Analysis of Enterprise Accounting Statements - World Credit Organization

3.7 Analysis of corporate accounting statements

3.7.1 The center of accounting statement analysis

The financial information of an enterprise reflects the operating results of the enterprise in a period of time. If we can analyze the financial information of the enterprise for many years, we can understand the trend of the enterprise's operation and development more clearly, thereby increasing the accuracy of credit analysis. Financial information is reflected through corporate financial statements. According to my country's current accounting system and the provisions of the "Company Law", an enterprise's financial statements mainly include: balance sheet, profit and loss statement, cash flow statement, various annexes and notes, etc. Under normal circumstances, financial reports mainly provide decision-making information for corporate management, existing and potential investors, creditors, etc. But for credit analysts, the original intention of analyzing financial reports is to find out the unreasonableness of financial statements, and at the same time use some testing methods to reveal the intentions of the report preparers.

The analysis of financial data in credit analysis is different from financial management. Financial management requires detailed analysis of reports, which takes a lot of time. In credit analysis, due to the need to make timely business decisions, it is only necessary to conduct detailed analysis on key items, and quickly browse other contents in the report, so as to obtain valuable information for oneself in a short time.

To sum up, in credit analysis, the focus of accounting statement analysis is as follows:

1. For capital items, analyze its actual value and flow rate;

Second, for debt items, analyze the time and amount of debt repayment by customers;

Third, for owner's equity items, it depends on whether changes in share capital and distribution of dividends have an impact on credit business.

3.7.2 Balance Sheet Analysis

1. Overview

The balance sheet, also known as the statement of financial status, is a written description of the assets and liabilities of an enterprise, reflecting the financial status of the enterprise when closing accounts on a certain date, and is a static accounting statement. It is based on the relationship between assets, liabilities and owner's equity, according to a certain classification standard and sequence, to properly arrange the assets, liabilities and owner's equity items of a certain date of the enterprise, and to organize a large number of items formed in daily work. The data is highly condensed and organized. It indicates the economic resources owned or controlled by a business on a specific date, the existing obligations undertaken and the owners' claims to net assets.

The balance sheet can clearly reflect the total amount and structure of liabilities on a certain date, indicating how much assets or labor services the company will need to use to pay off debts in the future; it can reflect the owner's equity and indicate the investor's share of the company's assets Proportion. Therefore, through the balance sheet, we can understand the composition of the owner's equity and analyze the production and operation capabilities of the enterprise. Through the balance sheet, we can also obtain basic financial information for credit analysis, and calculate financial ratios such as current ratio and quick ratio, so as to understand the short-term solvency of the company.

A balance sheet is a static description of a company's financial condition as of a specific date. This is like taking a photo of a car moving at high speed with a very fast shutter speed. We can get a photo of the car in a fixed position, but this photo will not give the observer any information about the speed and direction of the car. The balance sheet is such a snapshot, and its true meaning is that it summarizes the financial resources of the company on a specific date, and does not itself specify whether the company is profitable or losing money. To see financial performance over time there are other tools, such as income statements.

The balance sheet is divided into three parts, namely assets, liabilities, and owner's equity. Among them, assets are the items that make up the resources obtained by the company; liabilities are the items owed by the company, which can also be understood as the creditor's equity; owner's equity represents the owner's share or income in the company's total assets, and can also be called the net worth of capital. The relationship between them can be expressed by the accounting formula: Assets = Liabilities + Owner's Equity. The general format of the statement is that all assets are listed on the right, and liabilities and owner's equity are listed on the left, with the total on the left equal to the total on the right.

According to the preparation time of financial statements, they can be divided into monthly reports, quarterly reports, semi-annual reports and annual reports. In China, companies often use December 31 as the closing date of each year, while the fiscal year of many companies abroad is different from the natural year, some in October, some in November.

2. Analysis of asset subjects

The assets of the balance sheet are divided into the following six categories: (1) current assets; (2) long-term investments; (3) fixed assets; (4) intangible assets; (5) long-term prepaid expenses; (6) other long-term assets.

In the balance sheet, generally speaking, the order of assets of each category is arranged according to the difficulty and speed of asset realization, and the lower the row, the worse the liquidity of assets. The liquidity of an asset refers to the ease with which an asset can be converted into cash. This listing clearly reflects the total amount of cash that assets can convert into when the enterprise is liquidated (liquidation: refers to the activities of liquidating assets and liabilities according to certain procedures after the enterprise is terminated due to bankruptcy or other reasons.). Assets listed first are those that will actually realize their full value at liquidation, followed by those with very little realizable value at liquidation. For example, cash is always the top asset because it can be recovered in its entirety in liquidation; securities, especially government bonds, can usually be liquidated at their full value, or slightly above or below the balance sheet The value reported above.

In credit analysis, we are very concerned about current assets, because when companies pay their debts, they usually use these assets. In many cases, there is a considerable reduction in the value of illiquid assets when they are liquidated. Fixed assets and investments usually have a certain recovery value at the time of liquidation, but intangible assets other than land use rights, prepaid expenses, deferred expenses and other assets have little value at the time of liquidation. For analysts, the core of balance sheet analysis is to know how many assets it has and which ones can realize value during liquidation.

