Course Title: Financial Accounting

III. The financial statements

The balance sheet

The balance sheet is an essential financial statement that provides a
high-level picture that may indicate that the company is struggling to
repay its debts and may be in long-term financial difficulty.

Finally, the balance sheet can be used to assess the financial

performance of a company over time. By comparing the balance sheets
of several years, one can see the evolution of the company's assets,
liabilities and capital, as well as its level of indebtedness. This can help
investors, shareholders and financial analysts make informed decisions
about the company.

In short, the balance sheet is an essential financial statement for

understanding a company's financial position, funding structure and debt
level. It can also be used to evaluate the financial performance of the
company over time.
The balance sheet is a formal document that must be prepared at the
end of each accounting period, usually one year. It is one of the basic
financial statements that must be published along with the income
statement, cash flow statement and notes.

The balance sheet is presented in the form of a table with two columns:
one for the company's assets and the other for liabilities and capital. The
assets are classified in order of increasing liquidity, i.e. from the most
liquid to the least liquid. Liabilities are also classified in order of
increasing maturity, i.e. from short-term to long-term debt.

The balance sheet answers several important questions:

What are the company's assets, i.e. its property and rights, and what is
their value?
How does the company finance its assets, i.e. with what liabilities and
capital?
What is the company's level of indebtedness, i.e. its capacity to repay its
short and long-term debts?
What is the financing structure of the company, i.e. the distribution of
liabilities and capital between shareholders, lenders and suppliers?
The balance sheet is therefore an essential tool for evaluating the
financial situation of a company, its solvency and its capacity to invest
and develop. It is used by investors, banks, financial analysts,
shareholders, managers and accountants to make informed decisions.

Here is a simplified example of a balance sheet:

ASSETS Amount (in euros) LIABILITIES Amount (in euros)

Cash 10 000 Capital 50 000

Inventories 20 000 Loans 30 000

Machinery 100 000 Suppliers 10 000

Patents 50 000 Debts 20 000

Total assets 180 000 Total liabilities 110 000

In this example, the company has total assets of 180,000 Euros,

consisting of cash, inventory, machinery and patents. It also has total
liabilities of 110,000 euros, consisting of loans, debts, suppliers and
capital.

It can be seen that the company is financed from a variety of sources,

including loans and short-term debt, as well as equity contributed by
shareholders. The total liabilities are less than the total assets, which
means that the company is solvent.

By analyzing the balance sheet figures, we can also see that the
company has a relatively high level of debt, with total liabilities
representing more than half of total assets. This could indicate that the
company is having trouble paying off its debts and may be facing
long-term financial difficulties.
Finally, the balance sheet allows you to see the distribution of assets
among the different categories, as well as the distribution of liabilities
and capital. This can help investors, shareholders and financial analysts
understand the company's financing structure and make informed
decisions.
The balance sheet can be presented as a list without a table. Here is a
simplified example:

Assets:

Cash: 50,000 euros

Stocks: 30 000 euros
Real estate: 200,000 euros
Vehicles: 20,000 euros
Liabilities :

Bank loan : 100 000 euros

Supplier debts : 10 000 euros
Tax liabilities: 5 000 euros
Share capital: 185,000 euros
In this example, the total assets of the company are 300 000 euros,
composed of cash, stocks, buildings and vehicles. The total liabilities of
the company are also 300,000 Euros, consisting of a bank loan, trade
payables, taxes and share capital.

It can be seen that the company has a high level of debt, with a bank
loan of 100,000 euros. The debts to suppliers and taxes remain relatively
low compared to the other items. The share capital is also important,
which may indicate a strong involvement of the shareholders in the
company.

Buildings are the main asset of the company, while stocks and vehicles
are less important assets in value. This analysis helps to understand the
financial structure of the company and to determine the levers of action
to improve its financial health.
another example without a table to better understand the balance sheet:

Assets:

Goodwill: 200 000 euros

Accounts receivable: 50 000 euros
Investment securities: 30 000 euros
Equipment: 10,000 euros
Liabilities :

Bank loan : 100 000 euros

Accounts payable : 20 000 euros
Salaries to be paid : 5 000 euros
Share capital: 165,000 euros
In this example, the company's total assets are 290,000 euros, with a
significant amount of goodwill, trade receivables and investment
securities, as well as equipment. The total liabilities are also 290,000
Euros, consisting of a large bank loan, trade payables and salaries
payable, as well as the share capital.

