Study of changes in the financial situation. analysis and generation of resources

Study of changes in the financial situation. Analysis and generation of resources

INTRODUCTION.

In the late 1990s, the Accounting Principles Commission published as mandatory its bulletin b-12, statement of changes in the financial situation of the company. Said bulletin replaces the previous bulletin b-11, which talks about a cash flow statement.

The following bulletins are also given as background for this change:

Bulletin A-1 "Scheme of Theory of Financial Accounting".- in its paragraph 9 mentions that "a reasonably adequate presentation of the entity, is made up of the balance sheet, the income statement and the statement of changes in the financial situation "

Bulletin B-1 "Objectives of the Financial Statements".- This includes the statement of changes in the financial situation as one of the Basic Financial Statements.

Third Document of Adequacies to Bulletin B-10.- establishes, among other things, that the financial information is presented at the closing prices of the period for which it is being reported, or of the last reported year in the case of comparative financial statements.

The presentation of this form is the one that will serve as the basis for preparing the statement of changes.

It is the basic statement of financial position that shows in constant pesos the resources generated or used in the operation, the main changes that have occurred in the financial structure of the entity and its final reflection in cash and temporary investments over a given period.

Constant weights: represents weights of purchasing power at the balance sheet date (last reported year for comparative financial statements).

Financing activities include obtaining resources from shareholders and the reimbursement or payment of benefits derived from their investment; the loans received and their settlement and the obtaining and payment of other resources obtained through short and long-term operations.

Investment assets include the granting and collection of loans, loans, the purchase and sale of debts, capital instruments, real estate machinery and equipment, and other productive assets other than those that are considered as inventories of the company.

Operating activities are generally related to the production and distribution of goods and the provision of services. Normally activities that are related to transactions and other events that have effects in determining net income and / or activities that result in movements of account balances directly related to the operation of the entity and that are not framed in the financing or investment activities defined above.

When preparing the study of changes in the financial situation, a study of the needs that originate it should be made and determine which people are directly interested in its formulation, in order to give greater emphasis to that part of its content as required by each case..

The content of the statement of changes in the financial situation is divided into two parts, grouping, in the first, the elements that constitute the origin of resources, classified as: own and external resources; and in the second, the elements that constitute applications of resources, classifying them as: increases in assets and decreases in liabilities.

UNIT 5

“ANALYSIS OF THE GENERATION OF RESOURCES THROUGH THE STUDY OF CHANGES IN THE FINANCIAL SITUATION”

5.1. Analysis of the Generation of Resources through the Study of Changes in the Financial Situation (Bulletin B-12)

OBJECTIVES OF THE STATE

The main one is to provide relevant and condensed information related to a certain period so that users of financial statements have additional elements to those provided by other financial statements to:

to. Evaluate the ability of the company to generate resources.

b. Know and evaluate the reasons for the differences between the net profit and resources used or generated during the operation.

c. Evaluate the ability of the company to meet its obligations, to pay dividends and, where appropriate, anticipate the need to obtain financing.

d. Evaluate the changes experienced in the financial situation of the company derived from investment and financing transactions that occurred during the period.

and. Report on the changes that have occurred in the financial structure of the entity, showing the generation of resources from the operations of the period.

F. Disclosure of complete financial information about changes in the entity's financial structure that do not show the statement of financial position and the income statement.

The information must select, classify and summarize, so that the state clearly shows the result of financing and investment activities, as well as resources from operations and changes in the financial structure during the period to which they refer..

This state is very useful for the administration of the entity, because it finds the information necessary to project its expansion, financing programs, etc. In other words, it reveals, among other things, the entity's ability to generate resources.

ELEMENTS THAT INTEGRATE THE STATE

The basis for preparing the statement of changes in financial position is a comparative statement of financial position that provides the variations from one date to another, as well as the relationship with the income statement.

The variations obtained must be corrected, since they can compensate movements of origin and application of resources that have to be shown in the state separately.

The origins of resources are generated by decreases in assets, increases in liabilities and increases in stockholders' equity. The application of resources is produced by increases in assets, decreases in liabilities and decreases in stockholders' equity.

