Published by: Nuru
Published date: 07 Feb 2022
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:
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 |
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 |
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 |