It can be seen that the company has a high level of indebtedness with a
large bank loan. Trade payables and salaries to be paid are also
significant. On the other hand, the company has a large amount of
goodwill, which represents a significant part of its assets.

By analyzing the balance sheet, we can conclude that the company has
short-term cash flow difficulties, due to the supplier debts and the
salaries to be paid. The company may need to find additional financing
to meet these short-term obligations. In addition, the company must
ensure that it maintains the value of its goodwill, which represents a
significant portion of its assets.

The income statement

The income statement is a financial statement that measures the
economic performance of a company over a given period. It is also
called the profit and loss account or the operating account. The income
statement presents the company's expenses and revenues, as well as
the net result, i.e. the difference between expenses and revenues.

The income statement is presented in table form and consists of two

parts: the first part presents the revenues and the second part presents
the expenses. Revenues are the income generated by the company
during the period under review, while expenses are the costs incurred by
the company to generate these revenues.

Here is a simplified example of an income statement:

Revenue:

Turnover: 300,000 euros

Financial income: 5,000 euros
Expenses:

Raw material purchases: 100,000 euros

Personnel costs : 70 000 euros
Financial charges : 10 000 euros
Taxes : 15 000 euros
Net income: 110,000 euros

In this example, the company's income is mainly composed of the

turnover, which represents the sales made by the company during the
period under study, as well as the financial income, which represents the
income from financial investments.

Expenses are mainly composed of purchases of raw materials,

personnel costs, financial expenses, which represent the interest on the
company's debts, as well as taxes and duties.

The net result, which is the difference between income and expenses,
amounts to 110,000 euros. This means that the company generated a
profit of 110,000 euros during the period under review.

The income statement provides an understanding of the company's

economic performance over a period of time, highlighting the sources of
revenue and the costs incurred. It is used to make financial decisions,
such as investing or financing the business.
The income statement is an accounting document that presents the
company's income and expenses over a given period (usually one year).
It is used to calculate the company's net income, i.e. the profit or loss
made during the period.

Revenue includes all items that generated income for the company
during the period. This is mainly sales of goods or services, but may also
include financial income such as interest earned.

Expenses include all costs that the business incurred to generate

revenue during the period. This may include costs associated with the
purchase of goods, salaries and benefits, rent, advertising costs, interest
on loans, etc.

The operating result is obtained by subtracting expenses from revenues.

It represents the profitability of the company's main activity.

The financial result is calculated by taking into account the gains or

losses made on the company's financial operations, such as investments
or loans.

The net result is the profit or loss made by the company during the
period, once all expenses have been subtracted from income. If the
result is positive, it means that the company has made a profit. If the
result is negative, it means that the company has incurred a loss.
The income statement is an accounting document that presents the
financial situation of the company over a given period. Here is an
example to illustrate how the income statement works:
Let's assume that company "X" has achieved a turnover of 500,000
euros during the year, by selling products. It also received interest on
financial investments in the amount of 10,000 euros.

As regards expenses, the company spent 300,000 euros to buy the raw
materials needed to produce its products. It also paid salaries and social
security contributions for a total amount of 100,000 euros, and paid
20,000 euros in rent for its premises.

To calculate the company's operating income, simply subtract expenses

from revenues:

Income: 500,000 euros + 10,000 euros = 510,000 euros

Expenses: 300,000 euros + 100,000 euros + 20,000 euros = 420,000
euros
Operating result: 510,000 euros - 420,000 euros = 90,000 euros
Then, to calculate the financial result, we take into account the financial
operations of the company:

Financial gains: 10,000 euros

Financial losses: 0 euro
Financial result: 10,000 euros - 0 euros = 10,000 euros
Finally, to obtain the company's net result, we subtract the financial
result from the operating result:

