Intro to Financial Statements

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Introduction to FinancialStatements


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Learning Objectives

Different types of statements

Purpose of each

How they work together

Why they are all important

What we can learn from them


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Financial Statements

The financial statements are windows intoa company's performance and health.

Balance Sheet

Income Statement ~ Statement of Operations~ Profit & Loss Statement (P&L)

Statement of Cash Flows

All three of these statements are found in afirm's annual report.


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The Balance Sheet ~ What is it?

The balance sheet represents a record of a company's assets,liabilities and equity at a particular point in time. The balance sheet isnamed by the fact that a businesss financial structure balances in

the following manner:

Assets = Liabilities + Shareholders' Equity

Assets represent the resources that the business owns or controls ata given point in time. This includes items such as cash, inventory,machinery and buildings.

The other side of the equation represents the total value of thefinancing the company has used to acquire those assets. Liabilitiesrepresent debt, while equity represents the total value of money thatthe owners have contributed to the business - including retained

earnings, which is the profit made in previous years.


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The Balance Sheet

ASSETS

Cash

Inventory

Land/Bldgs

Equipment

Accts Rcvbl

Securities

= +

LIABILITIES

Accts Payable

Wages Payable

Taxes Payable

Notes Payable

Short term

Long Term

EQUITY

Pref Stock

Common Stk

APIC

RetainedEarnings


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The Balance SheetBalance Sheet

December 31, 2007

ASSETS LIABILITIESCurrent Assets Current Liabilities

Cash $ 2,100 Notes Payable $ 5,000Petty Cash 100 Accounts Payable 35,900Temporary Investments 10,000 Wages Payable 8,500Accounts Receivable - net 40,500 Interest Payable 2,900Inventory 31,000 Taxes Payable 6,100Supplies 3,800 Warranty Liability 1,100Prepaid Insurance 1,500 Unearned Revenues 1,500Total Current Assets 89,000 Total Current Liabilities 61,000

-

Investments 36,000 Long-term LiabilitiesNotes Payable 20,000

Property, Plant & Equipment Bonds Payable 400,000

Land 5,500Total Long-termLiabilities

420,000

Land Improvements 6,500Buildings 180,000Equipment 201,000 Total Liabilities 481,000Less: Accum Depreciation (56,000)Prop, Plant & Equip - net 337,000

-

Intangible Assets STOCKHOLDERS' EQUITYGoodwill 105,000 Common Stock 110,000Trade Names 200,000 Retained Earnings 229,000Total Intangible Assets 305,000 Less: Treasury Stock (50,000)

Total Stockholders'Equity

289,000

Other Assets 3,000-

Total Assets $770,000Total Liabilities &Stockholders' Equity

$770,000


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The Balance Sheet ~ Why do We care?

The balance sheet provides investors with asnapshot of a company's health as of the dateprovided on the financial statement.

Generally, if a company assets are large relativeto liabilities, it's in good shape. Conversely, justas you would be cautious loaning money to a

friend who is burdened with large debts, acompany with a large amount of liabilities relative

to assets should be scrutinized more carefully.


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The Income Statement ~ What is it?

The income statement measures a company's performanceover a specific time frame and presents information about therevenues, expenses and profit that was generated as a resultof the business' operations for that period.

Components of the Income Statement include:

Revenue (how much the company earned)

Expenses (how much the company has spent, sort of)

Net Income before and after Tax (the profits of thecompany)

This statement contains the information you'll most often seementioned in the press or in financial reports - figures such as

total revenue, net income, or earnings per share.


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The Income StatementSample Income Statement

(in $1,000s) Q2 Q1Sales RevenueWidgets $4,125 $4,330Repair kits 143 20Service 1,443 1,102

Total Sales Revenue 5,711 5,452Sales CostsWidgets 2,204 2,111

Repair kits 18 4Service 1,189 947

Total Sales Costs 3,411 3,062Gross Profit (Loss) 2,300 2,390

Operating ExpensesGeneral & Administrative 292 301Sales & Marketing 1,389 1,414Research & Development 214 214Other Operating Expenses 5 7

Total Operating Expenses 1,900 1,936

Operating Income 400 454

Interest Paid 1 2

Income before Taxes 399 452Taxes 127 144

Net Income from Operations $272 $308


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The Income Statement ~ Why do We care?

The income statement answers the question,"How well is the company's business

performing?" Basically, "Is it making money?"

Firms with low expenses and high profits relativeto revenues are typically more desirable forinvestment because bringing in more dollarsdirectly benefits you as a shareholder.


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The Statement of Cash Flows ~ What is it?

The statement of cash flows represents a record of abusiness' cash inflows and outflows over a period of time. It isthe most sensitive of the statements and focuses on the

following cash-related activities: Operating Cash Flow: Cash generated from day-to-day business

operations.

