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Aim of reformulation is to re-present the由英语论文网 www.51lunwen.org整理提供 financial statements in a way that facilitates application of the valuation models introduced in Topic 2

Reformulation of the balance sheet and profit and loss account is based on the information requirements of the AEVM and the AOPVM

Reformulation of the cash flow statement is based on the information requirements of the DVM and the FCFM
Reformulating the balance sheet
Net operating assets (NOA) measures book value of operating assets net of non-interest bearing operating liabilities
Net debt (ND) measures net borrowing (ie: borrowing net of cash and other financial assets) used by firm to finance net operating assets
Owners’ equity (BVE) measures the book value of ordinary shareholders’ equity in the firm
Measures of NOA and BVE are required for implementing the AOPVM and the AEVM respectively
Reformulated balance sheet for Wm Morrison plc
Reformulated balance sheet for Wm Morrison plc (continued)
Reformulating the profit and loss account
Net operating profit after tax (NOPAT) is reported operating profit less an estimate of the tax on operations
Tax on operations is the reported tax charge plus tax rate x net interest expense i.e: tax on operations excludes reduction in tax due to tax 由英语论文网 www.51lunwen.org整理提供 deductibility of net interest expense
Interest tax relief is included later in the reformulated profit and loss account and can be subtracted from net interest expense to give a measure of after-tax net interest expense
NOPAT and net profit should also be calculated before exceptional items
Reformulated profit and loss account for Wm Morrison plc (basic)
Reformulated profit and loss account for Wm Morrison plc (full)
Reformulating the cash flow statement
Reformulated cash flow statement measures free cash flow and net dividends (consistent with cash flow based valuation models introduced in session 2)

Free cash flow (FCF) is equal to cash flow from operations (CFO) minus total investment cash flow (INV) ie: FCF = CFO – INV

Note that CFO is equal to reported cash flow from operations minus tax paid on operations ie: CFO is measured on after-tax basis
Reformulating the cash flow statement (continued)
FCF is also equal to net dividends (DIV) plus net payments to debtholders
Note that:
net interest paid to debtholders is after corporation tax i.e. reported net interest expense x (1 – tax rate)
for example, for 2009, net interest paid after tax of £29m is equal to the reported net interest paid of £41m less the tax relief (at 28% corporation tax rate) on net interest paid of £12m
Reformulated cash flow statement for Wm Morrison plc
Reformulated cash flow statement for Wm Morrison plc (continued)

2. Accounting analysis: further issues

Accounting analysis and prediction of future fundamental performance

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