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Adjustments to Financial Statements

Category: Financial Control Management

In order to perform a sound financial analysis, the understanding of financial reports and awareness of particular areas that require restatements in order to provide accurate information, becomes crucial. Consequently, a single figure of «Net Income» or «Current Assets» can not be relevant to all users, and that means that the analyst must use these and other figures and the additional information disclosed in the financial statements and elsewhere as a starting point and adjust those to arrive at «true» ones that meets the analyst particular interests and objectives.

Adjustments to the Balance Sheet:

Accounts receivable must be shown net of provisions for uncollectible accounts;

Inventories will include only the current share of inventories. Excess inventories must be distinguished from inventories and attributed to non-current assets. (For

example: some trucking companies include the tires on their trucks as current assets). One must be kept in mind that inventories are shown in balance sheet at cost;

The market value of assets can significantly vary form their historical cost;

Marketable securities are often stated at cost that may be below market value;

Intangible assets and differed items of dubious value that are included on the asset side of the balance sheet affecting the computation of many financial ratios;

Prepaid expenses must not be taken into consideration because they can not be converted into cash. Prepaid expenses represent advance payments for services and supplies that would otherwise require the current outlay of cash;

One should be checked whether the current share of long-term liabilities and borrowings is properly shown in the balance sheet;

There are liabilities that are not fully reflected in the balance sheet (contingent liability), and there are accounts those accounting classification as debt or equity should not be automatically accepted by the analyst;

A particular attention must be paid in respect of short-term borrowings from company’s personnel (account 513 and 532) or miscellaneous participants that very often represent monetary contributions of owners, avoiding the implication of equity accounts that must be considered as equity.

«Due diligence» in respect of P&L Statement:

The amount of depreciation must be verified (balancing of the operating profit);

The method of tools and accessories write-off must be analyzed;

Repair and maintenance costs could be postponed for future periods, for which a higher level of operation is forecasted;

Marketing expenses regarding the promotion of new products could be labeled to the current year P&L Statement;

Provisions for accounts receivable written-off in different accounting periods.

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