Assignment 2 draft

Chapter 4: Analysing Financial Statements

It makes me excited that I am gaining something useful and new from each chapter as I am reading and thinking them every time. Also, I really enjoy the process even though it takes time. Yes, I had spent double time of the assignment requirement. At the beginning of getting started, I found it was boring and difficult to understand, I could not concentrate myself to pay attention, and of course I felt tiered to read sometimes. Then I realise that it is a good way to practice the skills of reading as we will be having a lot of reading and researches during the university life in the future. Recently, I have been getting more and more interested in this kind of readings as I found interesting case study such as the example of Sydney Fish Market which was mentioned in this chapter.

I have been to Sydney a couple of weeks ago, the only thing attracted me is the Fish Market, in which there are various seafood, it made me have no ideas what I should choose and eat, because of too many to select. The market was crowded, and people can order any fresh fish or oyster without cooking, lining up in the front of the store. From this chapter, I knew that this market also offers service of deliveries, I think this is what the author was trying to show us – Capital market.

To improve the value of a firm and expand the field of business are the major aims in capital market of an organisation. There will be a range of economic activities occurred in the period of development. What we can make plans or targets is to use financial statement by analysing data in past and predicting direction in the future.

How firms add value

Sometime formulas are complex and complicated, usually makes me confused. In this section, I have to write down not only the key concepts but also the abbreviation of each account. The most difficult part is to keep formulas in mind, because some of them are similar, so that I have to learn by rote. I am also confused that the FCF is a measure of transfer of value, and why it is not a measure of value add for a period at all? From the first section, a lot of examples and data information provided aims to tell us that value is added to a firm by investing and how each accounting system works in different items. What is the difference between economic profit and revenue? If an owner of a business invested a property for rental, does the income from renting belong to economic profit or revenue?

Operating and financial activities

From my own view, even though operating activities and financial activities are separate, however, these two types of activities are interacting. The operating activities are like a booster. The example of chocolate is very interesting to me, because I used to collect many toys by purchasing cookies of Oreo when I was younger, at that time the only thing I wanted is to find out what is inside that box. I think that operating activities are a strategy to attract extra value to a firm. The difference between OR and OE is OI, so is it making sense that OR-OE=OI? According to the part of statement of changes in equity, I also found other comprehensive income in the income statement of the report of my firm RELX Group. Why is it shown sometimes in the statement of changes in equity or in the statement of comprehensive income?

Restate two key financial statements

Balance sheet and income statement are the major financial statements in a firm. The most difficult challenge I am facing is the first time to restate financial statement which I had never contacted before. It is really a good suggestion to discuss and communicate with others in this project even though everyone has different companies. But sometimes I was shy to speak as English is not my first language. Is the reason why we have to restate financial statement to identify which part belongs to operating activities or financial activities? I do not understand much about this part. To separate each item of activities to operating or financial activities is in order to figure out the reason why these transactions incurred. I realise it is not easy to identify each activities and calculate tax by analysing formulas, which means there will be a number of works I have to pay attention to in this assignment 2. It makes me feel stressed.

Profitability and efficiency

This section told us that the real value must equals the reality of the products or services of a firm. It is not clear what the relationship between earnings of a business and earnings of investing in operating activities. I found it is hard to understand, practicing in reality might be a good way to get to know the concepts. To break things into bits means something has to be classified in detail. In my opinion, efficiency affects and interconnects profitability. This reminds me one of my friends who is running a supermarket currently, there are three owners and 2 warehouses, and in order to enhance efficiency of operating they are doing things separately, one is responsible for operation of sales, other two are doing recording and trading respectively. In other words, as well as in accounting each item should be classified into different statements to make a business clear and effectively.

It is easy to reading every single word, however, it is not easy to understand fully the implication of the aim author tried to tell. Sometimes we need time to absorb and comprehend, especially for international students. Back at the beginning, to restate financial statement aims to help us get to know our companies deeply and what kind of activities the firm performed, and what we should restate is statement of changes in equity, balance sheet and income statement. Also, it is a necessary part to analyse operating and financial activities.

Questions:

Why is not FCF a measure of value-add for a period at all?

What is the difference between economic profit and revenue?

The difference between OR and OE is OI, so is it OR-OE=OI?

