Too many questions!

I have been working on trying to understand more and more about Financial Statements and Lee and Man Handbags by delving into their annual reports.  Today I was in such a deep conversation with the 2014 suite of reports, and had asked it so many questions, that the transcript for this interview was recorded:

                                                                                                     

Statement of Income:  Erin, you have been staring at us a lot of the last few weeks and it’s getting uncomfortable. What is it that you are finding confusing about us?

Erin: Lots of things are confusing.  For starters, some of the terms on the reports are not always self-explanatory. One example is that there is an item on the income statement that just says ‘Other gains and losses’ but is just one number for both the gains and losses. To me it would make sense to have one item as ‘other gains’ and another item ‘other losses’. To understand the components of this item you have to check the notes to see that other losses has already been taken away from other gains and then added to the report as one figure. I felt like this could be more self-explanatory if separated, however, I can see that notes would probably have to be made for these regardless of whether there are listed under one or two items.

Statement of Cash Flows: What about our numbers? Is there any questions you have about Lee and Man's based on the numbers in the reports?

Erin: After an initial look at the numbers I can see that the profit is way down in 2014 from previous years but the Equity is higher than each year previous. I was required to look for further information than just profit being an indicator of healthy finances and to be honest, I’m still not entirely sure! It’s a question I will have to raise amongst students to see if they have experienced something similar with their companies.  I began looking at the Income Statement, and I can see that the Expenses are over HK$50,000,000 more than the previous years. Now I’m not sure why things like the administrative expenses and selling and distribution costs would have increased by this much but I think this could be why the profit looks down because expenses were so much higher. I will have to check over the Statement of Cash Flows when I understand it a little better.

Balance Sheet: I know we can be a bit confusing, but surely there are interesting things. What have you found interesting about us?

Erin: Yes, the story you can make with the financials! The notes are also interesting and very helpful. For 4 pages of reports there are 100+ pages of notes, just to explain the numbers in the reports.  They help you to understand a lot and can even be used as a bit of a glossary in regards to the ‘Significant Accounting Policies’ I have found it to be a good idea to read the specific note for the item on the report and then search through the SAP’s for just a bit more information.

I also like that you can seem to check each statement against the other statements.  The ‘Net Assets’ is on the Balance sheet and indicated as Equity in the Changes to Equity report. The ‘Profit before Taxation’ on the Income Statement is the first thing on the Statement of Cash Flows. This helps me to think everything is in order and it helps to cement that certain things are correct. Eg Net assets = Equity. I also like to be able to double check if I understand something correctly by adding it up myself. Does the Total Equity in the Statement of Changes in Equity equal all of the Assets minus all of the Liabilities from the Balance sheet? Even if it is listed on the Balance sheet as Net Assets, I am glad that I can understand how that figure on the Equity report has come to be.

Another component that I found very thought provoking was the issue of having 'Trading Halts' When I initially looked at Lee and Man handbags, and found that profits were down and then stumbled across a trading halt on their webpage, I thought it meant that the company was going down the plughole.  It has only been since I revisited the webpage that I found that the trading was resumed and it could have nothing to do with how the company is performing.  In this case, the parent company was in negotiations for a sale of their shares in Lee and Man Handbags, which I would think to mean that if the company is in demand, it cannot be failing as terribly as I initially thought.  I would love to know if any other students had a trading halt in their company to see for what other reasons this may come around.

Statement of Changes in Equity: Well we think that we are extremely interesting! Is there anything that you have found hard to believe?

Erin: Yes, one item on my report just stated “Other asset” totalling HK$395,000 with no note linked. I am desperate to know what this is! Taking into account that the equity for that year was HK$284 million, it’s a tiny amount, but still…What is it?! Can they even do that? Any ideas?

Statement of Changes in Equity: No, we are just the vessels for this information to get to the world, Erin! Gosh. Plus I think you’re talking to yourself…