Financial Statements
Written records
Convey:
1. Business activity
2. Financial Performance
Audited by govt agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes
Primary financial statements:
1. Balance Sheet
2. Income Statement
3. Statement of Cash Flow
4. Statement of Changes in Equity
Understanding Financial Statements
Investors/financial analysts rely on financial data to:
1. Analyze performance
2. Make predictions about the future directions of the company's stock price
Annual report (includes financial statements) - reliable and audited financial data source
Used by investors, market analysts, creditors, to evaluate:
1. Financial health
2. Earnings potential |
The Bottom Line
Financial statements are the ticket to external evaluation of a company's financial performance. The balance sheet reports a company's financial health through its liquidity and solvency, while the income statement reports a company's profitability. A statement of cash flow tie these two together by tracking sources and uses of cash. Together, financial statements communicate how a company is doing over time and against its competitors. |
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Balance Sheet
Provides overview of assets, liabilities, and shareholders' equity as a snapshot in tome (generally the end of the reporting period).
Assets
Cash and cash equivalents
Accounts receivable (A/R)
Inventory
Prepaid Expenses
Property, plant, and equipment (PPE)
Investments
Trademarks, patents, goodwill, and other intangible assets
Liabilities
Accounts payable (A/P)
Wages payable
Notes payable (N/P)
Dividends
Long-term debt
Shareholders' Equity
Represents the amount of money that would be returned to shareholders if all of the assets were liquidated and all of the company's debt was paid off.
Retained earnings |
Cash Flow Statement
Measures how well a company generates cash to pay debt obligations, fund operating expenses and investments
Illustrates operations, cash inflows/outflows
Reconciles the income statement w/ the balance sheet in three major business activities
Operating Activities
Any sources and uses of cash from running the business and selling products/services
Can include any changes made in cash accounts receivable, depreciation, inventory, and accounts payable
Also includes wages, income tax payments, rent, cash recepits of product/service sales
Investing Activities
Any sources and uses from a companys investments in the long-term future
Purchase/sale of asset
Loans made to vendors or received from customers
Any payments related to merger/acquistion
Also, purchases of fixed assets (PPE)
Financing Activities
Sources of cash from investors or banks, uses of cash paid to shareholders
Can include debt issuance, equity issuance, stock repurchases, loans, dividends paid, and repayments of debt |
Income Statement
Covers a range of time
Provides overview of revenues, expenses, net income, and earnings per share
Conveys:
1. Details of profitability
2. Financial results of business activities
Also illustrates how well a companys management is controlling expenses
Revenue
Operating revenue (generated from the core business activities)
Non-operating revenue (generated from the non-core business activities)
Other income (revenue earned from other activities), can include gains from sale of long-term assets
Expenses
Costs of goods sold (COGS)
Selling, general and administrative expenses (SG&A)
Depreciation/Amortization
Research and development (R&D)
Employee wages
Sales commissions
Utilties
Interest on loans or debt
Losses from sale of asset |
Statement of Changes in Shareholder Equity
Tracks total equity over time
The ending balance in statement of changes in shareholder equity is equal to the total equity reported on the balance sheet
Beginning equity: equity at the end of last period that simply rolls to the start of the next period
(+) Net income: amount of income earned in a given period. The proceeds from operations are automatically recognized as equity in the company, and this income is rolled into retained earnings at year-end
(-) Dividends: amount of money that is paid out to shareholders from profits. Instead of keeping all of a company's profits, the company may choose to give some profits away to investors
(+/-) Other comprehensive income: the period-over-period change in other comprehensive income. Depending on transactions, this figure may be an addition or subtraction from equity |
Statement of Comprehensive Income
Summarizes standard net income while also incorporating changes in other comprehensive income (OCI)
OCI includes all unrealized gains and losses not reported on the income statement
illustrates total change income, even gains and losses that have yet to be recorded in accordance to accounting rules
Can include: net income (from income statement), unrealized gains or losses from debt securities or derivative instruments ore retirement programs, unrealized translation adjustments due to foreign currency |
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