Is the reason why we have to restate financial statement to identify which part belongs to operating activities or financial activities?

STEP 2: A brief commentary

The most confusing and complicated thing to me is to determine which item should be classified into operating or financial position. Also, everyone has different companies which have different financial reports. The names of items are called in different ways. I could not identify them even though I had discussed with others. I had met my classmates only once a week even sometimes there are different faces, at first I was shy to ask until the lovely girl Helena who is enthusiastic and friendly talk to me, we had discussed where the item of cash and cash equivalent should be into operating or not, and we both had troubles on understanding of the item Exchange differences on transaction of capital and reserve, and she also helped me find out more information about my firm such as what my firm actually offers in particular, such as in the medical area they are researching the Mosby’s Nursing Skills, the Clinicalkey, Cell and so on, she really helped me a lot. Also, I have viewed the exemplars provided on the Moodle site, it makes me more confused when I restated statement of changes in equity, I did not know what the differences between other comprehensive income and total comprehensive income, is the first one different from the latter one? Compare to other’s annual report, there are a number of items in the statement of changes in equity, I did not know how to sort them to operating or financial.

Step 3: identify three products and services

From the market segments of my firm’s annual report I found three major services the RELX Group offers, which are in terms of Scientific, Technical & Medical markets, Risk & Business Information and legal. It actually took time to research and read, because the firm I have been given is not like other companies which have real products in sales markets, my firm is to sell services and professional advises and assessments. In fact, what the hardest task is to identify and calculate the price of these services due to there is no standard and object of reference.

Service 1:

Scientific, Technical & Medical service

ClinicalKey

Selling price: $15 per month

Variable cost: $3 per access

Contribution margin: $12

From the website of my firm RELX Group, I found a range of products allocated in each service the firm offers. Clinicalkey is based on the area of Scientific, Technical & Medical service, which is a search engine for offering the relevant information and knowledge of clinical decision, and supporting medical students or professional to research by accessing it. I did not find any information about the price of this sort of product, and one thing I noticed from the official website is that the access of this application is free for the first 30 days, so that I assumed that the fee of accessing is paid monthly, like being a member of an association. I can image that there would be various costs in creating this product, such as hiring administrators who manage customers’ personal information, equipment of data storage, the costs of collecting research outcomes from providers and so on. I estimated these costs to be 30% of selling price for each access per month.

Service 2:

Risk & Business service

Elsevier Magazine

Selling price: $20

Variable cost: $3-$5

Contribution margin: $15-$17
InstantID is a solution system of identity verification. It is suitable to be used by companies that would like the ability of validating the identity of a consumer or business. The variable cost might be in terms of technology, analytics, statistics, research and development, which would be costing higher than ClinicalKey. Moreover, I assumed that the users prefer to purchase this system for a year or more because it is able to keep working on spotting fraud and uncovering identity discrepancies in real time.

Service 3:

Legal service

LexisNexis SmartWatch

 Selling price: $50 per month

Variable cost: $8 per access

Contribution margin: $42

LexisNexis SmartWatch is like a risk monitoring system. As for the supplier management, SmartWatch is a monitoring tool to show what situation the business process is standing and analyse the risk assessment. I think the variable cost may be lower because the system is designed smart and automatic, in other words, it is produced one time to be used expansively. The expenses incurred are in the process of designing and in terms of technology staff and so on.

Commentary/ contribution margin

The contribution margins of the three products are $10.5 (ClinicalKey), $30 (InstantID) and $32.5 (SmartWatch) respectively. In my opinion, the usage of Cliniclkey is more extensive as the demands of medical research are more widespread. In addition, the selling price of Clinicalkey is estimated as $15 per month, being reasonable to public and everyone is able to affort it. The range of other two systems is limited as the demand of identity verification in business and the monitoring in supplier management is narrow. As the variable costs of these two systems are higher, the selling price would be increased. The business of RELX Group is to cover plenty of fields of industry, there are different professional teams in each category of industry, so they produce products and services not only focus on the contribution margins, but also the demand of marketing.

Constraints

I guess the constraint that my firm would face is the collection of resource. A powerful storage must be needed to contain database in a research project, RELX Group has the background of information provider, so keeping the pace with global trend and updating database is the first and most primary challenge that they are facing. The less research outcomes provider contribute, the more lack of information this company will be facing.