Cash from Investing: Cash used for investing in assets, as wellas the proceeds from the sale of other businesses, equipment or

long-term assets Cash from financing: Cash paid or received from the issuing and

borrowing of funds

The cash flow statement is important because it's very difficult for abusiness to manipulate its cash situation. Earnings can be

manipulated, but it's tough to fake cash in the bank. For this reason


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The Statement of Cash FlowsCash Flow Statement

(dollar figures are in thousands) 1997 1996

Net Income $ 1,911 $ 1,374Non-cash Adjustments:

Depreciation 1,024 783

Other Adjustments to Earnings 43 (16)Net Cash provided from Operations 2,978 2,141

Proceeds from Issuing New Stock 384 247Payments to Repurchase Stock (396) (278)

Stock Dividends Paid (10)

Net Cash provided from Financing (22) (31)

Additions to Property, Plant & Equipment (2,478) (1,987)

Net Cash used for Investing (2,478) (1,987)

Change in cash and equivalents during year 478 123Cash and Equivalents, beginning of year 2,260 2,137Cash and Equivalents, end of year 2,738 2,260


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The Statement of Cash Flows ~ Why do Wecare?

The statement of cash flows is very important toinvestors because it shows how much actual cash acompany has generated. The income statement includesnon-cash revenues or expenses, which the statement ofcash flows excludes.

One of the most important traits to look for is the firm's

ability to generate cash. Many companies have shownprofits on the income statement but struggled later

because of insufficient cash flows.


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Analysis of Profitability

Profitability is a subtle and complexconcept. Doing well may be measured by

different standards. Three concepts ofprofitability are given by:

Return on assets

Return on common equity

Earnings per common share


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Earnings Per Share or EPS

Most income statements include a calculation ofearnings per share or EPS. This calculation tells

you how much money shareholders wouldreceive for each share of stock they own if thecompany distributed all of its net income for theperiod.

To calculate EPS, you take the total net incomeand divide it by the number of outstandingshares of the company.


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Bringing It All Together

The three financial statements we have discussed areall related.

The changes in assets and liabilities that you see on thebalance sheet are also reflected in the revenues and

expenses that you see on the income statement, whichresult in the companys gains or losses.

Cash flows provide more information about cash assetslisted on a balance sheet and are related, but not

equivalent, to net income shown on the incomestatement. Therefore, no one financial statement tellsthe complete story.


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Reporting Framework

GAAP starts with a conceptual framework of standardsthat anchor financial reports to a set of principles (suchas materiality- the degree to which the transaction is bigenough to matter) and verifiability (the degree to whichdifferent people agree on how to measure the

transaction). The basic goal is to provide users equity investors,

creditors, regulators and the public - with "relevant,reliable and useful" information for making gooddecisions.

Sitting on top of the simple framework is a growing pileof literally hundreds of accounting standards.


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Reporting Framework

The reporting frame work is applicable in Pakistan while preparing andpresenting of financial statements is as follows:

Applicable Laws and Regulations Regulating Authority

Listed Companies other

than, Insurance, NBFCs,

Modaraba and Bank

Companies Ordinance 1984.

International Financial Reporting Framework (IFRS) as applicable

in Pakistan

Stock Exchange Listing Regulations

Securities and Exchange

Commission of Pakistan

(SECP)

Banking Companies International Financial Reporting Framework (IFRS) as applicable

in Pakistan

Companies Ordinance 1984.

Stock Exchange Listing Regulations (Particularly Code of Corporate

Governance)

Banking Ordinance 1962

Prudential Regulations (Corporate, SMEs and Consumers)


Commission of Pakistan

and State Bank of

Pakistan.

Insurance Companies International Financial Reporting Framework (IFRS) as applicable

in Pakistan

Companies Ordinance 1984

Stock Exchange Listing Regulations

Insurance Ordinance and Rules


Commission of Pakistan.


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User of Financial Statements

User of the financial statements Interest of the user

Equity investors (existing and potential) They are interested whether buy, hold or sell the shares in hand

and also enable them in payment of dividends.

Loan creditors ie, existing and potential

holders of debentures and loan stock, and

providers of short-term loans

The amount will be paid when due and for continuation of the

business.

Employees (existing, potential and past) Interested in stability and profitability for employmentopportunities, remuneration and retirement benefits.

Business contacts including customers,

trade creditors, competitors and potential

take-over bidders

Whether the payment of loan will be made in due dates and

enable sustainability of business for future business with the

enterprise.

Government, including tax authorities,

government departments and local

authorities

Interested in allocation of resources and also to regulate the

activities of an enterprise and determining tax policies and as a

basis for national income.

Public, including tax payers, ratepayers and

environmental groups

Trends and recent development in the prosperity of the entity

and range of its activities.

Intro to Financial Statements

Documents

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