L2 Refined Corporate finance: financial statements:

Financial statements:

Are financial reports containing past performance information that firm must publish annually/quarterly and follow unified worldwide accounting rules (IRFS) to protect small investors, or GAAP (US) and China.

Financial statements traits

-        Filed with the appropriate regulatory agency (SEC in US)

-        These must always be sent to shareholders.

-        Clear and not complex to confuse investors

-        Honest an reliable

-        Checked by auditors

Types of financial statements

• Balance sheet: Acts as a snapshot in time of a firm's financial position. It follows the identity Assets = Liabilities + Stockholders’ Equity.

• The Income Statement (Profit and loss statement): Measures profitability over a period by listing revenues and expenses.

• Cash flow statement:

Assets

Include current assets (cash, accounts receivable, and inventory) and long-term assets like property and machinery.

Current assets

o   (converted to cash within one year): E.g. Cash & Marketable Securities, Accounts Receivables (credit to customers), Inventories (raw material, work in progress..) and Pre-paid expenses.

Long-term assets:

o   Include assets such as real estate or machinery that produce tangible benefits for more than one year.

§  Net Property, Plant, and Equipment: Book Value = Acquisition Cost – Accumulated Depreciation

§  Goodwill & intangible assets (brand, reputation, network, customer base, employees):

·       Paid–book value

·       Amortization = Reflects the gradual loss of value of these assets

• Investment in long-term securities.

• Depreciation

Depreciation

•   Is loss of value of the assets due to wear and tear or outdated. Not a cash expense but an accounting method to acknowledge that an asset’s value decreases as it gets older.

Accumulated depreciation:

Total depreciation amount deducted from the asset’s original cost over its life.

Liabilities:

-        Represent what the company owes e.g. loans, bonds and accounts payable, divided into current (due within a year) and long-term debt.

Current liabilities: Due to be paid in one year e.g.:

§  Accounts Payable = credit to firm by suppliers

§  Short-Term Debt/Notes Payable

§  Current Maturities of Long-Term Debt

§  Taxes payable

§  Wages payable

Long-term liabilities: Extend beyond one year.

• Long-Term Debt: Any loan or debt obligation with a maturity of more than a year.

·       When a firm needs to raise funds to purchase an asset or make an investment, it may borrow those funds through a long-term loan.

§  Capital Leases: long-term lease contracts where firm must make regular lease payments in exchange for use of an asset. Allow a firm to gain use of an asset by leasing it from the asset's owner. E.g. firm lease a building for corporate headquarter.

§  Deferred Taxes: taxes that are owed but have not yet been paid