CFA Institute Investment Foundations Program: Chapter 7 – Financial Statements (Part II)

In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here).  It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing.  Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.

There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations.  This series of articles will highlight the core knowledge of each chapter.

Chapter 7 provides an overview of financial statements. The learning outcome of chapter 7 is as follows:

·        Describe the roles of standard setters, regulators, and auditors in financial reporting;

·        Describe information provided by the balance sheet;

·        Compare types of assets, liabilities, and equity;

·        Describe information provided by the income statement;

·        Distinguish between profit and net cash flow;

·        Describe information provided by the cash flow statement;

·        Identify and compare cash flow classifications of operating, investing, and financing activities;

·        Explain links between the income statement, balance sheet, and cash flow statement;

·        Explain the usefulness of ratio analysis for financial statements;

·        Identify and interpret ratios used to analyse a company’s liquidity, profitability, financing, shareholder return, and shareholder value.

Although each major financial statement—balance sheet, income statement, and cash flow statement—offers different types of financial information, they are not entirely separate.  The income statement is linked to the balance sheet in many ways. The revenues and expenses reported on the income statement that have not been settled in cash are reflected on the balance sheet as current assets or current liabilities.

The balance sheet reflects financial conditions at a certain point in time, whereas the income and cash flow statements explain what happened between two points in time. So, although the three financial statements show different kinds of information and have different purposes, they are all related to each other and should not be read in isolation.

Financial statement analysis involves the use of information provided by financial statements and also by other sources to identify critical relationships. These relationships may not be observable by reading the financial statements alone. The use of ratios allows analysts to standardise financial information and provides a context for making meaningful comparisons. In particular, investors can compare companies of different sizes as well as the performance of the same company at different points in time.

Ratios help managers of the company or outside creditors and investors answer the following questions that are important to help determine a company’s potential future performance:

·        How liquid is the company?

o   Current ratio; Quick ratio

·        Is the company generating enough profit from its assets?

o   Return on assets; Basic earning power

·        How is the company financing its assets?

o   Financial leverage

·        Is the company providing sufficient return for its shareholders?

o   Return on equity

Source: https://www.cfainstitute.org/en/programs/investment-foundations

Sample Question:

The return on equity for a company and the industry in which it operates are 10.3% and 9.6%, respectively. The company is most likely performing:

better than the industry.

the same as the industry.

worse than the industry.

 

pollcode.com free polls

What Makes Employees Happy At Work?

There are 3 billion working people in the world. About 40% may say they are happy at work. That means about 1.8 billion people.

Organisations with a lot of happy employees have three times revenue growth than those that are miserable. That’s according to Michael C. Bush. The key is not to spend more to make this happen but the following:

(i)         Trust and Respect

            Leaders often talk of “we trust our employees” or “we empower our employees”. But when an employee needs a laptop, there are 15 people in the approval process! More money is spent on the approval process than the laptop. For Four Seasons the employees are told “Do whatever is right when servicing the customer”. That’s trust handed to an employee. So they deliver one of the best services in the world.

(ii)        Fairness

            Unfair treatment erodes trust. Employees want to be treated fairly regardless of rank, tenure, age, experience, or job category. So there is always a need to re-balance this out.

(iii)       Listening

           

          Active listening and eye contact is not listening. Repeating what the person says is not listening. But being humble and always searching for the best possible idea, that’s what listening is. Employees like to know if what they say matters and you may change your mind because of that. Otherwise, forget about the conversation.

We all need to change – the way we behave, treat others and the way we support initiatives –all these define work experience and so remain flexible, agile and open to change!

Reference:

This is what makes employees happy at work, Michael C Bush

As an employee, are you happy at your work now? Yes No   pollcode.com free polls

Jumps in Approved FDI: Too Early to be Happy?

Compared to the same period last year, approved foreign direct investment (FDI) has increased by 73.4%, from RM16.90 bil to RM29.30 bil in Q1 of 2019. According to the Finance Minister Lim Guan Eng, the approved FDI is expected to create more than 41,200 jobs for Malaysians, of which more than half would be in the manufacturing sector.

Malaysia is benefiting from business relocation, as well as trade and investment diversions caused by the US-China trade war. However, due to escalation of the trade war, the FDI numbers in the coming quarters is still uncertain. Could it remain strong? Would FDI really stir up our economy? Are we too early to be happy with the rising “approved” FDI?