Cash, government bonds, receivables, and corporate tax returns are also known as quick assets because they can be quickly converted to cash without selling effort. Commodities and inventories can only be converted into cash after they are sold. At the same time, there is price uncertainty in the realization of commodities, so they cannot be called quick assets. Advances are a slower-moving asset than goods because advances first have to be converted into ordered goods, which still need to be sold to be converted into cash.

Next, we introduce some specific asset items.

(1) Current assets. Current assets are cash and those assets that are readily convertible into cash in the normal course of business. The main current assets are:

1. Monetary funds.

Including corporate cash in hand, bank settlement account deposits, foreign deposits, bank draft deposits, cashier's check deposits, credit card deposits, credit guarantee deposits and other cash deposits.

Analysis of cash: Cash should only include unrestricted cash that is freely withdrawn to pay the company's debts as they fall due. The analysis of cash should focus on the following points:

(1) Limited-purpose cash. Refers to that portion of cash that is deposited into a special fund to meet the needs of a sinking fund or that can only be used to pay specific debts. In most cases, this part of the cash should be regarded as dead assets.

(2) Foreign currency cash. If the foreign exchange amount accounts for a large proportion of the cash amount, further investigation should be carried out, including exchange rate fluctuations, conversion limits, and payment difficulties that may be caused by foreign exchange controls.

(3) Small company cash review. For some small companies, because their financial statements have not been audited, analysts should focus on analyzing the company's cash and bank deposits. When the cash figure is too large, analysts should analyze the reasons for the formation. There is no point in repaying the debt if it is due to a temporary borrowing or other item that is not part of the cash balance.

2. Government bonds or other securities.

Usually, such assets are classified as short-term investments of enterprises, mainly referring to stocks and bonds that can be cashed at any time and are ready to be cashed at any time, and held for no more than one year (including one year).

Analysis of marketable securities:

(1) There are three main types of securities: government bonds, corporate bonds, and company stocks (listed or unlisted). Government bonds mainly refer to treasury bonds or special bonds. Since they represent government debt and because government bond prices fluctuate relatively little, they can be considered to have the same ability to pay as cash. Since the prices of the company's unlisted bonds and stocks fluctuate greatly, and the market liquidity is not strong, if the company's working capital invests a large amount of corporate bonds and stocks, special attention should be drawn to the attention of credit analysts. If it is known through investigation that the company has strong investment strength, and the purpose of investing in these bonds is to control other companies or adjust the company's long-term strategy, these investments can be regarded as non-current assets and long-term investments.

(2) Negotiable securities can be valued at cost or market value, or at the lower of cost or market value that is most acceptable to creditors. If carried at cost, the market value of the security at the reporting date should be disclosed in the notes to the balance sheet. In addition, many bonds and stocks can be registered, which can be recorded in the name of the company or the name of the company's main person in charge. Therefore, when some small businesses are merged into a large company, it is best to confirm whether the government bonds are hung under the name of the new company or under the name of a person in charge. If it is recorded in the name of the person in charge, it is not conducive to the creditor's realization of the creditor's rights.

3. Accounts receivable.

Accounts receivable refers to the various payments that the enterprise should collect from the purchase unit due to the sale of goods and the provision of labor services. It reflects the funds receivable by the enterprise but not recovered.

Accounts receivable analysis: The main purpose of analyzing accounts receivable is to find out the liquidity of accounts receivable and accurately calculate the recovery rate of accounts receivable of credited customers. According to different entities forming accounts receivable, accounts receivable can be divided into accounts receivable to customers, accounts receivable to subsidiaries and branches, and accounts receivable to internal personnel.

(1) Accounts receivable to customers. Accounts receivable from customers are current assets. The aging of accounts receivable is the main issue worthy of attention. The quality of accounts receivable with different ages is different, and the possibility of recovery is also different. Therefore, possible bad debt losses should be deducted before accounts receivable are included in assets and liabilities. The accounts receivable sub-ledger will list the month in which credit sales and accounts receivable occurred. By comparing the company's sales conditions and the aging of these accounts, it is easy to know whether these payments can be collected during normal sales.

For example, a company's sales terms are 30-day payment period, and the amount and aging of accounts receivable are listed in the financial statement on December 31, 2003.

It can be seen from this that the return period of the goods shipped in December is within 30 days, which is not yet due. But receivables from November, October and before October are due. It can be seen from the calculation that more than 57% of all accounts receivable are too slow to flow. Such a high uncollected ratio indicates that the quality of the company's accounts receivable is low. Some of these deferred accounts may no longer be recoverable. If the company's accounts receivable is limited to a few customers, then the names of these major customers should be known. Since any financial and operational difficulties or other delays in these customers will make it difficult to collect accounts receivable, it is necessary to understand the financial status of these customers.

(2) Accounts receivable from subsidiaries or branches. Accounts receivable from subsidiaries and branches, especially when the amount is large, should be carefully reviewed by the analyst to ensure that consignment shipments or shipments are not included in accounts receivable before being classified as current assets. It is an advance payment for the financing needs of subsidiaries. If it is consignment goods, this receivable should be regarded as inventory; if it is financing for a subsidiary, it should be put into long-term or short-term investment depending on its liquidity. Goods on consignment can still be included in current assets as long as they can be recovered within the period of the parent company's sale conditions. If the subsidiary or division's receivables are large relative to total receivables, the subsidiary or division's statements should be analyzed.