STATE FORMULATION:

As already mentioned to prepare this statement, you must start from a comparative statement of financial position and complementary information that reveals certain facts and figures necessary to determine the correct origins and applications.

Generally the additional information needed can be summarized as:

to. Profits for the year or period

b. The movements made in the surplus

c. Investments and write-offs on non-current assets

d. The depreciation, amortization and depletion generated in the year or period.

and. The movements or transactions made in non-current liabilities.

In order to obtain the statement of changes in the financial situation, it is necessary to prepare a worksheet that starts from the figures shown in the comparative statement of financial position, determining the net increases or decreases that must be modified through the entries of reclassification to obtain the correct figures.

The steps proposed by the newsletter are seen below as follows:

to. You must start in your presentation of the net profit or loss, or before extraordinary items, if any. In his case, the resources generated or used in the operation must be presented before extraordinary items.

b. Changes in the financial situation will be determined by differences between the different items of the initial and final balance sheets, both expressed in pesos of purchasing power as of the most recent balance sheet date, and will be classified into the three groups mentioned above. The movements will be taken from the resulting differences between the initial and final balances at constant weights.

c. When due to their importance and meaning it is convenient to highlight some movements that it would not be possible to appreciate if only the net difference between the opening and closing balances is presented, these operations must be presented separately. To capture the effect of these items, the important variations that will arise in the immediate periods must be analyzed. We could also mention the medium and long-term loans that the company received in the period, which in the statement of changes should not be mixed with its own amortizations or with the transfers that are made to current liabilities.

d. Those accounting movements that only represent transfers and do not imply changes in the financial structure of the companies, such as the capitalization of profits, increases in the legal reserve, etc., will offset each other, omitting their presentation in the statement of changes in financial situation; On the contrary, if the transfer implies a modification in the financial structure, such as the conversion of liabilities to capital, the acquisition of assets through financial leasing contracts, etc., the 2 movements must be presented separately.

and. In the event that the company updates certain lines of its financial statements using the specific cost method, the result for holding non-monetary assets that arose during the period should be eliminated from the final balance of the item that gave rise to it and from the of stockholders' equity, before making comparisons. In the case of RETANM accounts that affect results, 2 holdings are observed: (1) Eliminate them directly against the result for the year. (2) Eliminate them against the investment account to which they correspond, so the RETANM of the cost will be taken to the difference in inventories and the one corresponding to the depreciation for the year is eliminated against that of the accumulated depreciation of the balance sheet.

F. The monetary effect and exchange rate fluctuations modify the purchasing power of companies, therefore, they should not be considered as virtual items that did not have an impact on the generation of resources.

g. When comparative financial statements are presented, the statements of changes in the financial position of the different periods included must be expressed in pesos with purchasing power as of the date of the last balance sheet.

STATEMENT OF CHANGES IN THE FINANCIAL SITUATION BY THE METHOD OF GENERAL PRICE LEVELS

General considerations

As mentioned in bulletin B-12, the starting point should be to have comparative financial statements to the same unit of measurement, in accordance with the provisions of the third document of adjustments to bulletin B-10.

The technique that must be used to determine the state of changes is the same if the information was restated by general price levels or by the specific cost method.

The steps that are followed are:

1. Formulate the worksheet comparing the financial statements.

2. Propose the eliminations that we must carry out such as depreciations, amortizations and accounting transfers.

3. Determine the final balances, which in fact present generation or application of resources in the company, and classify them in the main items requested by bulletin B-12.

4. Formulate the statement of changes in the financial situation.

DISPOSALS TO BE MADE

to. Elimination of the movements of depreciation and amortization.- These represent an estimate and therefore do not require in themselves an application of resources.

b. Changes net of deferred taxes.- If any, their elimination would be with an adjustment contrary to that of its determination.

c. Participation of decreased subsidiary and associated profits of dividends received in cash.- They are incorporated when managing the participation method in companies. It does not represent a real movement of resources towards the parent until the moment they are received in cash via dividends.

d. Long-term liability provisions.

and. Disposals of fixed assets.- In these cases the origin of resources is given for the total amount of the sale, so the adjustment must be made by canceling the movements that occurred in the accounts of fixed assets, accumulated depreciation and profit or loss in operation.