Economists believe that international companies bring in competition and can shake up an existing domestic industry, or create an entirely new industry. Besides, FDI can create new jobs and boost government tax revenues.

Much research has been done to examine the impact of FDI towards economic growth in different countries. Given the conflicting conclusions, Fadhil and Almsafir (2015) chose Malaysia to examine the impact of inward FDI activities on Malaysia’s economic growth. By analysing 1975-2010 annual data, the results showed that FDI inflows together with the human capital development contributed strongly to the host country’s economic growth. As a result, they suggest government should commit more political and fiscal support in developing human capital to induce more FDI inflows which in turn would strengthen country’s economy. 

According to Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias, not only Malaysia, other Asean countries such as Vietnam, Thailand and Indonesia would also benefit from the trade diversion. Thus, Malaysia has to improve its competitiveness in order to sustain the FDI numbers.

BIMB Securities Research economist Imran Nurginias Ibrahim said it might be too early to celebrate the strong “approved” FDI. He pointed out that approved FDIs do not necessarily translate into actual investments by foreign companies. Moreover, it may take time to realise the FDI. Approved FDIs are not actual investments. Prominent economist Jomo Kwame Sundaram also advised that the government should focus on strengthening domestic investors as they form the economy’s foundation.

Reference:

Trade War bane for FDI inflows into Malaysia, The Star, 19 Jun 2019

What is ‘foreign direct investment’? www.ecnmy.org

Fadhil, M.A., Almsafir, M.K. (2015), The role of FDI inflows in economic growth in Malaysia (time series: 1975-2010). Procedia Economics and Finance, 23, 1558-1566

Rising Foreclosure Cases in Malaysia

The number of properties foreclosed is rising and is expected to increase in the second half of 2019, according to The Star.

  

The volume of auction properties rose to 32,611 cases, with a total reserve value of RM15.56 billion in 2018, according to AuctionGuru’s 2018 Auction Report. It was about 90 properties a day!

Up to April 30, 11,203 units valued at RM3.85 billion were being auctioned in the first four months of this year. The number of properties went under the hammer is rising every year, indicating the housing loan defaults are rising as well.

According to AuctionGuru, the challenging part in the property market currently is that salary increments among workers have not caught up with property price growth, and therefore limiting affordability.

Banks on the other hand may have problems with the way properties were priced, marketed and sold in last few years.

Banks disbursed loans based on sales and purchase agreement (SPA) price, instead of the actual house price, less rebates and freebies. For instance, if the rebate is 35% to 40%, giving a 70% financing is still considered high. The bank is disbursing more than the net house price.

Ten years ago when the market began to revitalise, mortgage brokers would apply up to six banks for a buyer. The buyer may then end up buying more than one unit if more loans were approved, sometimes with the “motivation” of a cash rebate. The more units they buy, the more rebate they get, and if the cash rebate is big enough, they believe they could use it to pay their car loans, or even use in house flipping.

Banks however were unaware of the multiple loan applications. “This led to banks asking for termination letters from the other banks, when they got wind of it,” the source says. “Buyers may face financial difficulties when they have to pay full instalment.”

As a result, some banks today request the property to be valued independently when the developer sells to buyers. They want to know “the real price” instead of the SPA price for loan approval.

This whole phenomenon of a property cycle is not new. The level of coordination is always low. The authorities approve development, developers look for a quick return and banks channel liquidity into “safe” assets like property. Then there is growing urbanisation, young people on their first rung of their career (hoping to purchase) and speculators – what would we do without them! Once the “bubble” is reached, there is catharsis with significant drop in prices and more foreclosures! Politicians, bankers and others promulgate “new” policies and create new institutions like “Danasomething”. For a while, we will not sin! Then we forget and the whole process starts again to reach new heights – just examine 1985-87, 1997-99, 2008 (U.S. case), if you don’t believe!

Referrence:

Foreclosures on the rise, The Star, 15 Jun 2019

More defaults expected in the second half, The Star, 15 Jun 2019

More went under the hammer in 2018, EdgeProp, 23 February 2019

CFO Survey: Global Recession Predicted

Professor John Graham (of Duke Fuqua School of Business) directs the world's most comprehensive research on senior finance executives. Nearly half of chief financial officers in the United States believe the nation’s economy will enter a recession in 2020, according to the Duke University/CFO Global Business Outlook. CFOs in other parts of the world predict an even higher probability of recession. The CFO survey has been conducted for 93 consecutive quarters and spans the globe, making it the world's longest-running and most comprehensive research on senior finance executives. The survey ended June 6. Results are for the U.S. unless stated otherwise.

