Understanding Financial

Statements
Financial statements are used for reporting and financial

analysis. Examples are:

>The Balance Sheet

>The Income Statement

>Cash Flow Statement

Start at the
beginning
Think of it as a story.

How did it start? Where

and when did it happen?

Who played important

role in the event?

Assets
Current Assets

>The components of current assets are cash and

other assets that are consumable/ convertible to

cash in a relatively short time, less than 1 year.

>It represents working capital of the firm that

provide support for day-to-day operations, without

which it cannot operate efficiently.

Liabilities Fixed Assets

>It is normally stated as:

-Fixed assets at gross value or at book value

>Liabilities can be divided into two

-Net value – gross value minus accumulated

categories:
depreciation
-Current Liabilities: obligations that are

-Some firms may have patents and goodwill in

due/ payable within 1 year or less. their balance sheet listed as other assets. Please

-E.g. Accounts payable, accruals and

note that these are intangible assets and should

notes payable. not be considered as part of the analysis.

-Long-term liabilities: debt due/ payable

beyond 1-year period.

Stockholder’s Equity
-E.g. Term loans, debentures, bonds,

mortgages and leases.

Common Stock

-Has no predetermined rate and last to obtain a share in the

assets when the corporation is dissolved. Have voting power.

Preferred Stock

Income
-Has priority over other shares. Must be paid in full before any

other classes of stock. Have no voting privileges.

Retained Earnings

Statement
- Retained earnings (retained income) is the balance in

stockholders’ equity due to the cumulative effect over the life

of the corporation of all profits or losses generated less

amounts distributed to shareholders.

A summary of the firm’s

operating results over a

period, normally for 1-

year period.
The Cash Flow Statement
During a period of time, the cash flow

statement provides information about:

>Cash Receipts (cash inflows)

>Uses of Cash (cash outflows)

Inflows and outflows are reported for:

>Operating activities

>Investing activities

>Financing activities