F. Separation between the credits obtained and the amortizations made to them.- This should only be carried out in loans other than the normal operations of the company, in this way the new loans obtained should be separated, without considering the revolving loans that are given in the normal management of the company's credit lines.

g. Separation in the items of real estate, machinery and equipment of the acquisitions and disposals made in the period.- In the practical case there are only acquisitions, so this separation does not proceed. Remember that in cases of alienation what must appear as resources obtained is the amount of the sale.

h. Compensation between if of those accounting movements that only represent transfers and do not imply modifications to the financial structure of the company.

i. Cancellation of the Result for Holding Non-Monetary Assets.- Not applicable since the update was made through the general price levels method and there is no result for holding assets that are monetary.

GENERAL STRUCTURE OF THE STATE

The state structure must be made in such a way that it links:

1. The net result of the company.

2. Changes in the financial structure.

3. The increase or decrease in cash and temporary investments in the period.

The bulletin also recognizes that in the set of activities carried out by the company, resources are generated and / or used in three main areas:

Operation.- Within the normal course of its operations.

Financing.- As a consequence of the financing obtained and its real amortization in the short and long term.

Investment.- Depending on the investments made.

PRESENTATION RULES:

The statement of changes in the financial situation must show all the important aspects of financing and investment that have affected the financial structure of the company.

It must show the increases or contributions of share capital, conversion of long-term liabilities into share capital, acquisition of long-term liabilities, sales of fixed assets such as land, machinery and equipment, profits or losses on sale of all kinds of assets not current, dividends in cash or in kind, capital reductions, acquisitions of fixed assets, investments in shares of associated or affiliated companies, settlement of long-term liabilities.

They must clearly show and determine the total amount of working capital that the results of the period generated or used. This includes charges to results that did not require cash, such as depreciation, amortization and exhaustion. Extraordinary items will be eliminated from this result so that the information is not distorted and thus be able to determine the possibilities of investment and financing.

It is also necessary to show the variation in working capital, which must be analyzed by showing the changes in the concepts that make it up in the same order that they appear in the balance sheet. If there are considerable profits or losses from the sale or disposal of non-current assets, these should be increased or deducted from the net profit for the year in order to present this information after the total resources generated by the operations.

FORMS OF PRESENTATION:

There are various ways of presenting this state

to. The presentation of changes in working capital based on the generated working capital and decreasing the working capital used to obtain the net increase or decrease. Variations in working capital are analyzed in a separate statement, an amount that must be equal to the previous one.

b. It starts with the generated resources and later shows the resources used, whose figures must be the same. The generated resources are shown in the own resources and the external resources. The resources used are presented grouped into: increases in assets, decrease in liabilities and capital.

The Accounting Principles Commission of the IMCP AC in its bulletin B-12 establishes that the statement of changes in the financial situation must be presented on a cash basis, and qualifies it as a basic financial statement that shows “the resources generated or used in operations, the main changes that occurred in the financial structure of the entity and its final reflection in cash and temporary investments over a given period.

Whenever this statement is prepared, a study of the needs that originate it should be carried out, in order to determine that the readers are directly interested and to give greater scope to certain information, as the case requires.

FORMS OF PRESENTATION OF THE STATEMENT OF CHANGES IN THE FINANCIAL SITUATION:

Equal sums of origin and application of resources

Changes in working capital

Cash-based

Change flow.

STATE FORMAT

5.2. Financial Reasons applied to the Statement of Changes in Financial Position for your:

5.2.1. Analysis.

5.2.2. Interpretation.

READING

For every $ 1.00 of Current Liabilities it is guaranteed with cash and other assets in the normal course of operations are converted into cash.

MEANING

This ratio represents the company's short-term payment capacity and the company's solvency ratio.