Nearly half (48.1 percent) of U.S. CFOs believe that the U.S. will be in recession by the second quarter of 2020, and 69 percent believe that a recession will have begun by the end of next year.

“The numbers may fluctuate slightly, but this is the third consecutive quarter that U.S. CFOs have predicted a 2020 recession,” said John Graham, a finance professor at Duke’s Fuqua School of Business and director of the survey.

Eighty-five percent of African CFOs believe their countries will be in recession by the second quarter of 2020, as do the majority of CFOs in Europe (63 percent), Asia (57 percent), and Latin America (52 percent).

“For the first time in a decade, no region of the world appears to be on solid enough economic footing to be the engine that pulls the global economy upward. Trade wars and broad economic uncertainty are hurting the economic outlook,” said Graham.

The U.S. CFO Optimism Index, which historically has been an accurate predictor of hiring and GDP growth, is sending mixed signals this quarter. Pessimists outnumber optimists by a two-to-one margin in terms of their optimism about the overall U.S. economy. At the same time, those growing more optimistic about their own firm’s prospects outnumber those growing more pessimistic. Both indices were strongly optimistic as recently as September 2018. “The reduced optimism about the overall U.S. economy likely reflects continued uncertainty about trade policy and weaker global economic growth,” said Graham. “The overall Optimism Index is 65.7 this quarter, on a scale from 0 to 100, down from 70 in September 2018.” Another factor is the ominous inversion of the yield curve, which means short-term interest rates are higher than long-term rates for at least a full quarter. Inverted yield curves have predicted the last seven recessions. “All of this bodes poorly for economic growth,” said Campbell Harvey (another Fuqua finance professor).

Reference:

CFO Survey: Global Recession Predicted; Strong Support for U.S. Immigration Reform, Duke Fuqua School of Business, June 11, 2019

CFA Institute Investment Foundations Program: Chapter 7 – Financial Statements (Part I)

In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here).  It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing.  Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.

There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations.  This series of articles will highlight the core knowledge of each chapter.

Chapter 7 provides an overview of financial statements. The learning outcome of chapter 7 is as follows:

·        Describe the roles of standard setters, regulators, and auditors in financial reporting;

·        Describe information provided by the balance sheet;

·        Compare types of assets, liabilities, and equity;

·        Describe information provided by the income statement;

·        Distinguish between profit and net cash flow;

·        Describe information provided by the cash flow statement;

·        Identify and compare cash flow classifications of operating, investing, and financing activities;

·        Explain links between the income statement, balance sheet, and cash flow statement;

·        Explain the usefulness of ratio analysis for financial statements;

·        Identify and interpret ratios used to analyse a company’s liquidity, profitability, financing, shareholder return, and shareholder value.

Financial statements are read and analysed by many people to assess a company’s past and forecasted performance.  Accounting standards guide the gathering, analysis, and presentation of information in financial statements.

Regulators support accounting standards by recognising them and enforcing them.  Auditors are independent accountants who express an opinion about the financial statements’ preparation and presentation. This opinion helps determine how much reliance to place on the financial statements.

The balance sheet (or statement of financial position or statement of financial condition) provides a statement of the company’s financial position at one point in time. The balance sheet shows the company’s assets, liabilities, and equity.

The income statement (or profit and loss statement or statement of operations) identifies the profit (or loss) generated by a company during a given time period.  The profits reported on the income statement are not the same as net cash flows. Revenues and expenses, which are used to calculate profit, are measured on an accrual basis rather than when they are received or paid in cash.

The statement of cash flows identifies the sources and uses of cash during a period and explains the change in the company’s cash balance reported on the balance sheet.  The statement of cash flows shows how much cash was received or spent, as well as for what the cash was received or spent. Cash inflows and outflows are classified into three kinds of activities on the cash flow statement: operating, investing, and financing.

Source: https://www.cfainstitute.org/en/programs/investment-foundations

Sample Question:

Which of the following is an example of an operating expense?

Dividends paid to shareholders

Interest payments made on a bank loan

Depreciation expenses for plant and equipment

 

pollcode.com free polls

How Entrepreneurs Think Differently?

