The matched-allocation position and performance statement. (Accounting Issues).

Bringing his trilogy to a close, John Cassis pulls together the matched-allocation position statement and the matched-allocation performance statement to provide the best possible picture of a company's performance over a defined time period.

New approaches to the cash flow statement and balance sheet--presented in two earlier issues of The RMA Journal (1)--were designed with the analyst in mind. While the income statement, cash flow statement, and balance sheet are indispensable to the lender/analyst, most financial statement users would agree that deconstruction of these reports is often required. Well-informed users typically make numerous "mental" adjustments to any or all of these statements to fully relate a company's financial performance over a period of time--as well as its financial position at a given point in time--to the institution's lending or investment criteria.

The matched-allocation performance statement bridged the gap between the cash flow statement (largely accounting driven) and EBITDA (largely analyst driven) to combine the best of both worlds into one package.

This statement grouped cash sources directly with their intended uses instead of with their FASB 95 sections. The performance statement further allowed adjustments for nonrecurring items and direct calculation of debt service coverage. Finally, this statement incorporated qualitative judgments about a company's performance over a given period of time directly into the quantitative output.

The matched-allocation position statement applied the same grouping principle to the balance sheet to show which assets a company's equity capital has been allocated to. Knowing which assets received the equity investment may help a lender or equity investor better understand which assets remain effectively unencumbered and thus available in the event of liquidation. Like the performance statement, the position statement also allowed the user to apply qualitative knowledge about a company's financial position (such as off-balance-sheet assets and liabilities) directly into a single quantitative presentation.

This third and final article in the series combines the two statements into one. While either statement may be used separately, integrating the two provides a valuable perspective. The performance statement shows how much cash flowed into and out of the company in a given period of time, matched by specific application rather than by accounting classification. This flow of cash translates into changes on the position statement over the period. Furthermore, the cumulative effects of all historical cash movements up to a certain point in time give rise to the position statement itself. We'll call this integrated analytical tool the matched-allocation position and performance statement (MAPP statement, or MAPPS).

A Case Study

Tables 1 and 2 show a MAPPS case study. Customary financial reporting places the balance sheet first, and this rule has been followed in this MAPP statement.

The position statement of this company shows $146,000 of equity invested in the form of cash. This amount is net of accruals and may represent surplus cash. Were this the case, the company's loan officer might recommend some short-term investments to enhance interest income. While this company has invested $296,000 of its equity into receivables, the next line shows that total funding sources of inventory exceed inventory …