APPLICATION

This reason is generally applied to determine the company's ability to pay, its solvency ratio; Likewise, to study working capital in our environment, the ratio of 2 to 1 has been accepted as good, said ratio is rather of a practical nature, not of a technical nature, assuming that if for any reason the current assets of the company should drop from value up to 50% that will remain of that current asset, would serve to pay and cover creditors in the short term. Now, because the ratio verifies quantity and not quality, that is, the ratio of working capital measures only the total value in money of Current Assets and Current Liabilities,It is necessary to study each individual company taking into account all its characteristics and external factors in order to be able to make a preliminary, never definitive judgment.

READING

For each peso of investment in current liabilities of short-term creditors, owners and long-term creditors invest.

MEANING

This ratio shows us the reality of the investments of short-term creditors, such as that of long-term creditors and owners, that is, it reflects the relative importance of the two classes of investments with respect to current liabilities.

APPLICATION

In practice, it is applied to determine the short-term credit limit for granting or requesting

READING

For each peso of short-term obligations, the company has 2 quick assets.

The difference between current assets and inventories is known as a quick asset.

MEANING

It represents the sufficiency or insufficiency of the company to cover short-term liabilities, that is, the ratio represents the company's immediate solvency ratio.

APPLICATION

This reason is applied in practice, to determine the sufficiency or insufficiency of the company to cover its short-term obligations.

The company guarantees for every peso of obligations it has inventories for immediate solvency insufficiency.

READING

For each peso of the company's creditors, it is guaranteed with 2 of the owners of the company.

MEANING

This reason may mean the protection that the owners offer to the creditors, the credit capacity of the company.

APPLICATION

It is applied to determine the guarantee that the owners offer to the creditors; likewise to determine the guarantee that the owners offer to the creditors; likewise to determine the position of the company vis-à-vis its owners and creditors.

The practical ratio in this case is generally 1 to 1.

For each weight of the company's short-term creditors, it is guaranteed with a weight of the owners of the company.

FOUNDATION

The purpose of this group of reasons is to know the proportion that exists at the origin of the company's investment, capital from outside sources and capital obtained from its own resources.

INTERPRETATION

As a general rule, 1 to 1 can be accepted as the maximum ratio with respect to the first ratio, that is, the foreign capital is equal to your own, because a higher ratio would cause an imbalance and there would be a risk that it would become property from third parties.

FOUNDATION

As indicated in the reason, it is necessary to analyze sales and take only those that are on credit, after deducting returns, bonuses and discounts for this type of operation so that when compared to the average of monthly customer balances (minimum the balance of 3 different dates), give us the number of times this average scrolls through sales.

INTERPRETATION

These reasons indirectly indicate the result of the application of a good or bad administrative policy; so in general, it can be said that the longer we move, the better the administrative policy to follow, since it indicates the efficient use of the values studied.

FOUNDATION

If the results obtained for the above reasons that show the rotation of different accounts and translate them into days, we will have more understandable data.

Regarding accounts receivable, we will know if the credit granted is in accordance with administrative policy and is recovered in a reasonable time so as not to hinder our economic cycle.

FOUNDATION

In order to have the data that shows the productivity of the company, it is necessary to use sales in relation to own capital and capital in motion, which is work, since these sales are subject to the potential of said capitals.

INTERPRETATION

The study of sales through this method is not entirely accurate, so it is necessary to apply other methods that indicate proper interpretation.

5.3. Generation and Use of Resources.

SOURCE OF RESOURCES:

The resources come from:

1. Increases in stockholders' equity:

a) By profit, equity: The net profit shown in the income statement is the return on operations, which produces an increase in net assets and stockholders' equity.

b) Due to increases in social capital: external resources. Like the previous one, they produce an increase in net assets and stockholders' equity.

2. Increases in non-current liabilities. Upon receiving loans, the company receives external resources.

3. Decrease in non-current assets: own resources: Depreciation, amortization and depletion are sources of self-financed resources; The same applies to sales of fixed assets, which must be taken at their net value, that is, the investment value less accumulated depreciation

4. Decrease in working capital. Obtaining resources from the short-term financial cycle as a result of the change in the financial structure of the company.

