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Financial Statements

Financial Statements

  • Three main financial statements:

    • Balance sheet

    • Income Statement

    • Statement of Cash Flow

Balance Sheet

  • The Balance Sheet is a Financial Statement that shows the firm’s assets and liabilities at a particular time. (Typically end of quarter or fiscal year)

  • It is a snap shot of what the firm owns and owes.

  • Basic accounting identity:

    Assets = Liabilities + Owners’ Equity

The Balance Sheet

Current Assets

  • Cash & Securities

  • Receivables

  • Inventories

Fixed Assets

  • Tangible Assets

  • Intangible Assets

=

Total Assets

Current Liabilities

  • Payables

  • Short-term Debt

Long-term Liabilities

Shareholders’ Equity

=

Total Liabilities & Shareholders’ Equity

Total Assets = Total Liabilities & Shareholders’ Equity

Assets

Assets represent the uses of a firm’s funds

(i.e. Assets show what the firm “owns”)

  • Liquid Assets can be converted easily into cash at fair value.

  • Current vs. Fixed Assets

Fixed Assets

  • Tangible Assets

    • Property, plant, and equipment (PPE)

  • Intangible Assets

    • Trademark, patented technology, movies, etc.

Liabilities

Liabilities represent the sources of a firm’s funding.

(i.e. Liabilities represent what a firm “owes.”)

  • Current vs. Long-Term Liabilities

    • Current liabilities are due within 12 months (account payables, wage payables, short-term debt)

Current Assets - Current Liabilities = Net Working Capital

Shareholder’s Equity

  • Equity is the difference between the total assets and total liabilities

  • Equity represents shareholders’ investment in the firm.

  • Equity is typically composed of two parts:

    • Paid-in-capital (sometimes listed as common stock)

      • The amount of equity raised from shareholders

    • Retained earnings

      • Accumulated net profits not paid out to shareholders since inception

The Income Statement

  • Shows the expenses and revenues generated by a firm over a past period, typically a quarter or a year

    • A video stream, or a summarization of the firm’s operation over the reporting period.

  • Expenses can be cash expenses (wages, utility etc.) or non-cash expense (depreciation, amortization, etc.)

  • Expenses can also be classified as operating expenses and non-operating expenses (interest expenses, taxes and other expenses unrelated to the firm operation)

  • The top line of the income statement is revenue, or sale

  • The bottom line is the net income, or net profit:

    Net income = Revenues - total expenses

  • Operating profit is the difference between the revenue and operating expenses

    • Operating profit is also known as earnings before interest and taxes (EBIT)

    • EBIT = Revenues - operating expenses

Retained Earnings

  • Part of the net income is paid out to shareholders as dividends.

  • The firm retains the remainder net income for reinvestment

    • Addition to the retained earnings

  • Battista paid a dividend of $2,869 million in 2014.

    • Addition to the retained earnings is $2, 773 million

Net Income Vs. Cash Flow

  • Net income is not the same as cash flow.

    • Firm earned an income of $5,642 million

    • Cash account decreased by $65 million

  • Three major reasons

    • Non-cash expense items — depreciation

    • Changes in net working capital

    • Non-operating cash flows

The Statement of Cash Flows

The Statement of Cash Flows shows the firm’s cash receipts and cash payments over time.

Why is it useful?

Free Cash Flow is cash available for distribution to investors after the firm pays for new investments or additions to working capital.

The Statement of Cash Flows Structure:

Cash flow from operations + Cash flow from investments + Cash flow from financing = Change in cash balance