Financial Statement Framework

Financial Performance & Financial Statements

Professor Doug Cerf Donald Bren Graduate School of Environmental Science and Management Corporate Environmental Management (ESM 281) Spring 2010

 Financial Statement Framework is a primary channel for communicating information about the economics of a business

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Objectives
Goal: Obtain the tools to evaluate the financial performance of a business, project or division Use financial statements to understand financial performance.
the main point is the ability to understand how to evaluate and communicate financial performance.
It is not the preparation of the statements

applies to a continuum of entities

division of a company start up company partnership corporation

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Lecture on the financial statement framework

Evaluate Wal-Mart. (WMT) financial performance on Google Finance Financial Statement Framework (the big picture)
Statement of Financial Position (Balance Sheet)
Company assets and claims to those assets At a point in time

Statement of Operations (Income Statement)

Revenue less expenses (costs necessary to generate revenue) For a period of time

Statement of Cash Flows

Inflows and outflows of cash related to the operating, financing and investing activities of the entity For a period of time
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Maria Hernandez Case

Understand the financial condition of a start-up enterprise.
Has Maria made a profit? Does it matter? Why has the cash level declined significantly? Should Maria be worried? What are the risks?

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Analyze financial condition

Two phases
Phase #1 Prior to beginning of operations
Prior to July 1, 2004 Go through the transactions prior to July1 to prove balance sheet shown on page 1 of case. Prepare a Statement of Cash Flows

Phase #2 First two months of operation

July 1, 2004 through August 31, 2004 Prepare all three statements
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Prior to start of operations

As a class
prove balance sheet prepare statement of cash flows

She raised $50,000 and has $12,000 left and she has not started her business What does she have to show for it? Can you see the distribution of her assets and who has claim to them?
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Financial condition at the end of two months of operations

Prepare the financial condition for the first two months of operations 7/1/04 8/31/04
Transaction by transaction Students work on this in groups for 15 minutes if necessary Entire class prepare statements on the board

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How is Maria doing?

Maria had services rendered of $47,000 Maria received a salary
Interpretation of profit is different if owners do not receive a salary.

From operation of the business:

Assets have increased by about 10,300. Liabilities have increased by 5,700. Profit $4,600

Why has the cash level declined significantly?

Started at $50,000 and now is $6,600 2+ months later

Should Maria be worried? What are the risks?

Solvency-Can she pay salaries next month? Can she borrow money? Collection risk (from customers)
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