(3) Accounts receivable to insiders. Accounts receivable from internal personnel are often listed as other receivables, which mainly occur to employees, shareholders, directors or main leaders of the company. Welfare expenses for high-level personnel, so this part of the borrowing has no meaning for debt repayment. Unless there are special circumstances. In foreign accounting systems, receivables from senior staff and advance payments to sales staff are sometimes listed as other assets in the balance sheet. These items are generally not considered for debt service unless it is determined that they are recoverable.

In addition, there are some unusual receivables, for example, receivables for insurance claims or receivables for the sale of fixed assets. For such receivables, attention should be paid to the exact time of payment. If these accounts will be recovered after one year, then it is also regarded as dormant assets.

4. Notes receivable.

The subject of bills receivable reflects the commercial bills received by the enterprise that have not yet expired and have not been discounted to the bank.

Analysis of Notes Receivable: Notes Receivable refers to the commercial paper held by the enterprise and not yet cashed when due. A commercial bill is a negotiable certificate that contains a certain payment date, payment amount and unconditional payment of the payer, and it is also a certificate of credit that can be freely transferred by the holder to others. What is treated as bills receivable in accounting refers to the commercial drafts received by enterprises in credit sales. Therefore, there are generally two sources of notes receivable:

(1) Commercial bills of exchange used in installment sales;

(2) A bill accepted because an account receivable is overdue.

In addition, discounts, guarantees, mortgages, etc. are also sources of notes receivable that often appear in financial statements.

Analysts should scrutinize bills receivable for commodity trading before they are classified as current assets, as the presence of bills receivable may indicate slow collection of trade receivables. If there are too many bills receivable for installment sales, it will also give people a feeling of difficulty in sales. At the same time, companies usually need to rely on large short-term bank loans to support these unconverted installment bills receivables.

5. Commodities and inventory.

This subject reflects the actual cost of the enterprise's various inventories in storage, in transit and in process, including various materials, commodities, work in progress, semi-finished products, packaging, low-value consumables, and goods issued by installments , Consignment sales of goods, consignment sales of goods, etc.

Analysis of inventory:

The key point of inventory analysis is to evaluate the inventory comprehensively and reasonably. Because the contents of the inventory are complex, the value is difficult to determine, and the inventory accounts for the majority of the company's current assets, it is very important to accurately value the inventory. There are two methods for calculating the value of inventory not in stock during the period: the first-in first-out method and the last-in first-out method. In addition, in order to ensure a sound accounting policy, the calculated inventory value should be compared with the current market value, and then use the lower of the cost-to-market value method to make a reasonable valuation of the inventory at the end of the period.

(1) First in first out method. The first-in, first-out method is a method of valuing outgoing inventory on the assumption that the inventory purchased first is shipped first. Under this method of valuing inventories, we assume that raw materials purchased first are used first. When we take inventory, we use the cost of the most recently purchased goods. If prices go up, recent purchases will be more expensive, our estimate of the value of our outstanding inventory will be higher, our cost of goods sold will be lower, and our reported profit will be higher. Conversely, when the price falls, the value of the outstanding inventory becomes smaller, and the profit also decreases.

Using the first-in-first-out method, the inventory cost is determined according to the latest purchase, and the inventory cost at the end of the period is relatively close to the current market value. The advantage is that the enterprise cannot choose inventory valuation at will to adjust the current profit. This is especially true for companies with frequent inventory in and out.

(2) Last-in-first-out method. The last-in-first-out method is a method that assumes that the inventories received later are delivered first, and that the delivered inventories are valued at the unit price received most recently.

The advantage of using LIFO is that when the price rises, the inventory issued in the current period is calculated according to the unit cost of the latest receipt, so that the cost of the current period increases, and the value and profit of the outstanding inventory are relatively small. Only when the inventory price is lower than the cost calculated by the LIFO method, the ending inventory data and net profit will be exaggerated. Because prices generally rise in historical trends and past general trends, companies that use the LIFO method for inventory valuation will have lower profits and lower inventory values than companies that use the LIFO method for valuation. At this point, the LIFO method is more in line with the prudent and prudent principles in accounting practice.

(3) The lower of cost and market price. The lower of cost and market price method refers to the method of valuing the unexpired inventory at the lower of cost and market price. That is, when the cost is lower than the market price, the ending inventory is priced at cost; when the market price is lower than the cost, the ending inventory is priced at the market price. This prevents the inventory from being priced above market value and results in a robust inventory value or a more realistic valuation.

From the above we can see that the ending inventory value and income statement calculated by the LIFO method are robust. If the inventory value is calculated by other methods, it should also be measured and priced by the method of cost and market price, so as to obtain stable inventory valuation and profit data. Inventory is made up of raw materials, work in progress, and finished goods. They are very different, and the market conditions for buying or selling may be completely different,

Since inventory is the main part of current assets, it plays an important role in guaranteeing creditor's rights. When analyzing inventory, analysts need to understand the market nature and market conditions of the inventory in addition to the value of the inventory, which is far more useful than analyzing data.