APPLICATION OF RESOURCES:

The application of resources comes from:

1. Decrease in stockholders' equity:

a) Due to losses: Losses, as an aspect contrary to profits, represent an outflow of resources. The loss may be reflected in a decrease in assets, in an increase in liabilities or in a combination of both.

b) For distributed profits, for capital withdrawals. That is, as a consequence of decreeing dividends or amortizing shares with profits in a corporation, or as withdrawal of contributions from partners or shareholders.

2. Increases in non-current assets: By investing in non-current assets in the company, the company applies its resources.

3. Decrease in non-current liabilities: By reducing non-current liabilities, the company applies its resources.

4. Increase of working capital: Application of resources in the short-term financial cycle, as a result of the change in the financial structure of the company.

From the previous structure, it can be seen that the financial structure of the company is affected by the following groups that undergo changes:

a) Working capital

b) Non-current assets

c) Long-term liabilities

d) Stockholders' equity

WORKING CAPITAL:

Working capital is the difference between current assets and liabilities, and shows the possible availability of current assets in excess of current liabilities, representing the entity's ability to cover obligations within one year within the short-term financial cycle, if this is greater than one year.

NON-CIRCULATING ASSETS:

Non-current assets represent permanent investments and are made so that the entity has sufficient financial resources to achieve its corporate objective. Therefore, the changes and movements in non-current assets must be clearly presented and analyzed in the statement of changes in the financial situation.

LONG TERM PASSIVES:

Long-term liabilities represent obligations that would be settled in a period greater than one year or in the normal cycle of operations if it is greater than one year. Consequently, the movements of this group change the financial structure of the company and must be clearly presented and analyzed. In this group there are all kinds of liabilities contracted for more than one year or the normal cycle of operations if it is greater than one year, short-term obligations when there is sufficient evidence that they will not be settled in the short term and obligations that are going to be covered with non-current assets.

STOCKHOLDERS 'EQUITY:

Changes and movements in the share capital groups, such as premiums on the sale of shares, other contributions, accumulated profits, etc. must be clearly presented and analyzed in the shareholders' equity or equity.

EXAMPLES OF RESOURCES GENERATED OR USED IN THE OPERATION

The accounting principles commission recognizes as resources generated or used in operations those resulting from:

A) Net Income for the Period.

B) Income statement items to be removed: Those that have not generated or required the use of resources, for example, depreciation and amortization. And those whose net result is linked to activities identified as financing and investment, for example: the loss or gain on sale of fixed assets.

C) The increases or decreases (in constant pesos) in the different items directly related to the operation of the entity, decreased from the corresponding valuation estimates, for example: the increases or decreases in accounts receivable, inventories and taxes payable.

EXAMPLES OF RESOURCES GENERATED OR USED IN FINANCING ACTIVITIES

For the purposes of the newsletter, these mainly comprise:

A) Credits received in the short and long term, different from the operations with suppliers and / or creditors related to the operation of the company.

B) Capital increases for additional resources, including the capitalization of liabilities.

C) Dividends paid, except dividends in shares.

EXAMPLES OF RESOURCES GENERATED OR USED IN INVESTMENT ACTIVITIES

The bulletin mentions the following transactions as examples:

A) Acquisition, construction or sale of real estate, machinery and equipment.

B) Acquisition of shares of other permanent companies.

C) Loans made by the company.

D) Collections or decrease in constant pesos of credits granted.

5.4. Analysis and Interpretation of Growth Strategies and Operations in the Company based on this State.

STRATEGIES FOR THE POSSIBLE SOLUTIONS OF DEFICIENCIES IN THE OPERATION OF THE COMPANY.

The flaws and errors, as well as the detriments within a company are many and for very varied causes, however delimiting them mainly to two, excess and defect, that is, for having more or less than due.

Among the main ones due to excesses we have the following:

On investment in inventories. On investment in accounts and receivables and clients. On investment in fixed assets. Within the evils for defects we have: Insufficiency of capital. Insufficiency of profits.

ABOUT INVESTING IN INVENTORIES.

