Book 4: Financial Statements

financial statements, the balance sheet, the income statement, statement of cash flows, additional statements, financial statement analysis

financial statements

formal documents summarizing a business's financial activities, performance, and position over a specific period

provides the government, investors, executives, and lenders with a picture of a company’s financial activities and profitability

3 statements required by gaap

balance sheet

income statement

cash flow statement (cfs)

balance sheet

provides a snapshot of a company's financial position at a specific point in time

assets, liabilities, shareholder’s equity

income statement

a financial report that summarizes a company's financial performance over a specific period of time

reports a company’s revenues and expenses, including a company’s net income

cash flow statement (cfs)

tracks how a company uses its cash to pay its debt obligations and fund its operating expenses and investments

reporting date

the specific date for which financial or other information is being reported

making the balance sheet

record assets (split into current and noncurrent assets)

record liabilities (split into current and noncurrent liabilities)

record shareholder’s equity (includes common stock and retained earnings)

current assets

a company's resources that can be converted to cash or used up within one year

used to fund daily operations and pay for immediate expenses

ex. cash, accounts receivable, inventory, short-term investments

noncurrent (long-term) assets

long-term assets a company owns, which are not expected to be converted into cash within one year

used to generate income and provide value to a business for an extended period

ex. property, equipment, patents, long-term investments

common stock

a security that represents ownership in a corporation

includes voting rights and has variable dividends

preferred stock

a security that represents ownership in a corporation

does not include voting rights and has fixed dividends

capital stock

the total number of shares a company is authorized to issue

gross profit

sales revenue - cost of goods sold

operating expenses

expenses of operating a business other than cost of goods sold

ex. depreciation, rent, salaries, utilities, advertising

general and administrative expenses

day-to-day, indirect operating costs of running a business that are not directly tied to producing a specific product or service

subset of operating expenses

ex. salaries of administrative, executive, and hr staff; office space; professional services; supplies; insurance

operating income (income from operations)

gross profit - operating expenses

3 main sections of the statement of cash flows

operating activities, investing activities, financing activities

operating activities

stem from a company’s core business operations

cash inflow from operations

revenue, interest, dividends

cash outflow from operations

payments to suppliers, employee wages, rent

investing activities

related to long-term investments that affect a company’s growth

cash inflows from investing

selling assets, collecting payments on loans

cash outflows from investing

capital expenditures, investments in securities, business acquisitions

financing activities

how a business raises and repays capital through debt and equity financing

debt financing

borrowing money that must be repaid with interest

equity financing

selling a portion of ownership in the company in exchange for funds

cash inflows from financing

issuing stock, borrowing

cash outflows from financing

loan repayments, dividend payments, stock buybacks

statement of retained earnings

a financial statement that reports the amount of accumulated net profits that a business has retained and not paid in dividends since startup

retained earnings

the portion of a company's profits that are kept for reinvestment rather than being paid out to shareholders as dividends

financial statements are prepared in this order and feed into each other

income statement (produces the net income used in the statement of retained earnings)

statement of retained earnings (produces the retained earnings used in the balance sheet)

balance sheet

statement of cash flows

statement of owner’s equity

a financial statement containing the change in the shareholder’s capital over time

includes net profit or loss, dividend distribution, and withdrawals

worksheet

a spreadsheet that tracks each step of the accounting cycle

starts with the unadjusted trial balance and ends with the financial statements

5 columns in an accounting worksheet

unadjusted trial balance

adjusting journal entries

adjusted trial balance

income statement

balance sheet

horizontal analysis

compares account balances across time

vertical analysis

compares account balances within the same time period

ratio analysis

a financial tool used to assess a company's performance by calculating specific ratios from its financial statements

liquidity ratio

how quickly a company can convert assets into cash

types of liquidity ratios

current ratio

quick ratio

current ratio

current assets / current liabilities

quick ratio

(cash equivalents + accounts receivable) / current liabilities

solvency ratio

how a company can meet its long term obligations

types of solvency ratios

debt ratio

equity raito

debt-to-equity ratio

debt ratio

total liabilities / total assets

equity ratio

total equity / total assets

debt-to-equity ratio

total liabilities / total equity