Running your own business sounds great, in fact it is a difficult and complicated path. There is no quick way that can turn you into a successful entrepreneur overnight. Hard work and correct mindset are needed. To become a successful entrepreneur, one needs the following:

1. Challenges are opportunities

How do you react to challenges? Fear? Stress? Challenges are not obstacles that hinder progress, but actually provide opportunities to learn and grow.

2. Competitors are research subjects

Entrepreneurs see competitors as valuable information, they study their industry, business models and learn from them rather than seeing them as a threat.

3. Big things are made from small components

Breaking big things into small pieces makes it more manageable. Same goes to problems. Big problems are often made up of small components. Therefore, in order to solve our problems, we should list out solutions for small problems.

4. Mistakes are healthy

Not afraid to make mistakes is key as even successful entrepreneurs do make mistakes. The point is, you have to learn from your mistakes. Sometimes, entrepreneurs tend to view a mistake as a temporary downward trend for the next upswing.

5. It’s ok to admit what you don’t know

A common misconception about successful entrepreneurs is that they are often arrogant and believe they know everything. In fact, they are always the first to admit on what they do not know. The more they learn, the more they find that they do not know many things.

6. Others’ opinion is invaluable

Learn to listen to people’s opinion as it might help one to see things from a fresh perspective.  Richard Branson pointed out that listening is one of three most important leadership principles. “Nobody learned anything by hearing themselves speak,” he said.

7. Stay curious

Get curious and ask questions. Curiosity is a fundamental trait of successful entrepreneurs and they always look for alternatives to make thing better.

Reference:

Jayson DeMers, 10 Ways Entrepreneurs Think Differently https://www.entrepreneur.com

Ryan Robinson, 8 Surprising Traits of the World’s Most Successful Entrepreneurs https://www.thebalancesmb.com

U.S. Trade Deficit With China and Its Impact

The U.S. trade deficit with China was USD419 billion in 2018. Trade deficit arises because U.S. exports to China totalled USD120 billion while imports from China (by the U.S.) was USD539 billion.

The biggest items imported from China by the U.S. were computers and accessories, cell phones, apparel and footwear. In many cases, U.S. manufacturers send raw materials to China for low-cost assembly. Once shipped back to the U.S., they are considered imports. NVIDIA Corp., Micron Technology and Intel Corp. are especially vulnerable in a trade war. (Apple has so far “escaped”).

China’s imports from U.S. are commercial aircraft, soybean and autos.

China’s competitive pricing is a result of two factors:

          -lower standard of living; and

          -an exchange rate partially linked to the dollar.

China is the largest lender to the U.S. Government. As at end December 2018, U.S. debt to China was USD1.12 trillion – 28% of total public debt owned by foreign countries.

By buying U.S. Treasuries, China has kept U.S. interest rates low. If China stops buying Treasuries, interest rates could rise and throw the U.S. into a recession. That is not in China’s interests as well.

The fact is U.S. companies cannot compete with Chinese companies on costs. Outsourcing by U.S. to China or India adds to U.S. unemployment but at least U.S. companies survive with design and patent rights.

When will this end? Only Trump knows! The U.S. has maintained a large surplus with China in services. This totalled USD40.5 billion in 2018. It reflects largely spending by Chinese tourists and exchange students. What if China advises tourists to defer going to the U.S.? The U.S. tourism industry could be hit by a USD18 billion impact.

2020 then could be a defining moment for Trump, U.S. economy and the world.

References:

1. Why the U.S-China Trade Deficit is so Huge: Here’s all the stuff America imports, Jeffrey Bartash, May 14, 2019, MarketWatch

2. The Top 3 Industries Affected by the Trade War with China, Nathan Reiff (www.investopedia.com)

3. U.S. Trade Deficit with China and Why It’s So High, Kimberly Amadeo (www.thebalance.com)

Top Digital Marketing Trends in 2019

Marketing is a method to promote your company’s products or services. However, consumers are spending more and more time on the internet today. That means you may need to approach them through where they are spending time: online. In today’s article, we will summarise the top four digital marketing trends in Malaysia for 2019.

1. The Rise of Mobile Traffic

According to Axcel Digital’s observation, mobile traffic has surpassed desktop traffic on average by 60-70%! People’s attention has shifted to mobile and the numbers are now reflecting that change. Therefore, websites have to be mobile-friendly and mobile responsive as nobody likes to browse a website with their mobiles in a desktop’s version.