Net income: 90,000 euros - 10,000 euros = 80,000 euros

The net result of company X is therefore a profit of 80,000 euros for the
year in question.
Here is another simplified example of an income statement:
Revenue Amount
Sales $200,000
Interest received $5,000
Total revenue $ 205,000
Expenses Amount
Purchases 100 000
Salaries and social charges 40 000€ Rent 15 000
Rent 15 000
Advertising costs 5 000€
Financial charges 2 000€
Total expenses 162 000€
Income - Expenses Amount
Operating income 43 000€
Exceptional income 2 000€
Exceptional expenses -1 000€
Financial result 3 000€
Current result before taxes 47 000€
Income taxes -9 400€
Net income 37 600€.
In this example, we can see that the company made a turnover of 200
000€ thanks to its sales and also received 5 000€ of interests. Expenses
include purchases, salaries and social charges, rent and advertising
costs. The operating result is obtained by subtracting expenses from
revenues and corresponds to the profitability of the company's main
activity. Exceptional income and expenses include items that are not
related to the company's main activity, such as exceptional gains or
losses. Financial result corresponds to gains or losses related to the
company's financial operations, such as investments or borrowings. The
current result before taxes is obtained by adding the operating result, the
extraordinary income and expenses and the financial result. The net
result is obtained by subtracting income taxes from the current result
before taxes.

The cash flow statement

The cash flow statement (CFS) is an accounting document that presents
the company's cash flows over a given period. It allows the analysis of
the variation of the company's cash flow by detailing the cash inflows
and outflows.

The TFT is divided into three parts:

Cash flows from operations: these concern cash inflows and outflows
related to the company's current activity. It includes receipts from the
sale of products or services, disbursements for the purchase of raw
materials or services, payments of social security charges and taxes,
etc.
Cash flows from investing activities: these relate to the cash inflows and
outflows from the company's investments. This includes cash received
from the sale of assets or shareholdings, cash paid for the purchase of
real estate, equipment, etc.
Cash flows related to financing: these relate to cash inflows and outflows
related to the financing of the company. This includes cash receipts from
loans, capital increases, debt repayments, dividend payments, etc.
Here is an example to illustrate how the TFT works:
Let's assume that company "X" had a turnover of 500,000 euros during
the year, selling products. It also received interest on financial
investments in the amount of EUR 10,000.

As regards expenses, the company spent 300,000 euros to buy the raw
materials needed to produce its products. It also paid salaries and social
security contributions for a total amount of 100,000 euros, and paid
20,000 euros in rent for its premises.

Finally, the company invested EUR 50,000 in new equipment, repaid a

loan of EUR 30,000 and paid out EUR 20,000 in dividends.

The TFT of company "X" would then be as follows:

Cash flow from operations:

Cash receipts from product sales: 500,000 euros

Cash receipts from interest: 10,000 euros
Disbursements related to purchases of raw materials: 300,000 euros
Social security and tax payments: 100,000 euros
Rent payments: 20,000 euro
Cash flow from operations: 90,000 euros
Cash flow from investing activities :

Disbursements related to the purchase of equipment: 50,000 euros

Cash receipts from the sale of assets: 0 euro
cash flow from investing activities : -50,000 euro

Cash flows from financing activities:

Interest payments on debts: 5,000 euro
Dividend payments: 10,000 euro
Issuance of shares: 30,000 euro

Cash flows from financing activities: 15,000 euro

The cash flow statement then totals the cash flows of the three sections
to determine the company's net cash flow for the period. In this example,
the net balance is :

Net cash flow = Cash flow from operating activities + Cash flow from
investing activities + Cash flow from financing activities
Net cash flow = 75,000 euros - 50,000 euros - 15,000 euros
Net cash flow = 10,000 euros

The net cash flow balance indicates that the company generated a cash
surplus of 10,000 euros for the period under review. This can indicate a
strong cash position, which can be used to finance future investments,
pay down debt or distribute dividends to shareholders.

The cash flow statement is a financial statement that shows the cash
flows into and out of a company during a given period. It provides an
understanding of how a company generates and uses its cash and
whether it has a strong cash position.

The cash flow statement is generally divided into three main sections:

Cash flow from operating activities: this section shows the cash flows
generated or used by the company's core business activities. Examples
include revenues from sales, payments to suppliers, payroll payments,
and taxes paid.

Cash flows from investing activities: This section presents the cash flows
generated or used by the company's investing activities. Examples
include equipment purchases, real estate investments and financial
investments.

Cash flows from financing activities: This section presents the cash flows
generated or used by the company's financing activities. Examples
include interest payments on debt, dividend payments, and equity
issuances.

Ultimately, the cash flow statement shows whether a company

generated a cash surplus or deficit during the reporting period. It also
helps determine whether the company has sufficient cash to meet its
short-term financial obligations and whether it is able to finance its
long-term growth activities.