the shortfall. A way to reduce the expenses should be looked at or to increase the income or both. A spending increase is followed by a higher income level. Enlarging the investor’s equity is another alternative. This is whereby the investors put more money by increasing the number of shares in the company. A final alternative is borrowing against the company’s future positive cash flows. This may be done by postponing an expense to be paid at a future period. Suppliers can also extend payment terms or the long term customers might pay ahead of the time, their anticipated purchases and ask the people who owe the firm money to pay earlier. It is not easy sometimes to avoid negative cash flows. Negative cash flow should thus be predicted, and accounted for in the projections of the cash flows. They should be short time frame should not be permanent and should be short term. The business should be able to handle these negative cash flows. e) Assume that the reported operating income has been substantially more than the cash flow from the operations for the past two years. The question to be posed is where the cash went if the organization made a huge amount of money. Non cash items which include depreciation expense and sale of assets losses are added back to the net income. Changes in the statement of financial position are computed so as to reach to the cash provided or used in the entity’s operations. Operating income is higher than operating cash flow because of the receivables increase and also increase in the inventories. In order to put on hold the operating income, the entity should strengthen the capacity of to produce the products may be by investing in equipments or by settling its debt. The cash flows should be analyzed so as to be used to ascertain the ability of the company in generation of future cash flows and also reveal the differences between the net cash flow and the net operating income. References: Gibson H.Charles. (2008). Financial Reporting and Analysis. 11th Edition. Cengage Learning Read More