2. Chatbot Automation

Consumers today are getting more impatient and they want answers FAST. Instead of waiting for the reply via email, chatbot provides a solution to answer the FAQs automatically. Apart from improving customer service, some companies use chatbot to boost their sales as well. Here are some examples of businesses using chatbot:

·       Mastercard

Mastercard’s Facebook Messenger bot makes it easy for its customers to check on their account transactions (e.g. by asking “how much did I spent on restaurants in May?”).

·       Malaysia Airlines

Malaysia Airlines, together with Amadeus, has launched MHchat, a new feature which helps travellers to book flights and even pay for the flight tickets through the social media app, Facebook Messenger.

Read more: https://www.socialmediatoday.com/news/9-great-examples-of-how-brands-are-using-chatbots/524138/

3. Omni-Channel Marketing

Have you ever experienced to see the same advertisement multiple times in different digital channels? E.g.  Facebook, Google, YouTube, Instagram, LinkedIn and so on.

This is how it works: A person searches for your website on Google, the person lands on your website, checks out the products and services, and then leaves the website. With an omni-channel marketing strategy, this person will then see your advertisement again on Facebook, Instagram, YouTube and so forth.

4. Social Media Influencers

The generation Z and the millennials today spend more time on YouTube than on TV. As a result, many new influencers are born. The influencers spent time to increase their followers and build trust among their followers.

Endorsement or sponsor going to these social media influencers is rising by as much as 4 figures/digits just for one Instagram post. However, the price of influencers is still underpriced. As more brands start using influencers, the price will be more expensive.

Some other digital marketing tools/ideas such as voice search, livestream and content creation are also part of today’s marketing trends. Businesses therefore have to change their marketing strategies based on consumers’ behaviour and lifestyle patterns.

Referrence:

These Are The Top Digital Marketing Trends in Malaysia (Updated 2019) (https://www.axceldigital.com)

Top 8 Digital Marketing Trends for 2019 (https://www.exabytes.digital/blog)

Global Talent Crunch

Gartner’s survey shows global talent shortage was the top emerging risk organizations face globally in 4Q18. According to the survey, “talent shortage” outweighed “accelerating privacy regulation” and “cloud computing”, which were once rated as the top risks. “Talent shortage” is now the key concern.

Top Five Risks by Overall Risk Score: 1Q18, 2Q18, 3Q18, 4Q18 (Source: Gartner, January 2019)

By 2030, the global talent shortage could reach 85.2 million people, where shortage of skills is the key driver to talent crunch, according to Korn Ferry’s research. Even companies that are using more robotics foresee a growing demand on human talent with advanced skills. The companies might use robots in place of people from the factory floor, and redeploy these people to the research laboratory. However, the mismatch between technological advances and the skills and experience a worker needs to leverage these advanced tools is still a problem.

Below are three knowledge-intensive industries that the research shows will be threatened by the global talent crunch:

1. Financial and business services

By 2030, this industry could face a deficit of 10.7 million workers, which may lead to failure in generating $1.313 trillion of revenue in the market. According to research, the talent crunch will be even more damaging for small but currently mighty spots like Hong Kong and Singapore as small economies have limited opportunities for expansion. Thus, upskilling the existing workforce is critical.

2. Technology, media, and telecommunications

The research forecasted that by 2030, the labor-skills shortage will reach 4.3 million workers with unrealized output of $449.70 billion. U.S. as the world’s tech leader, could face a loss of $162.25 billion due to talent shortages. India, meanwhile, will see a surplus of 1.3 million skilled workers by 2030, offering more opportunities for the nation.

3. Manufacturing

By 2030, the manufacturing industry could face a labor shortage of 7.9 million with $607.14 billion of unrealized output. The industry can be sustained by short-term surpluses driven by China and Russia, until 2020. However, developed countries such as U.S. already struggle to fill certain manufacturing roles.

Based on the research, U.S. is projected to be one of the countries that would face significant talent shortage. Korn Ferry attributes this shortage in part to the nation’s greying population, with 10,000 baby boomers in U.S. expected to reach retirement age each day for the next 19 years. By 2030, the country could experience unrealized revenue of $1.748 trillion due to labor shortages, equivalent to 6% of its entire economy.

Organizations therefore have to be prepared for the talent crunch. Companies need to invest in training initiatives and focus more on upskilling both new and current employees.

Reference:

Korn Ferry, The Global Talent Crunch

Gartner, Inc., 4Q18 Emerging Risks Report and Monitor