6. Advance payment.

Advance payment refers to the amount paid in advance to the supplier, or the amount paid in advance to the contractor to start a project. Unless there are clear refund conditions stipulated in the contract, the advance payment is generally non-refundable, and it does not have much significance for the company to repay the debt.

7. Enterprise tax refund.

Enterprise tax rebate refers to the return of tax paid in accordance with national regulations. This situation is often used in domestic export companies, because the country stipulates that after the export of goods, the value-added tax that has been paid in the circulation process can be returned, and export companies usually include this amount in current assets.

(2) Long-term investment.

Long-term investment is to some extent like fixed assets, which are long-term assets. The main investment assets include: 1. Investment or prepaid projects in companies or affiliated companies; 2. Investment in stocks or bonds; 3. Cash or securities placed in special funds; 4. Real estate or fixed assets not used in the company's business operations.

Analysis of long-term investments: Investments are usually valued at original acquisition cost or current market prices. If the investment in a subsidiary is priced at acquisition cost, it refers to the full price paid when acquiring the investment equity. In valuing investments other than subsidiary investments, cost value is widely used because market values are difficult to obtain accurately. For the analysis of investment, the liquidity of investment projects should be divided according to their different properties. We know that cash and bonds are very liquid, but if they are earmarked, they should be classified as "dormant assets" because these assets will not be used in the normal course of business to pay off debts. Of course, in very urgent cases, these funds can still be used to meet the requirements of general creditors.

(3) Fixed assets.

Fixed assets are the basic conditions to ensure the production or operation of an enterprise. They are tangible assets, but they will not be purchased or sold on a regular basis. Often fixed assets can be considered permanent assets that are only consumed at a very slow rate over a long period of time. In the ordinary course of business, fixed assets are generally not converted into cash.

The main fixed assets include: 1. Real estate; 2. Other buildings; 3. Factory equipment; 4. Furniture and installations; 5. Other equipment.

Buildings, equipment and furniture and fixtures should be systematically depreciated, that is, a portion of their cost value should be depreciated to reflect wear and tear, obsolescence and, at least in theory, to finance eventual replacement of the asset. Due to the difference of Chinese and foreign legal systems, the nature of the land asset in the asset statement is different. In western countries, individuals and companies are allowed to own land, and they can also buy and sell land freely, so it is a fixed asset in the accounting subject and is considered to be able to retain the full value without depreciation. In China, all land belongs to the state, and individuals and enterprises can only have the right to use the land for a certain period of time. Therefore, the domestic accounting system includes land as an intangible asset, and its value needs to be evaluated before it can be recognized.

Analysis of fixed assets:

Fixed assets can be valued in various ways, such as historical cost (the cost of acquiring the asset), valued at full replacement value, and valued at net value, etc. Due to the objective and verifiable characteristics of historical cost pricing, fixed assets are usually recorded at historical cost on the books. During the long-term use of fixed assets, their value continues to decrease, and this part of the value that disappears is the amount of depreciation. Under the domestic accounting system, all fixed assets must be depreciated systematically, and the cost of the fixed assets is amortized in a planned way during the service life of the fixed assets to offset the non-cash expenses of profits.

Depreciation is deducted from the sales revenue as an expense, so the depreciation rate has a certain impact on the annual profit. Managers decide the depreciation rate of equipment according to different business strategies. If the company wants to lower the net income to reduce the tax, the depreciation rate will be accelerated to increase the cost to reduce its net income. When the economy is in recession, some companies will reduce the depreciation rate to reduce their depreciation amount, so as to reflect a certain profit in the financial report. Under normal circumstances, a company's depreciation method is unchanged, which can maintain the consistency of the financial system. If the depreciation method or depreciation rate is changed, the detailed depreciation amount that should be accrued this year should be stated in the notes to the financial statements, and the depreciation expense should also be listed as an expense in the operating report. Analysts should pay attention to whether the company has changed the depreciation method or depreciation rate, and analyze the reasons and motivations for the change. If the financial statement does not clearly show the fact that it changes the depreciation method or depreciation rate, more attention should be paid to its motivation.

Because the market value of fixed assets is constantly changing during long-term use, the value of fixed assets in the balance sheet has little to do with the actual variable value on the reporting date. For example, machinery and equipment should be depreciated over a ten-year period, but it may be that an item of equipment is actually only five years old, or that some equipment, after twenty years of use, is still functioning well. Fixed asset values are sometimes increased through appraisals, which can help companies more easily secure loans against some equipment. If historical cost pricing is still used, fixed assets are undoubtedly greatly underestimated when prices rise. But this is for analysts to avoid giving mortgages that exceed the book value of the mortgaged property even if prices rise.

In recent years, some companies have recorded fixed assets at appraised (or current replacement) values. ) items are listed as "Fixed Assets Revaluation Appreciation". For analysts, even if this increase is made by a well-known appraisal company on the basis of legal appraisal, the value of fixed assets added by appraisal should not have any impact on the credit decision, and the motivation behind it should also be analyzed . First, it is quite difficult to assess the value of such assets when there is no efficient market for such assets. Second, appraising appreciation can mislead creditors into believing that the debtor has a larger investment. If you are only confused by superficial phenomena, then the risk of credit sales will increase.

