Finance Chapter 2 Financial statements

Financial statements & reports  Annual report—a report issued once a year by a corporation to its stockholders, containing:  Basic financial statements  Management’s analysis of the past year’s operations  Management’s opinions about the future  Basic financial statements  Balance sheet  Income statement  Statement of retained earnings  Statement of cash flows

The balance sheet  Assets (left side)  Liabilities or equities (right side) – claims against assets  Assets ordered in terms of liquidity: the length of time it takes to convert asset to cash  Cash & marketable securities  Accounts receivable  Plant & equipment  Liabilities (money owed) & equity  Accounts & notes payable  Accruals (a future outlay of cash) & long-term bonds  Stock  Retained earnings

The income statement  Summarizes revenues & expenses over an accounting period (issued quarterly)  Net sales minus costs  Depreciation (tangible assets)  Amortization (intangible assets, e.g., patents)  EBITDA – earnings before interest, taxes, depreciation, and amortization  EBIT – earnings before interest and taxes

Statement of retained earnings  How much of the firms earnings were retained rather than paid out as dividends  Cumulative  Not a cash equivalent  Normally used for re-investment

Statement of cash flows  Reports the effect of operating, investing, and financing activities on cash flows over an accounting period  Differs from accounting profit