Analysis of the Operation and Financial Condition of the Enterprise

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Analysis of the Operation and Financial Condition of the Enterprise Sources of the enterprise resources presented as assets are disclosed underthe liabilities (where they have originated from).Balance sheet assetsThe basis for sub-classification of assets into individual items is the degree ofliquidity of these assets (the ability to transform the assets into cash). This is exactlythe property according to which the assets are classified into two main groups: non-current or long-term assets (investments); current or short-term assets.Current or short-term assets are assets that are used, consumed or sold within onereporting period).Current assets are assets whose value is transferred to goods for sale within oneoperating cycle.For the purposes of decision-making it is important to distinguish among the followinggroups of current asset items: cash assets; short-term financial investments; accounts receivable; inventory of goods and production reserves.Table 3.1 shows the composition of the enterprise current assets broken down by thedegree of risk of capital investment.Table 3.1Composition of current assets by the degree of risk of capital investmentGroup of current assetsBalance sheet items1. Current assets with a minimum 1.1 Cash: in till, on account, on foreign currency accountdegree of risk1.2. Short-term financial investments2. Current assets with a low degree 2.1. Accounts receivable, excluding doubtful debtsof risk2.2. Production reserves, excluding obsolete stock2.3. Stock of goods for sale, excluding unsaleable goods3. Current assets with a mediumdegree of risk4. Current assets with a high degreeof risk3.1. Low value inventory (after depreciation)3.2. Work in progress3.3 Prepaid expenses4.1. Doubtful debtors4.2. Obsolete production reserves4.3. Goods for sale, for which there is no demandCash assets are made up of cash in till or cash on the enterprise current account inbank. These are the most liquid part of the current assets; these assets may be used forexecution of current payments, salary payments, production development etc. needs. Forthis purpose usually there are certain cash reserves established in an enterprise.Short-term finance or investments or readily realisable securities are essentiallyshort-term investments with a high degree of liquidity into which the temporarily sparecash assets of an enterprise are invested. Most often such securities can be governmentbonds which in the case of necessity may be transformed into cash assets. These50
Analysis of the Operation and Financial Condition of the Enterpriseinvestments are done for the period of time only when the cash assets are not needed for thecurrent needs of an enterprise.Accounts receivable are the unpaid invoices issued by an enterprise for the goodssold (services provided). Accounts receivable are short-term debts with the repaymentperiod less than a year. These debts arise upon selling goods to customers on credit (ondebt) with a certain period of payment, for example, 1-3 months upon delivery of goods.Accounts receivable are shown on the balance sheet according to actual sales valueof the goods, i.e., based on their amount of cash. In the annual report the net accountsreceivable amount is disclosed as the difference between the actual amount of accountspayable and any provisions for doubtful debts disclosed on the liabilities side of thebalance sheet.Production reserves are tangible assets intended for sale in the course of a regulartrading cycle or for use in the process of goods production and further sales of these goods.These items are usually called the materials of goods and are composed of raw materials,packing materials, semi-finished goods and components usually purchased from thesuppliers.Production reserves are a less liquid group of the current assets however it is veryimportant to include them in the analysis. Inventories may constitute a significantpercentage not only from the current, but also from the total enterprise assets. This couldbe an evidence of difficulties that the enterprise is facing regarding the sales of goods,which has been caused, on its turn, by insufficient market research and quality of products.Deviations of the amount of inventories from the optimum level may incur losses inthe enterprise activities as the inventory storage costs are rising, liquid assets are taken outof circulation, the threat of impairment of the stock value is occurring.Fixed assets are assets acquired for continuing use by the enterprise including land,buildings, constructions, plant and machinery, equipment and transport vehicles. In thecourse of operation these assets (excluding land) wear out causing the need to graduallywrite off their value or amortise them. Due to the above fixed assets in the balance sheetare reflected at to their net book value, i.e., the original value is reduced by an amount ofdepreciation.Fixed assets are a group of assets: for which depreciation is calculated; that are intended for use in the enterprise for a period of above one year; that have a limited period of service; that are used by an enterprise for production and sales of goods and provisionof services or for lease.Depreciation is the distribution of the depreciable value of a fixed asset over the preestimatedterm of the transaction (for example, 2, 5 or 10 years). Depreciation calculated fora reporting period reduces the profit for the year reported.Long-term financial investments are amounts of spare cash given at the disposal ofother enterprises for more than one year with a view of earning regular income in the formof interest on loans or credit facilities, or else in the form of dividends from investments inthe shares of other enterprises. Along with short-term financial investments this itemreflects the enterprise performance in the financial markets.51
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Analysis of the Operation and Financial Condition of the Enterprise

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