1. Financial Statements Filippo Egizii UNIDO ITPO Bahrain 10-15-2008

2. Learning Objectives What are the different financial statements? How do they differ from each other? What is their purpose? How are they constructed?

3. Purpose of Financial Statements The objective of financial statements is to provide information about the financial “health” and “performance” of a company

4. Use of Financial Statements Financial statements are useful for making decisions: Deciding pricing of products Tracing company growth Estimating marketing budget Etc.

5. 3 Important Questions 1. Is the company making a profit? 2. What is the value of the company? 3. Can the company pay it bills?

6. Financial Statements Income statement Balance Sheet Cash Flow Statement

7. What is an income statement? An income statements is a financial document that analyzes the PROFITABILITY of a company

8. Income Statement Shows how much money is received from sales and how much is spent on expenses. What remains is the company's profit. The purpose of the income statement is to show whether the company made or lost money during a period of time. The Income statement represents a period in time

9. The Income Statement Equation How do you calculate the profitability of a company? Income = Revenues - Expenses

10. Items on Income Statement Revenue: Sales collected from the company's operating activity. - Can be cash or credit! Variable Costs: those expenses directly related to selling a product or providing a service. - Things like raw materials, sales commissions, cost of packaging, etc Fixed Costs: those expenses that are unrelated to the volume of sales. - Rent, salaries, electric bills, insurance, etc

11. Sample Income Statement Company XYZ – Income statement (Jan 1 – Dec 31 2009) Revenues: 100,000 Variable Costs: Packaging 5,000 Sale Commissions 15,000 Raw Materials 50,000 Fixed Costs: Rent 10,000 Salaries 12,000 _________________________________________________________________ PROFIT: 8,000

13. Balance Sheet What is a balance sheet? An balance sheet is a financial document that analyzes the VALUE of a company

14. Balance Sheet A Balance Sheet is a summary of an organization's balances. Assets, Liabilities and Equities Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time. A company balance sheet has three parts: assets, liabilities and equities. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth of the company; according to the accounting equation.

15. Definitions: Assets: are everything owned by or company (all tangible and intangible property) that can be converted into cash. What the company owns. Liabilities: is defined as an obligation of an entity arising from past transactions, the settlement of which may result in the transfer or use of assets. What the company owes. Equities: (or Shareholders' equity or stockholders' equity) is the interest in remaining assets, spread among individual shareholders. The value of the company.

16. The Balance Sheet Equation Assets = Liabilities + Equities therefore Equities = Assets - Liabilities

17. Items on Balance Sheet - Assets Current Assets cash inventories accounts receivable prepaid expenses Long-term Assets property, plant and equipment intangible assets

18. Items on Balance Sheet - Liabilities Current Liabilities accounts payable credit cards Long-term Liabilities bank loans issued debt securities (bonds)

19. Sample Balance Sheet Assets: Cash 5000 Machines2000 Computer3000 _______________________ Total Assets:10000 Liabilities: Bank Loan5000 Equities: Owner’s investment5000 ____________________________ Total Liab+Equ10000

21. Cash Flow Statement What is a cash flow statement? An cash flow statement is a financial document that analyzes the LIQUIDITY of a company

22. Cash Flow Statement A cash flow statement is a financial statement that shows a company's liquidity (the ability to pay!) The money coming into the business is called cash inflow, and money going out from the business is called cash outflow. The statement breaks the analysis down to operating, investing, and financing activities

23. The Cash Flow Equation CF from Operating Activities + CF from Financing Activities + CF from Investment Activities = _______________________________ Net Cash

24. Items on Cash Flow Statement Cash flow from Operating Activities Cash flow that originates from the company main business lines, such as selling products, paying for wages, rent etc. Cash flow from Investing Activities Cash flow that originates from the company investments like the sale of an asset or machine or other capital expenditures (such as building a new plant). Cash flow from Financing Activities Cash flow that originates from the company financing activities such as paying dividends or buying back stocks.

25. Sample CF

26. Conclusion Statement: Time Frame: Equation: Used for: Income St. From – To Profit = Revenues – Expenses Analyzing profitability Balance Sheet One Day Assets = Liabilities + Equities Analyzing value Cash Flow From – To Cash = Op. Act. + Inv. Act. + Fin. Act Analyzing liquidity