As mentioned above, net assets are the main factor for analysts to consider credit. In addition to examining the scale of net assets, their composition must also be analyzed. These should all be taken into account when we judge similar businesses whose fixed assets are valued differently. Finally, when a business's fixed assets are of considerable value to the going concern, the depreciation in value will be considerable if liquidation occurs. Therefore, if the enterprise increases the value of its fixed assets through appraisal, it should also clearly indicate the increased surplus from the revaluation of fixed assets.

After revaluation of fixed assets, many enterprises continue to accrue depreciation at the original depreciation rate on the basis of the original cost.to calculate profit. In this case, the appreciation of fixed assets due to revaluation can be directly included in the appraised appreciation of the capital reserve.

(4) Intangible assets.

Intangible assets refer to non-monetary assets that do not have physical form. Usually these assets are an essential part of the going concern of the business, but cannot be used to pay off debts, and if the business ceases or is liquidated, these assets lose a lot of value. The main intangible assets are as follows: 1. Goodwill; 2. Patents; 3. Copyright; 4. Franchise rights;

Owning intangible assets, the enterprise will be in a special advantageous position in the market competition, which will enable the enterprise to obtain additional economic benefits, which also determines that the enterprise will spend a lot of money to purchase such assets. Therefore, when the assets of an enterprise are recognized as intangible assets, the following conditions must be met:

(1) The role and ability of the asset to obtain economic benefits for the enterprise can be proved.

(2) The cost of acquiring the asset can be measured.

In practice, the technologies and patents purchased by enterprises are certain in terms of obtaining economic benefits, and it is reasonable to include them in assets. However, there is a lot of controversy as to whether the costs and expenses of an enterprise's own research and development can be included in assets. Due to the great uncertainty in the results of R&D activities of enterprises, the domestic accounting system generally only includes these expenditures in the expense account. However, for some enterprises, in order to improve production methods, develop new or special machinery and equipment, improve packaging or develop new products, the cost of research and development can reach several million yuan in a certain period of time. In the western accounting system, which amount should be expensed and which amount should be capitalized in the R&D cost is usually handled in the following way:

(1) Capitalize the full cost of developing a successful patent or research;

(2) Keep project cost records, and only capitalize those costs that can reasonably be considered to be of great help to profits generated after the current accounting period;

(3) Offset all the costs of the entire research and development department against the income of the current period.

Although the second method is very reasonable in theory, in practice, for the sake of reducing income tax, the third method is more widely used.

Analysis of Intangible Assets: Intangible assets may be of great value in a well-run company, but have little value in a company liquidation. It is very difficult to make an accurate valuation of intangible assets. Some well-known domestic companies often use valuation methods to evaluate brands and goodwill, and realize their value through transfer or transfer of use rights. For an enterprise, obtaining a patented manufacturing method or formula is different from brand and goodwill, and it must actually invest in development or purchase. The value of this type of intangible asset should be estimated in terms of cost during development or acquisition cost. However, for prudent analysts, the intangible assets of enterprises are generally ignored, except, of course, land use rights in mainland my country.

(5) Long-term deferred expenses.

Long-term deferred expenses refer to various expenses that have been paid by the enterprise and have an amortization period of more than one year (excluding one year). This subject mainly includes: the start-up expenses incurred during the preparation period, which will be included in the operating profit and loss after the enterprise starts production and operation; the handling fees or commissions paid by the joint stock company entrusting other units to issue stocks, minus the interest during the stock issuance freeze period If the balance after income is not enough to be offset from the premium of the issued shares, if the amount is relatively large, it can be used as a long-term deferred expense, amortized on average within a period not exceeding 2 years, and included in profit or loss.

Start-up expenses refer to various expenses other than those that should be included in the value of relevant property and materials during the preparation period of the enterprise, including personnel wages, office expenses, printing expenses, registration fees, and borrowing expenses that are not included in the value of fixed assets wait. When a company is set up, management usually does not charge start-up expenses incurred in the current year as a first-year expense, but may decide to capitalize them and amortize them over five years, usually one-fifth per year, In addition, the tax law also requires the capitalization of start-up costs in order to ensure the income tax base. In domestic accounting standards, long-term deferred expenses include leased fixed asset improvement expenditure and fixed asset overhaul expenditure.

The difference between long-term deferred expenses and deferred expenses is: long-term deferred expenses are deferred expenses, but the amortization period exceeds one year, while the deferred expenses are generally within one year.

Long-term prepaid expenses are essentially just an expense without "realization". The larger the amount, the lower the asset quality of the enterprise. Therefore, for enterprises, the amount of such assets should be as small as possible, and the smaller the proportion of total assets, the better.

When analyzing long-term deferred expenses, we should pay attention to whether the enterprise uses long-term deferred expenses as a profit regulator according to its own needs. Expenses within the scope of expense accounting are transferred in; and when the profit exceeds the target, in order to reduce taxes and speed up the amortization speed, a large amount of long-term deferred expenses are transferred in advance to amortization, so as to achieve the purpose of reducing and concealing profits, and provide future benefits. The improvement of operating performance during the period laid the groundwork.

