Analyse and explain the effect of balance sheet adjustments, normalised earnings and cash flow statement adjustments on a company's financial statements, ratios and overall financial condition
The idea
Adjusting statements gives a truer picture of condition. Balance sheet modifications add pension and other debt-like obligations to debt, plus any lease liabilities left out of reported debt, and remove or write down doubtful assets such as goodwill, then recompute leverage. Earnings normalisation removes non-recurring gains and charges, after tax at the appropriate rate, and may smooth cyclical items to find sustainable profit. Cash flow modifications reclassify items to their economic category, for example moving excess pension contributions to financing, or removing the effect of factoring or stretched payables from operating cash flow. Adjusted ratios such as debt to EBITDA and interest coverage then feed credit and valuation judgements. The trap is removing only the losses as one-offs while leaving gains in normalised earnings.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Integration of Financial Statement Analysis Techniques
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