Understanding financial statements:

Financial statements report the historical performance of a firm and provide a basis for making projections and forecasts for the future. These statements are part of the report, which is a document that informs shareholders about the performance of the firm. It consists of: 

• Income statement,
• Cash flow statement, and
• Balance sheet

Income statement:

It is the statement that measures the net results of the firm's operations over a specified time interval such as a month, quarter, or year.

The income statement also referred to as the profit and loss statement is compiled on an accrual basis which means that an attempt is made to match the firm's revenues from the period's operations with the expenses incurred in generating those revenues. The implication of an accrual method is that these revenues and expenses generally do not represent actual cash flow for the period (Bowlin, Martin, and Scott: 1990). It means that computed net income for the period will not equal the actual cash provided by the firm's operations.

Example of the Income statement:

Particulars	Amount
Revenues	xxx
Cost of goods sold	(xxx)
Gross income (Revenues-Cogs)	xxx
Marketing expense	(xxx)
General and administrative expense	(xxx)
Earnings before depreciation, interest, and tax (EBDIT)= Gross income - Marketing expenses - General and administrative expense	xxx
Depreciation	(xxx)
Net operating income (NOI) = EBDIT - depreciation	xxx
Other incomes and gains	xxx
Earnings Before Interest and Tax (EBIT) = NOI + Other incomes and gains	xxx
Interest expense	(xxx)
Earnings Before Tax (EBT) = EBIT - Interest expense	xxx
Income Tax	(xxx)
Net Income = EBIT - Income Tax	xxx

Cash flow statement: 

It is the statement that shows the net inflow of cash to the outflow of the cash in the firm. This is the statement that represents the firm's strength or weaknesses in terms of liquidity i.e. cash. 

Particulars	Amount	Amount
Cash flows from operating activities:
Net income	xxx
Add: depreciation and amortization	xxx
Due to changes in working capital
Decreases in accounts receivables	xxx
Increase in inventories	(xxx)
Increase in accounts payable	xxx
Increase in accrued wages	xxx
Increase in other accruals	xxx
Net cash flow from operating activities (a)		xxx
Cash flow from long-term investing activities:
Increase in fixed assets	(xxx)
Net cash flow from long-term investing activities (b)		(xxx)
Cash flow from financing activities:
Decrease in notes payable	xxx
Decrease in long-term debt	(xxx)
Payment of dividends	(xxx)
Net cash flow from financing activities (c)		xxx
Summary:
Net change (d) = (a) + (b) + (c)		xxx
Cash and cash equivalents at the beginning of the year (e)		xxx
Cash and cash equivalents at the end of the year (f) = (d) + (e)		xxx

Balance sheet:

The balance sheet is the statement that presents the firm's resources or assets on one side and the owner's equity and liabilities or debts on another side. It shows the financial positions of the firm as of a certain date.

Liabilities and Equity	Amount	Amount
Accounts payable	xxx
Notes payable	xxx
Accrued wages	xxx
Other accruals	xxx
Current Liabilities (A)		xxx
Long-term debt	xxx
Preferred stock	xxx
Stockholder's equity:
Common stock with a par value	xxx
Paid in Capital	xxx
Retained Earnings	xxx
Total stockholder's equity (B)		xxx
Total liabilities and equity: (A) + (B)		xxx

 

Assets	Amount	Amount
Cash	xxx
Marketable securities	xxx
Accounts receivables, net	xxx
Inventories	xxx
Prepaid expenses	xxx
Current assets (A)		xxx
Gross fixed assets:
Land	xxx
Building	xxx
Machinery and equipment	xxx
Other fixed assets	xxx
Total fixed assets	xxx
Less depreciation	(xxx)
Net Fixed Assets		xxx
Total Assets		xxx