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Pillole di Finanza Il Bilancio - Lo Stato Patrimoniale — Transcript

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0:02Good morning everyone, I am Alberto
0:04Dell'Acqua, professor of corporate
0:06finance for the Nibi Master’s program
0:07on business internationalization. Today
0:12we are going to cover a topic that is
0:15foundational for our corporate finance
0:18lessons and, I would say, a
0:20prerequisite for managing a business.
0:26Today we are talking about financial
0:28statements, with the goal of analyzing
0:31the components of an annual report and
0:33learning how to read the items that
0:35make it up. The annual report is
0:40composed of two main parts. The first
0:43is the balance sheet and the second is
0:45the income statement. Well, in this
0:48first brief lesson, we will talk about
0:51the balance sheet. What is the balance
0:54sheet? Actually, I have already
0:56represented it here; we will look at it
0:58together in a moment because it is a
1:00long list of many elements. You can
1:04think of the balance sheet as a large
1:07inventory, a large inventory of the
1:09company's assets and, at the same time,
1:12of the claims held over these assets by
1:15others—obviously, by parties who have
1:18interests in the company and therefore
1:21hold rights over these assets. So, I
1:25will quickly illustrate this with the
1:27help of this other board, which I am
1:28placing here in front of you. How could
1:33I summarize a company’s balance sheet
1:39? A company's balance sheet, as I was
1:43telling you, is made up of two major
1:45elements. The so-called company assets
1:49—we will see they are assets of
1:52different natures—and the claims held
1:56by a series of parties on these assets.
2:01So, we effectively have an inventory
2:03with opposing sections of the assets
2:06and the claims on these assets. The
2:09assets go in the active section, the
2:14asset side, and the claims go in the
2:17liabilities section. Why do they go in
2:21the liabilities section? Because,
2:23obviously, these assets are owned by
2:26the company, but there are parties who
2:28have claims on these assets and at some
2:30point could ask for a portion of what
2:32belongs to them back. Therefore, the
2:36company might find itself in a position
2:37of needing to liquidate these assets
2:38and give them to these parties. So, the
2:41company in this case is in a passive
2:43position regarding these parties. Thus,
2:48the company balance sheet we find in
2:50the financial report is nothing other
2:52than this inventory of assets and
2:54claims. Together, we must examine each
2:59entry that makes up the list of assets
3:01and the list of claims. So for now,
3:06let's leave this board, which we no
3:08longer need, and move to the larger
3:10board where all these elements are
3:12already laid out. I will try to comment
3:15on them one by one. This is the
3:19representation of the balance sheet
3:21according to the so-called Fourth EC
3:25Directive. What is the Fourth EC
3:27Directive? It is essentially the
3:31regulation that established a common
3:33standard for representing this list of
3:36assets, this inventory, for all
3:38companies. So, let's look at them
3:41together. We will start, obviously,
3:43with the assets. I remind you that
3:46assets include the company's property,
3:50listed using these letters A, B, C, D.
3:54It's like making a grocery list,
3:58itemizing everything in your cart with
4:02a list of letters in alphabetical order
4:06. What do we find here under the first
4:10letter? Receivables from shareholders
4:15for capital contributions still due—
4:17that is, payments these individuals
4:19still owe to the company. So, we can
4:24imagine a shareholder who decided to
4:26subscribe to a company's capital but
4:29hasn't yet paid the full amount they
4:31committed to. Well, at that point, what
4:35does the company have? It has a
4:37receivable from that shareholder. If a
4:41company has a receivable of this type,
4:43it records it here in its balance sheet
4:45assets under letter A. Not all
4:47companies have receivables from
4:49shareholders, because they often pay
4:51the full capital they committed to
4:53finance the firm. But sometimes it
4:58happens that a shareholder has
5:00subscribed to a share of the capital
5:02and paid part of it, but still owes a
5:05remaining balance; thus, a receivable
5:07is formed against them. A receivable is
5:11, in fact, a financial asset that the
5:14company claims from its shareholder.
5:18What else do we find? We find fixed
5:21assets. What are fixed assets? Well,
5:25unlike receivables from shareholders,
5:28which are essentially money the company
5:30expects to receive—let's make a note
5:33of that—fixed assets are goods of
5:35various types that are fungible. What
5:39does fungible mean? That they can be
5:42used to produce goods or services;
5:44therefore, they are true capital goods.
5:47As we are here in this room, I myself
5:50am using fungible goods: for example,
5:52the whiteboard, or in front of me, a
5:55computer, and there is a camera filming
5:57me. These are assets, fixed assets that
6:00this facility has on its balance sheet.
