Using accounting for decision makingStep 1: Analyzing financial statementsI agree with Marc Bloch that one must consult the past in order to foresee the future in analyzing the financial statements of any company. It is from the financial statements of a company that analysts are able to understand the past of the firm. I agree to the fact that firms do not add value by paying dividends to its equity investors rather it does add value by transferring the value between a firm and its equity investors. I bear a similar understanding of free cash flow with the writer.
In this case, I fully agree that cash flow is a measure of value though it is not in itself a measure of value. I also believe that the amount of free cash flow which a firm generates will be affected by the decision of the firm about how much to invest into operating assets. It is also very true that, the more a firm invests in its operating assets the less it will have its free cash flow. Therefore cash flow can be sued by firms to add value as the firm will earn returns.
Economic profit is also another way in which a firm can add value. This method is used by firms as a measure of the extent to which a firm has been bale to add value over and above its cost of capital during a period. In my understanding, firms can use both economic profit and cash flow to add value to its equity investors therefore a good way in which firms can analyze their financial statements.
In the issue of operating and financial activities, I agree with Anita Roddick that business is about creating a products or service so good that people will pay for it. I also agree to the fact that the most efficient way of identifying accounting drivers of economic profit and cash flow is to restate the firm’s financial statements in order to ensure all earnings are included. I also think in line with the article that in restating the financial statements of firm, the operating activities should be separated from the financial activities in order to see how the firm is financed and have a clear view of the firms operating activities from inside.
I do not think that dirty surplus which makes firms not to include its earnings in income statement and put it directly in the balance sheet should be allowed as this might not be a sign of being genuine. On the issue of restating two key financial statements, I agree that balance sheets of any firm should be restated in order to separate the operating and financial assets and liabilities.
In my understanding, it very true that restating the balance sheet will facilitate short term and long term liquidity of a firm. I fully agree that it also very important to restate income statement if a firm wishes to separate its operating and financial revenue and expenses.