Under normal circumstances, the scale of long-term deferred expenses should show a decreasing trend. If the scale of long-term deferred expenses has increased significantly, attention should be paid to the accounting statement on the recognition standards and amortization of long-term deferred expenses in the notes to the accounting statements. Policy, focus on checking the detailed list of various long-term deferred expense items in the notes to the accounting statements, and check the rationality of the occurrence and amortization of each item; at the same time, special attention should be paid to items that have increased significantly in the current year and have not been amortized normally.

(6) Other long-term assets.

Other long-term assets are assets that cannot be freely controlled by the enterprise due to some special reasons, generally including special materials reserved by the state, frozen deposits in banks, temporary facilities, and property involved in litigation.

(7) Cash surrender of life insurance.

In western countries, companies usually subscribe to life insurance for key company leaders, with the company as the beneficiary, resulting in a growing cash surrender of life insurance. Cash surrender amounts are listed as assets in the company's financial statements. This approach is very necessary for the stable operation of the enterprise and the stability of talents, and it is also good for improving the credit rating of the enterprise. However, the domestic practice of purchasing life insurance for business leaders has not been widely used. But from a global and future perspective, it is not superfluous for credit practitioners to understand this content.

In the financial statements, the cash surrender amount of life insurance can be regarded as current assets. The direct reason for this is that the policy can be converted into cash at any time, and the company can also mortgage the cash surrender amount of life insurance to borrow money. Credit analysts should be aware that life insurance cash surrenders have high liquidation value and easy access to mortgages. But in normal operations, companies usually don't discount policies lightly. Therefore, such assets will not be used to pay short-term current liabilities, and companies will choose to repay borrowings by liquidating inventories or notes receivable, or repay debts through profits, rather than converting assets into cash. Therefore, this asset should also not be included in the composition of working capital in the analysis process.

3. Analysis of Liabilities

There are two types of liabilities: current liabilities and long-term liabilities.

(1) Current liabilities

Current liabilities are debts that are due within one year. This type of debt usually requires the business to repay it in cash, but occasionally it can also be repaid in goods or services. They arise in the ordinary course of business, such as liabilities incurred for the purchase of goods, the calculation of taxes, or the implementation of an insurance policy, and are payable within a definite period of time. Major current liabilities include: accounts payable, notes payable, or promissory notes; short-term loans to banks or other financial institutions; accrued expenses, such as accrued wages or taxes; advance payments from customers; and taxes payable. For current liabilities, the following items should generally be analyzed:

1. Accounts payable.

Accounts payable are various payments that a business is required to make. Analysts should analyze the composition of accounts payable, especially pay attention to the amount of due but outstanding accounts payable, and the reason for the outstanding payment. If there is no reasonable reason for the outstanding payment, it means that the company may have financial difficulties or have a low willingness to be honest. The phenomenon.

2. Notes payable.

A bill payable is a bill issued by the drawer, entrusting the payer to unconditionally pay a certain amount to the payee or bearer on the specified date. In our country, bills payable are bills issued by the issuer and accepted by the acceptor due to the adoption of commercial bills in economic activities. Broadly speaking, according to the different drawers, notes payable can be divided into: bank notes payable, notes payable to officers, shareholders or branch companies, trade notes payable and other notes payable. Notes payable, like accounts payable, represent the external liabilities of the business. Due to different creditors and different reasons for the formation of debts, their priorities are not the same when debt settlement occurs.

3. Tax payable.

The operating income and profits realized by the enterprise within a certain period of time must pay various taxes to the state in accordance with regulations. These payable taxes shall be withheld and included in relevant subjects according to the accrual principle, and shall temporarily stay in the enterprise before payment, and become a major current liability item on the financial statements.

4. Account received in advance.

From the perspective of analysts, Advance Payments should be listed as current liabilities on the balance sheet, rather than as a write-off of inventory. After the enterprise signs the contract, the customer will pay the advance payment, which constitutes a considerable liability. The heavy machinery manufacturing industry is a typical example. They usually start production after receiving a part of the payment in advance, and their advance payment may account for a relatively large part of current liabilities. The operating characteristics of such businesses may cause the balance sheet to appear as if the business has a sizable liability. However, we should be clear that this is not a liability that has to be paid in cash but needs to be repaid by delivery of product, so advance receipts are usually not a very pressing liability.

(2) Long-term liabilities.

Long-term liabilities are those liabilities that are due for more than one year. The main long-term liabilities include: bonds and long-term loans. For long-term liabilities, you should generally pay attention to the following matters:

1. Guarantee.

Long-term liabilities are either unsecured (such as unsecured term loans, debentures, etc.) or secured by fixed assets (such as mortgage bonds or notes secured by land, equipment, and machinery). It is a favorable factor for the business if the long-term liabilities are unsecured. This is also normal if the long-term liabilities are secured by fixed assets. However, if a business uses liquid assets as collateral, it is abnormal and generally a sign of financial distress.

2. The owner of the liability (creditor).

It is also important to understand the creditors of long-term liabilities. If the bills or bonds are held by many dispersed creditors, the terms of the loan agreement must still be strictly adhered to and cannot be changed at will when the business is in financial difficulty. If the long-term debt is held by one or some large institutions, such as banks or insurance companies, the loan agreement can be modified more reasonably through mutual negotiation under certain conditions.