6:04So, let's see what kind of fixed assets
6:06we are talking about, because we said
6:09there are different types. The first
6:14ones we find represented in the balance
6:16sheet under letter B at point 1 are
6:18intangible fixed assets. Well, what
6:21does intangible fixed assets mean? They
6:24are those goods that have an intangible
6:27nature. For example, they could be
6:30patents, or software, that a company
6:38uses for its production. In fact, these
6:42assets derive primarily from the use of
6:46forms of intellectual capital, but
6:49there could also be licenses, perhaps
6:54software licenses, or even commercial
6:56licenses that a company uses to produce
6:59. All of these are assets that are
7:04difficult to touch in some way; they
7:06are not tangible, they have an
7:08intangible nature, but there is no
7:10doubt that companies can derive
7:12benefits from exploiting these assets
7:14or that these assets are essential to
7:16their production. These are the first
7:21types of fixed assets that we find on
7:24the balance sheet. Then there are
7:26tangible fixed assets. Here, on the
7:28other hand, we have something more
7:30tangible. We can think of a factory, a
7:37building, okay? Which produces goods,
7:40so inside there might also be machinery
7:43. Machinery is another example of a
7:46tangible fixed asset that is obviously
7:48used for production, but it could also
7:51be land, okay? All tangible assets. And
7:54then we have financial fixed assets.
7:57What are financial fixed assets? In
8:00this case, we include investments here
8:07in other companies; so, in fact, they
8:11are nothing more than shares that the
8:13company holds in other companies,
8:15perhaps because they are strategic to
8:17its business, because they are part of
8:19a corporate group, or simply because
8:21the company decided over time to invest
8:24in other businesses. So, under letter B
8:29, we find fixed assets, assets
8:30essential for the production of goods
8:32or services that the company will then
8:34place on the market. What do we find
8:38under letter C? Under letter C, we find
8:41what the financial statement, the
8:43balance sheet, defines according to the
8:45fourth EEC directive as current assets.
8:51Inside current assets there are goods
8:53of a different nature, there is
8:54inventory. What is inventory? Obviously
8:58, a company that produces things
9:00doesn't necessarily sell everything in
9:03the year it produces these goods;
9:05perhaps a portion of these goods is
9:07stored in a warehouse and will be used
9:09or put on the market the following year
9:12. They can be raw material inventories,
9:15so raw materials the company uses for
9:18processing, they could be
9:20work-in-progress inventories, so things
9:22still to be finished, or they could be
9:25finished goods, so actual products that
9:28are stored and will be sold the
9:31following year. So, obviously imagine a
9:35warehouse. Here we find represented in
9:39the company's balance sheet the
9:42inventory of semi-finished or finished
9:45goods, or even raw materials that are
9:47needed for production or are the result
9:50of production, we find them in the
9:53company's warehouse. Then there are
9:56receivables. Well, what are receivables
9:58? Similar to what we saw before, these
10:02are rights in this case that the
10:04company has toward its customers. So,
10:07the customer who has not yet paid, even
10:10if they may have already received the
10:12invoice but haven't paid it yet, in
10:14this case, creates a receivable for the
10:17company. So it's money, in this case we
10:20can imagine not yet euros, but they
10:23will become euros that the company has
10:26to receive from its customers, to whom
10:29I have sold goods and services, but
10:32they haven't paid yet. Then there are
10:36the so-called financial assets,
10:39financial assets that do not constitute
10:42fixed assets. What does this mean? Well
10:46, they certainly shouldn't be confused
10:49with those we saw before, the so-called
10:51financial fixed assets. Why? Because
10:55financial fixed assets are investments
10:57in other companies. Financial assets
11:01that do not constitute fixed assets are
11:04instead uses of excess liquidity, and
11:06these are companies that have excess
11:08cash and say to themselves, "Well, why
11:10not invest it?""We could get a return."
11:15They could be, for example, government
11:17bonds where the company has invested
11:20excess liquidity. However, they are not
11:24true fixed assets because they are not
11:26fungible assets, like business
11:27operations or a stake in another
11:29company. Yes, because maybe I need the
11:32other company to produce, because it's
11:34a commercial company, maybe I need it
11:37to place the product on the market, but
11:39a short-term bond or government bond
11:41certainly doesn't help me produce. I
11:45need it to get a short-term financial
11:47return on excess liquidity. And then
11:51there are cash and cash equivalents.
11:53Cash, this is money, okay? This is
11:58certainly money that the company has in
12:00its current account, okay? It can be
12:03represented by deposits that have been
12:06made, it can be represented by actual
12:09cash, and so it goes under this item of
12:11current assets, cash and cash
12:13equivalents. So in current assets we
12:18have these elements which are linked,
12:20as we will see later, to what is a
12:23company's typical cycle, that is, its
12:26current cycle, meaning the activity of
12:28purchasing goods, transforming goods,
12:31and selling these goods. Finally, the
12:35last letter, letter D, is made up of
12:38accrued income and prepaid expenses.
