1. “Accounting is the Language of Business”
Module 3 Introduction to Financial Statements
“Accounting is the Language of Business”
ANDREA D. GARZON

2. Why study Financial Statements?
Analyzing a firm’s financial statements can help financial managers carry out three important tasks:
To assess the current performance of the firm.
Monitor and control operations.
Plan and forecast financial performance.
ANDREA D. GARZON

3. What are the basic financial statements?
Balance Sheet
Income Statement / Profit and Loss Statement
Cash Flow Statement
ANDREA D. GARZON

4. Balance Sheet
Contains information about the firm’s assets (everything of value the company owns); liabilities (the firm’s debts); and shareholders’ equity (the money invested by the company owners).
In finance, we use the balance sheet to describe a firm’s investments in assets and the way it has financed the purchase of its assets (Debt or Equity Financing).
Internal Financing = from the business itself (profit from operations)
External Financing = from the investors and creditors
ANDREA D. GARZON

5. Balance Sheet Total Assets Current Assets Cash Accounts Receivable
Inventories
Other Current Assets
Long-Term (Fixed) Assets
Property, Plant and Equipment
Other Long-Term Assets (Patents, Trademarks, Royalties, etc)
Current Liabilities
Accounts Payable
Short-Term Debt
Other Current Liabilities
Long-term Liabilities
Long-Term Debt
Stockholders’ Equity
Paid-In Capital
Retained Earnings
Left-Hand Side
Right-Hand Side
ANDREA D. GARZON

6. Assets (Left – Hand Side)
Current Assets – assets that the firm expects to convert into cash in 12 months or less.
Examples
Cash
Accounts Receivable
Inventory
ANDREA D. GARZON

7. Assets (Left – Hand Side)
Long-term (Fixed) Assets) – assets that the firm does NOT expect to sell within one year.
Land
Building
Equipment/Machineries
ANDREA D. GARZON

8. Liabilities and Stockholders’ Equity (Right – hand side)
Current Liabilities – liabilities that are due and payable within a period of 12 months or less.
Accounts Payable
Accrued Expenses
Other short-term debts that are payable in less than 12 months
ANDREA D. GARZON

9. Liabilities and Stockholders’ Equity (Right – hand side)
Non-Current/Long-term Liabilities
Long-term debts – loans from banks and other other lenders that have maturities longer than 1 year.
ANDREA D. GARZON

10. Liabilities and Stockholders’ Equity (Right – hand side)
Stockholders’ Equity - the money invested by the company owners.
Paid-In Capital – the amount of capital the firm raised from investors
Retained Earnings – the earnings that have been retained and reinvested in the business rather than being distributed to the company’s shareholders.
ANDREA D. GARZON

11. Key Concepts Firm Liquidity and Net Working Capital
Liquidity of an Asset– refers to the speed with which the asset can be converted into cash.
Some assets are less liquid since they are more difficult to sell and convert into cash (equipment).
Liquidity of a Firm – the firm’s ability to regularly converts in CA into cash so that it can pay its bills on time.
Assessing a firm’s overall liquidity involves comparing its current assets to its current liabilities.
ANDREA D. GARZON

12. Net Working Capital = Current Assets – Current Liabilities
Key Concepts
Firm Liquidity and Net Working Capital
Net Working Capital – is a tool to measure the firm’s liquidity.
Net Working Capital = Current Assets – Current Liabilities
ANDREA D. GARZON

13. Assessment
As a finance manager, what does the firm’s net working capital tells you about the liquidity of a firm?
ANDREA D. GARZON

14. Income Statement
Reflects the sales (revenues) earned during a specific period of time less the expenses the firm spent in producing those revenues.
In finance, we use the income statement to evaluate the firm’s profitability.
ANDREA D. GARZON

15. Income Statement
The firms income statement is typically analyzed by calculating profit margins based on:
Gross profits (Sales – Cost of Goods Sold)
Operating Income (Gross Profits – Operating Expenses)
Net Income (Operating Profits – Interest and Tax Expenses)
ANDREA D. GARZON

16. ABM Inc. Income Statement For the year ended December 31, 2017 (In Millions) Sales P2, Cost of Goods Sold (2,025.00) Gross Profit P Less: Operating Expenses Selling Exp Gen. and Admin Exp Total Operating Exp (P ) Net Operating Income (EBIT) P Less: Interest Expense Earnings before Taxes (EBT) P Less: Income Tax (30% of EBT) ( 94.50) Net Income P
Cost of Debt Financing
ANDREA D. GARZON

17. How do gross profits, operating income and net income differ?
Assessment
How do gross profits, operating income and net income differ?
ANDREA D. GARZON

18. Changes in Cash Balance = Ending Cash Balance – Beginning Cash Balance
Cash Flow Statement
Explain the changes in the cash balances over a period of time by identifying all of the sources and uses of cash for the period.
Changes in Cash Balance = Ending Cash Balance – Beginning Cash Balance
ANDREA D. GARZON

19. Sources and Uses of Cash
Sources of Cash – is any activity that brings cash into the firm
Ex. When the firm sells goods and services or sells an old piece of equipment that it no longer needs.
Uses of Cash – is any activity that causes cash to leave the firm
Ex. Purchase of a new equipment or payment of taxes
ANDREA D. GARZON

20. Sources and Uses of Cash
Sources of Cash
Uses of Cash
Decrease in an Asset Account
Increase in an Asset Account
Increase in a Liability Account
Decrease in a Liability Account
Increase in an Owners’ Equity Account
Decrease in n Owners’ Equity Account
ANDREA D. GARZON

21. Classifying Sources and Uses of Cash
3 Broad Categories
Operating Activities – represent the company’s core business including sales and expenses(basically any cash activity that affects net income for the period).
Investment Activities – include the cash flows that arise out of the purchase and sale of long-term assets such as plant and equipment.
Financing Activities – represent changes in the firm’s use of debt and equity (sale of new shares and payment of dividends).
ANDREA D. GARZON

22. Basic Format of the Cash Flow Statement
Beginning Cash Balance
Plus: Cash Flow from Operating Activities
Plus: Cash Flow from Investing Activities
Plus: Cash Flow from Financing Activities
Equals: Ending Cash Balance
ANDREA D. GARZON

23. Assessment
Why is reviewing the cash flow statement of a certain firm important to financial analysts?
ANDREA D. GARZON

24. THANK YOU!
END
ANDREA D. GARZON