3. The terms of the contract for long-term loans.

Usually, when creditors provide long-term loans, they not only stipulate the loan itself, but also stipulate the use of the enterprise and its business activities to ensure the safety of the loan. These regulations have also formed some restrictions on the operation of enterprises. The understanding of these regulations is of course conducive to the analysis of the short-term solvency of enterprises. The main restrictions in long-term loan agreements often include the following: (1) requiring the company to maintain a certain working capital; (2) requiring the company to maintain a certain current ratio or other important ratios; (3) dividend restrictions and restrictions on the company's stock repurchase limits.

Fourth, analysis of capital net worth (owner's equity) subject

Net worth, also known as owner's equity, is the result of subtracting liabilities from assets. These two names illustrate a problem from two perspectives. Net assets measure the value of a company from the perspective of creditors, and owner's equity measures the company from the perspective of investors. From the perspective of credit sales, credit analysts pay more attention to the tangible net assets of the company, that is, the amount after deducting all intangible assets from the net asset data, because this allows creditors to clearly see how much assets can be used as debts compensation. Equity represents the owner's portion of a company's assets that is left over after paying off various debts. It can be easily calculated: Assets - Liabilities = Equity. In selling on open account, tangible equity is more important. Tangible net worth = net worth - intangible assets.

From the balance sheet, the amount by which we calculate net worth is simply the book value. However, if the value of inventory, fixed assets, and deferred assets is reasonably evaluated, the market value of the enterprise can be very different from the book value. This difference in market value can be more fully reflected when a company goes public or is acquired. Typically, the net worth of a successful and healthy business may exceed its book value, while the net worth of a poorly run business will be less than its book value. Analysts need to take this into account before they can make a correct judgment.

5. Preparation

Provisions, also known as reserves, are defined by international accounting standards as liabilities of uncertain time or amount, mainly to meet contingencies. Under normal circumstances, it is paid special attention to in the fields of finance, insurance, and securities. In fact, it is also widely used in the industrial and commercial fields. The establishment of accounting reserves in corporate finance is mainly based on the possibility that various risks faced by the company will cause unexpected cash flow needs, and a certain amount of additional funds are required to deal with them. Some accounting provisions may be liabilities, while others may be assets. Provisions may appear in various sections of the balance sheet, such as the assets, liabilities and net assets sections. In fact, the assetsThe provisioning of different parts of the balance sheet has different meanings. Reserves in assets and liabilities can still be used as reserves or allowances, but provisions for net assets are generally called surplus reserves or provident funds. In my country's accounting practice, the types of provisions that are allowed to be withdrawn are limited. The "Accounting Standards for Business Enterprises" allow all enterprises to make provision for "bad debt reserves", "commodity price reduction reserves", etc., and the "Accounting System for Joint Stock Companies" allows The provisions made by listed companies include "inventory depreciation reserve", "short-term investment depreciation reserve" and "long-term investment depreciation reserve". In contrast, foreign companies are much more flexible about the withdrawal of reserves.

There are three main types of reserves: valuation reserve, liability reserve, and surplus reserve.

(1) Valuation preparation.

The establishment of the valuation reserve is to offset the value of an asset, and it will be recorded as a deduction of the asset on the balance sheet. The main valuation preparations are: 1. Depreciation; 2. Bad debts; 3. Expected sales discount; 4. Decrease in inventory value based on the lower of cost and market price; 5. Amortization of intangible assets such as patents.

(2) Provision for liabilities.

A provision for liabilities is an actual liability whose amount cannot be determined. Provisions for liabilities are generally included in the financial statements as current liabilities rather than long-term liabilities. Unless strong evidence can be provided that the liability will not fall due within one year. The main liability preparations are: 1. Income tax preparation; 2. Revaluation preparation; 3. Advance payment preparation.

(3) Surplus reserve.

Surplus reserve is established by the board of directors of the company, which is mainly a part of net profit that has not paid dividends to shareholders and other individuals, in order to meet the needs of expected expansion plans or future unfavorable situations. The surplus reserve does not represent any actual liabilities of the enterprise. Understanding it in a positive sense shows the long-term consideration of the managers for the future development plan of the enterprise. However, there are many opportunities to use surplus reserves in the statements, and it will also be used to conceal some liabilities, and analysts should be familiar with them. For the analysis of surplus reserves, it is important to understand whether the purpose of each reserve extraction is correct. For example, for a contingency provident fund, you need to know whether it represents a surplus reserve for a specific purpose or conceals actual liabilities; if there is an expansion provident fund in the accounts, you need to know whether the company has plans to expand production scale; If there is a reserve fund for price decline in the report, it is necessary to analyze whether there is a trend of inventory price reduction in the future.

The main surplus reserves of the enterprise are: 1. Plant expansion reserve fund; 2. Inventory price loss loss reserve fund (preparation); 3. Special fund (asset) reserve fund; 4. Self-insurance provident fund; 5. Contingency event provident fund.