12:41What are accrued income and prepaid
12:42expenses? They are a particular element
12:47and perhaps not easy to understand
12:48immediately, especially for those who
12:50have never seen a balance sheet. So, I
12:54have dedicated a specific part of my
12:57board to these two elements. What are
13:01these elements? I wrote it up here,
13:03they are adjustment entries. Why?
13:08Because at the end of the year, at the
13:11end of a fiscal period, a company is
13:13still operating, okay? And there are
13:18some operations that are sort of
13:20halfway between one year and the next.
13:23How should this company represent them
13:25in the financial statements? It must
13:27follow a principle, and this principle
13:29is the accrual basis of accounting. It
13:33is a very simple principle; I must
13:36record in the financial statements what
13:38pertains to that year and note what I
13:41may have received or paid in that year,
13:44but which does not belong to that year,
13:46perhaps belonging to a subsequent one.
13:52So, in effect, these are the entries
13:54that allow the company to define what
13:56is still ongoing, how it is attributed
13:59to the current year and the next year.
14:03So, what are accruals? Accruals are
14:07revenues or costs already incurred,
14:09therefore they are already economically
14:12relevant to that year, but for which
14:14the so-called monetary manifestation
14:16has not yet occurred; the collection or
14:18payment has not yet taken place. Let me
14:22give you an example. An example of an
14:26accrued asset is represented by, for
14:28instance, interest income that the
14:30company has recorded on government
14:32bonds or treasury bills; they have
14:35already been earned, but the company
14:37has not yet collected them. The coupon
14:42that the company receives from an
14:45investment in a bond might be paid the
14:47following year, but a portion of that
14:49coupon is relevant to the year in which
14:52the investment was made. So, it is
14:56right for the company to record this
14:57portion of accrued interest in the year
14:59the investment was made. Regarding an
15:04accrued liability, in this case, we
15:06have a cost already incurred that,
15:09however, has not yet been paid. And
15:12what could that be? Well, it could be,
15:16for example, a portion of rent that the
15:18company has yet to pay, even though it
15:20has already used that rented space, so
15:23it must remember to record an accrued
15:25liability in its balance sheet, which
15:27we will see on the liabilities side.
15:31Prepayments and deferred income are
15:33somewhat mirror images of accruals,
15:36right? It is as if accruals were
15:39looking in the mirror, in the sense
15:41that prepayments and deferred income
15:43are revenues or costs not yet incurred,
15:46but already collected or paid; the
15:48opposite of accruals, if you will. An
15:51example of a prepaid expense. Hmm, an
15:54example of a prepaid expense, for
15:57instance, a cost; a cost we can imagine
15:59as an insurance premium that has
16:01already been paid. So, a premium paid
16:06to the insurance company, but which is
16:08valid not only for this year but also
16:10for next year, because it covers the
16:12company over a time horizon that goes
16:14beyond the year or spans across the
16:16year, as we mentioned before. That is
16:21why it should record this as a prepaid
16:23expense. Finally, we must also imagine
16:27a possible deferred income. So in this
16:30case, a revenue not yet earned but
16:33already collected. So, it could be
16:37represented by interest expense that
16:39the company has already paid on a debt,
16:42but that debt pertains to the current
16:44financial year and the next. I come to
16:49the very last list, which is
16:50represented by the items of the
16:52liabilities. Here it is much easier
16:55because we have fewer elements; they
16:57are precisely representative of the
17:00rights that some parties hold over
17:02those assets. Under letter A, we find
17:05net equity, the shareholders 'equity.
17:09Here we have the shareholders, those
17:11individuals who invested—let's put a
17:14label on them—they invested money in
17:17the company; they are the equity
17:19partners and this is their equity,
17:22consisting of share capital and any
17:24profit reserves accrued. Then under
17:29letter B, we have the provision for
17:31risks and charges, which the company
17:33uses to cover itself against potential
17:35future losses. Therefore, the company
17:38sets up a protection fund against
17:40future losses. Under letter C, we have
17:44the TFR, the employee severance
17:46indemnity, which is that portion of the
17:49salary withheld by the company and paid
17:52out when the employee leaves. Under
17:57letter D, we have all the debts owed to
17:59those who provided capital, but as a
18:01debt to be repaid, meaning those who
18:03lent money to the company. Under letter
18:06E, we find our accruals and deferrals
18:08once again. Well, that is the entire
18:10balance sheet. I remind you it is a
18:12comprehensive inventory of assets and
18:14the rights held over these assets. The
18:18individual line items represent both
18:20the assets and the rights. We will have
18:23the opportunity to analyze them in
18:24greater depth. during the course,
18:26during the subsequent sessions.

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