Part II – Accounting Analysis

3. Analysis of financing activities

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Analysis of financing activities

Companies investments and operations are financed

by various sources
 two sources of financing:
– Shareholders’ Equity (Capitais Próprios)
– Debt or Liabilities (Capitais Alheios ou Passivo)
 Non-current or long-term financing (Financiamento
permanente) vs Current or short-term financing
(financiameto curto prazo)
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1
 Liabilities

Current (short-term) Noncurrent (Long-Term)

Liabilities Liabilities

Obligations whose Obligations that

settlement requires use of mature in more than
current assets or the one year (or the
incurrence of another operating cycle,
current liability within one whichever is longer).
year or the operating
cycle, whichever is
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longer.

Liabilities

Obligations that arise from operating

activities--examples are accounts
Operating payable, unearned revenue, advance
Liabilities payments, taxes payable,
postretirement liabilities, and other
accruals of operating expenses

Obligations that arise from financing

Financing activities--examples are short- and
Liabilities long-term debt, bonds, notes, leases,
and the current portion of long-term
debt

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2
 Analysis of Shareholders’ Equity

What are the basic characteristics of Shareholders’

Equity?
How is Shareholders’ Equity analyzed?

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Shareholders’ Equity

Shareholders’ Equity refers to owner (shareholder)

financing
– Long-term financing, reflects claims of owners on net assets
– Equity holders usually subordinate to creditors
– Exposed to maximum risk and return

Key elements: Preferred stock, Common Stock,

Paid in capital, Treasury stock, Retained earnings,
Net Income,…
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3
 Off-Balance-Sheet Financing

Off-Balance-Sheet Financing: is the non-

recording of financial liabilities
Motivation: to keep debt out of the balance sheet
Transactions sometimes used as off-balance-sheet
financing:
Operating leases that are indistinguishable from capital leases
Sell receivables with recourse and record them as sales rather than
liabilities
Sell receivables as backing for debt sold to the public
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…

Example: Leasing

4
 Example: Leasing

Example: Leasing

Impact of Operating Lease versus Capital

Lease:
– Operating lease understates liabilities
– Operating lease understates assets
– Operating lease delays expense recognition
– Operating lease understates current liabilities by
ignoring current portion of lease principal payment
– Operating lease includes interest with lease rental (an
operating expense)
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5
 Analysis of Debt or Liabilities

 Potential adjustments:
– ___________________________________________
– ___________________________________________
– ___________________________________________
– ___________________________________________
…

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 Bibliography:
– Subramanyam (2014). Financial Statement Analysis, McGraw-
Hill International Edition (Chapter 3)
– Neves, J. C. (2012). Análise e Relato Financeiro – um visão
integrada de gestão, Texto Editores ( Parte II – Instrumentos-base
da análise financeira, cap. 5)

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