6. Contingencies

A contingency is a situation that may result in loss or uncertain earnings for a business, the ultimate outcome of which can only be confirmed by the occurrence or non-occurrence of an event in the future. Contingent events are not included in the face of the balance sheet but are disclosed in the notes. Contingent events usually disclose possible liabilities, so for these uncertain situations of enterprises, analysts need to make careful analysis and judgment. The more important contingent liabilities include: (1) possible recourse of notes receivable; (2) commodity guarantee stipulated in the commercial contract; (3) guarantee or endorsement provided to other enterprises; (4) important pending Litigation; (5) Taxes that may be paid or returned.

Analysts should have some common sense about contingent liabilities. If an enterprise must find a guarantor to complete the transaction, then it should be judged whether the enterprise is already in a bad credit situation; If the company executes guarantees, or provides guarantees for other companies' loans, it should further understand the information about the exact amount and maturity date of the guarantees; losses; if the sums in any of these legal proceedings are substantial, obtain as many details as possible to judge the risk of extending credit.

7. The format of the balance sheet

Balance Sheet

There may be some differences between the balance sheet of some enterprises and this format, but the main reason is that the positions of some items are different, and the core content is the same.

3.7.3 Income statement analysis

1. Overview of profit and loss statement

The profit and loss statement, also known as the income and loss statement, is a statement that measures the operating performance of a company within a certain period of time (usually one year). The profit and loss statement matches the operating income of a certain period with the operating expenses of the same accounting period to calculate the net profit (or net loss) of the enterprise for a certain period. The profit and loss statement can reflect the operating results of the current period, and can also analyze the development trend and profitability of the company's future profits by comparing tables in different periods.

The profit and loss statement reflects the operating results of the enterprise through tables, but because different countries and regions have different information requirements for accounting statements, the structure of the profit and loss statement is also not completely the same. There are two main types of income statement: multi-step income statement and single-step income statement. Here we mainly introduce the structure of the multi-step income statement.

Second, the format of the income statement

Taisho Corporation Income Statement December 31, 2004 Unit: Thousands of Yuan

Total Sales	50000		The total price of the invoice for the goods sent
Sale returns and discounts	2000		Subtract from invoice amount
Net sales	48000		Net sales = total sales - sales returns and discounts
Cost of goods sold	38000		The raw materials, labor, and manufacturing costs required to produce a product.
Maori		10000	Gross profit is the balance of net sales minus cost of goods sold
Sales fee			Costs incurred in selling and distributing merchandise
Sales salary	1000
Advertising costs	1000
Shipping	500
Total other expenses	500
Total sales expenses		3000
Management fees
Office staff salary	1000
Telephone communication costs	500
Senior staff salary	500
Total management fee		2000
Total operating expenses		5000	Operating expenses=sales expenses+management expenses
Operating profit	5000		Operating profit=gross profit-operating expenses
Other income
Interest income	200
Less: Interest Expenses	1200	-1000
Net profit before tax		4000
Income tax	1320
Net profit		2680	Net profit represents the income available for dividend distribution or reinvestment for the year.

3.7.4 Analysis of cash flow statement

1. Overview of cash flow statement

Cash flow statement is a kind of statement of changes in financial position. Before introducing cash flow statement, the concept of statement of changes in financial position must be introduced. The statement of changes in financial status reflects the description of the source and use of funds and the flow of funds of the company over a period of time. Through different statements of changes in financial status, people can understand the changes in the company's liquidity, thereby judging the company's solvency; they can also understand how the company's net assets change through operations, so as to understand a company's ability to accumulate capital, etc. wait.

Fund itself is an ambiguous term, and people often have different definitions. For example: 1. Funds are equal to working capital or working capital (working capital = current assets - current liabilities); 2. Funds are equal to cash; 3. Funds are equal to current assets; 4. Funds are equal to all assets, etc. Using different ways of expressing funds, the content explained by the turnover of funds is different, and the basis for compiling the statement of changes in financial status is also different, thus resulting in various forms of statements of changes in financial status. The statement of changes in financial status has the following main types: 1. Statement of source and use of working capital (or statement of source and use of working capital); 2. Statement of cash flow; 3. Statement of change in total current assets; 4. Statement of change in total asset; 5. Statement of changes in net assets; 6. Statement of changes in liquid assets; 7. Statement of changes in net quick assets (net quick assets = quick assets - payables).

At present, my country's accounting system stipulates that only the cash flow statement can be used when preparing the statement of changes in financial status. The biggest advantage of the cash flow statement is that it is beneficial to assess debt repayment risk and income quality, and to calculate enterprise value based on the cash flow provided in the statement.

A cash flow statement is a statement that reflects the cash inflow and outflow of a business. The main symbol of the success of an enterprise is the cash inflow of the enterprise. The size of the cash injection of the enterprise is closely related to the level of the enterprise risk. The cash inflow of the enterprise and the enterprise risk determine the enterprise value together. Therefore, the cash flow itself is the most important indicator to reveal the value of the enterprise. Changes in the cash flow of an enterprise correspond to the operating activities of the enterprise, and are reflected in changes in different items on the balance sheet. The essence of the cash flow statement is to reflect the value of the enterprise with cash as the standard, and to reflect the change of the enterprise value with the change of cash flow.

Second, the format of the cash flow statement

Cash Flow Statement

The above content is excerpted from "ICE8000 Credit Investigation, Analysis, and Rating" (written by Fang Bangjian, free to use, but please indicate the source)