Exists on investment in inventories in a company, when the products, materials, products in process or finished product are out of proportion of unbalanced purchases or production, or due to the lack of coordination of the purchasing, production and sales functions.

Causes:

Desire to broaden the company. Advance purchases in excessive quantities, by taking advantage of low prices in the market.

Effects:

Increase in purchase expenses Stocks of goods that are damaged Theft due to lack of control Decrease in profits

Recommendations.

Try to sell part of the inventories, the obsolete and the damaged ones. Improve the purchasing policy If necessary, obtain new funds from the company through contributions from partners.

ABOUT INVESTMENT IN ACCOUNTS AND DOCUMENTS RECEIVABLE AND CLIENTS.

It occurs mainly when the company has followed a policy to release in the granting of credits or when collections have been deficient.

Causes:

Excess credit sales Fraudulent actions by officials Poor collection policy.

Effects:

Increase in collection expenses. Increase in bad debts, Decrease in profits.

Recommendations:

Carry out a study aimed at improving the credit and collection policy. Document the accounts receivable and try to discount them in the credit institutions. If there is economic tension, seek funds from the company, with contributions from the partners, etc.

ON INVESTMENT IN FIXED ASSETS.

This occurs when the investment of such assets is out of proportion to the other balance sheet values, or when the maximum production capacity is much higher than the actual production of the company.

Causes:

Acquisition release of fixed assets. To eliminate the human element. To try to reduce the cost of production. To offer better advantages than the competition.

Effects:

Increase in interest for financing for the acquisition of fixed assets.Increases in production expenses for:

1. Depreciations

2. Maintenance costs.

3. Repair costs

4. Conservation expenses.

Recommendations:

Try to sell the fixed asset that is not needed in the company. Re-invest profits to rebalance the company. Obtain long-term credits.

CAPITAL INSUFFICIENCY.

It is when one or more assets of a company are out of proportion, or the own capital is lower in relation to the foreign capital.

Causes:

Due to an increase in the operations of the company, due to an increase in fixed liabilities, due to a bad organization in the company.

Effects:

Increase in interest on fixed assets. Delays in payments to short-term creditors, Reduction of working capital.

Recommendations:

Retain profits Increase the amount of share capital Study the possibility of renting fixed assets and not make new acquisitions or new credits.

INSUFFICIENCY OF UTILITIES.

It is when these are relatively inferior in proportion to the capital invested, volume of operations and capacity of the same.

Causes:

Bad management of the company. On investment in inventories. On investment in accounts and documents collected from clients. On investment in fixed assets. Capital insufficiency. Sales deficit. Excess in cost of sales. Excess in administration, sale and financing expenses.

Effects:

Discontent of the owners Dismissal of personnel Liquidation of the company.

Recommendations:

Make a study of the reorganization of the company. Study each and every one of the items of the state of profit and loss and determine possible defects. Determine the possibility of developing plans for diversification of new projects; new markets, new businesses.

CONCLUSIONS

As mentioned throughout the development of this unit, carrying out this State will help the entity to evaluate its capacity in generating resources, as well as evaluating the reasons for the differences between profit and resources used in operations.. The analysis of the generated resources is of utmost importance for the administration of the entity since it will yield enough information to project a possible expansion, different financing programs, etc., since it will reveal how capable the company is in generating resources.

It must be taken into account that in order to carry out this State, the origin of each of the resources must be taken into account so that its application can be easily identified and thus provide the most reliable information for decision-making. In addition to adequately identifying the resources that are generated in the Operation area, in the Financing or in the Investment area, since this is more explicit for administrators from where or in which areas the resources are being generated and where they are being applied, to make decisions in each of these and in general. Your decisions will make you more precise.

INFORMATION SOURCES

-Finance in the Company (Information, Analysis, Resources and Planning)

Joaquin A Moreno Fernandez.

Publisher: ANFECA.A. de CV

Fifth Edition, 1994

P. 83-87

-Analysis and interpretation of financial statements.

Abraham Perdomo Moreno

Publisher: ECAFSA

1999.

P. 45, 46, 49, 50, 56, 57

-The Financial Statements, their Analysis and interpretation.