UNDERSTANDING FINANCIAL STATEMENTS

BASIC OBJECTIVES Accounting Basics Types of Financial Statements What do all these numbers mean?

ASSETS = LIABILITIES + EQUITY Assets –Things that a company owns that have value. (Cash, inventory, plants, equipment, investments, trademarks) Liabilities –Amounts of money that a company owes to others. (Accounts payable, loans, payroll owed to employees, taxes owed) Equity –Money left if a company sold all assets & paid all liabilities (Net worth, capital)

CURRENT OR LONG TERM Assets Can it be converted to cash in less than 1 year? Liabilities Is it expected to be paid in less than a year?

GAAPGAAP Common set of standards used to compile financial statements Creates at least a minimum of consistency Must be used to report financial statements to the public Requires assets to be valued at their purchase price, not at their market value Requires use of accrual accounting method G ENERALLY A CCEPTED A CCOUNTING P RINCIPLES

ACCRUAL VS. CASH METHODS Cash method Recognizes revenues when cash is received & expenses when they are paid Does not recognize accounts receivable or accounts payable Simple to maintain Bank account shows the exact amount of resources available Income is not taxed until it’s in the bank

ACCRUAL VS. CASH METHODS Accrual method Revenues and expenses are recorded when they earned Most commonly used method Gives a more realistic idea of income & expenses during a period of time Doesn’t provide awareness of cash flow

TYPES OF FINANCIAL STATEMENTS Balance Sheet Income Statement Cash Flows Statement

BALANCE SHEET Gives a detailed snapshot of the financial health of a company on a specific date Assets Listed on the left-side or at the top Listed in order of liquidity Liabilities Listed on the right-side or after the assets Listed in order of due date Equity Listed after the liabilities Totals of left and right sides must balance

INCOME STATEMENT Shows revenue and expenses over a period of time Revenues or sales are shown at the top Total amount of money brought in Costs of Sales Amount spent to produce the goods or services Total of Revenue minus Cost of Sales is called Gross Profit Operating Costs are deducted from Gross Profit Includes costs to support operations Includes administration, marketing, research Income Tax is deducted from Operating Profit Net profit is what’s left after all deductions

CASH FLOWS STATEMENT Reports the inflows and outflows of cash for a period of time Will show whether the company generated cash Reorders information from the balance sheet & income statement Operating activities Reconciles net income to the actual cash received or used Adjust for non-cash items, receivables, and liabilities Investing Activities Financing Activities Bottom line reflects net change in cash for the period A cash flow forecast will show whether cash balances are sufficient

OTHER THINGS TO CONSIDER Comparisons to historical statements can be very helpful The creation of financial statements is an art not a science Financial Statements alone don’t tell you everything about the condition of a company There are many industry ratios and calculations that will help to evaluate financial strengths and weaknesses Some companies are required to have their financial statements audited Footnotes provide lot of other information Included opinions, analysis, and other disclosures