Reading & Understanding Basic Financial Statements.pptx

Reading & Understanding

Basic Financial Statements

SCOPE

• _{Purpose of financial statements} • _{The Balance Sheet}

• _{The Income Statement}

• _{Statement of Retained Earnings} • _{Statement of Cash Flows}

• _{Notes to the financial statements}

• _{Fundamental concepts and assumptions} • _{Accrual vs. cash-basis accounting}

Primary Financial Statements

Basic financial statements:

_{Balance Sheet}

_{Income Statement}

Primary Financial Statements

• _{Primary financial statements answer basic questions including:}

• _{What is the company’s current financial status?}

• _{What was the company’s operating results for the period?}

The Balance Sheet

• _{Summary of the financial position of a company at a particular date} • _{Assets: cash, accounts receivable, inventory, land, buildings,}

equipment and intangible items

Liability

• _{In financial accounting, a liability is defined as the future sacrifices of economic}

benefits that the entity is obliged to make to other entities as a result of past transactions or other past events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

• _{A liability is defined by the following characteristics:}

_{Any type of borrowing from persons or banks for improving a business or personal}

income that is payable during short or long time;

_{A duty or responsibility to others that entails settlement by future transfer or use of}

assets, provision of services, or other transaction yielding an economic benefit, at a specified or determinable date, on occurrence of a specified event, or on demand;

_{A duty or responsibility that obligates the entity to another, leaving it little or no}

discretion to avoid settlement; and,

The Balance Sheet

• _{What are the resources of the company?}

Accounting Equation

Assets = Liabilities + Owners’ Equity

Sources of Funding

Creditors’ claims against resources

=

+

Sample Balance Sheet

Assets

Cash $ 40

Accounts receivable 100 Land 200

Total assets $340

Liabilities

Accounts payable $ 50 Notes payable 150

$200

Owners’ Equity

Capital stock $100

Retained earnings 40 $140

Total liabilities

and owners’ equity $340

Classified and Comparative Balance

Sheets

• _{They distinguish between:}

• _{Current and long-term assets} • _{Current and long-term liabilities}

• _{Listed in decreasing order of liquidity}

Balance Sheet Limitations

_{Assets recorded at historical value}

The Income Statement

• _{Shows the results of a company’s operations over a period of time.} • _{What goods were sold or services performed that provided revenue}

for the company?

• _{What costs were incurred in normal operations to generate these} revenues?

Revenues

• _{Assets (cash or AR) created through business operations}

Expenses

• _{Assets (cash or AP) consumed through business operations}

Net Income or (Net Loss)

• _{Revenues - Expenses}

The Example Company Income Statement

For the Years Ended December 31, 2010 and 2011

2011 2010

Revenues:

Sales $100 $ 85

Other revenue 30 15 Total revenues $130 $100

Expenses:

Cost of goods sold $ 62 $ 58 Operating & admin. 16 12 Income tax 20 18

Total expenses $ 98 $ 88

Statement of Cash Flows

• _{Reports the amount of cash collected and paid out by a company in} operating, investing and financing activities for a period of time.

• _{How did the company receive cash?} • _{How did the company use its cash?}

• _{Complementary to the income statement.}

Statement of Cash Flows

Cash inflows

• _{Sell goods or services}

• _{Sell other assets or by borrowing}

• _{Receive cash from investments by owners}

Cash outflows

• _{Pay operating expenses}

• _{Expand operations, repay loans}

Match Classification of

Cash Flows

• _{Operating activities – Transactions and events that enter into the} determination of net income.

• _{Investing activities – Transactions and events that involve the}

purchase and sale of securities, property, plant, equipment, and other assets not generally held for resale, and the making and collecting of loans.

• _{Financing activities – Transactions and events whereby resources and} obtained from, or

Operating Activities

Cash Inflow

• _{Sale of goods or} services

• _{Sale of investments} in trading securities • _{Interest revenue}

• _{Dividend revenue}

Cash Outflow

• _{Inventory payments} • _{Interest payments} • _Wages

Investing Activities

Cash Inflow

• _{Sale of plant assets}

• _{Sale of securities, other than trading securities} • _{Collection of principal on loans}

Cash Outflow

• _{Purchase of plant assets}

Financing Activities

Cash Inflow

• _{Issuance of own stock} • _Borrowing

Cash Outflow

• _{Dividend payments}

Statement of Cash Flows

CASH INFLOWS

CASH OUTFLOWS

Operating Activities

Investing Activities

Financing Activities

Operating

Activities Investing

Activities

Statement of Cash Flows Analysis

Operating Investing Financing General Explanation

Building up pile of cash, Possibly looking for Acquisition

Operating cash flow being Used to buy fixed assets And pay down debt

Operating cash flow and sale of fixed assets being used to pay down debt.

Operating cash flow and borrowed money being used

Statement of Cash Flows Analysis

Operating Investing Financing General Explanation

Operating cash flow problems covered by sale of fixed assets, borrowing and owner

contributions.

Rapid growth, short falls in operating cash flow; purchase of fixed assets.

Sale of fixed assets is financing operating cash flow shortages.

Company is using reserves to finance cash flow