Cash flow statement
The cash flow statement is one of the three main financial statements used by
companies to report their financial performance. It provides insights into how cash is
generated and used over a specific period of time. The cash flow statement is divided
into three sections: operating activities, investing activities, and financing activities.
Here's an overview of each section:
1. Operating Activities:
• This section reports the cash generated or used in the company's core
operating activities. It includes transactions related to the production and
delivery of goods and services.
• Examples of cash inflows from operating activities include:
• Receipts from customers
• Interest and dividends received
• Examples of cash outflows from operating activities include:
• Payments to suppliers and employees
• Operating expenses (e.g., rent, utilities)
2. Investing Activities:
• This section reflects cash transactions for the purchase and sale of long-term
assets and investments.
• Examples of cash inflows from investing activities include:
• Proceeds from the sale of property, plant, and equipment
• Proceeds from the sale of investments
• Examples of cash outflows from investing activities include:
• Purchase of property, plant, and equipment
• Purchase of investments
3. Financing Activities:
• This section reports cash transactions with the company's owners and
creditors. It includes activities related to the issuance and repurchase of the
company's own stock and the issuance and repayment of debt.
• Examples of cash inflows from financing activities include:
• Proceeds from issuing new debt (e.g., loans, bonds)
• Proceeds from issuing new equity (e.g., issuing new shares)
• Examples of cash outflows from financing activities include:
• Repayment of debt
• Dividend payments to shareholders
• Repurchase of company's own stock (buybacks)
The net cash flow for each section is calculated by summing the inflows and outflows.
The overall change in cash for the period is obtained by combining the net cash flows
from operating, investing, and financing activities. This change in cash is then added to
the beginning cash balance to arrive at the ending cash balance. The cash flow statement
helps stakeholders understand a company's ability to generate cash, meet its
obligations, and fund its operating and investing activities.
Income statement
The income statement, also known as the profit and loss statement (P&L), provides a
summary of a company's revenues, expenses, and profits over a specific period of time.
Here are the key components typically found in an income statement:
1. Revenue:
• Also called Sales or Turnover, this is the total amount of money earned from
the sale of goods or services.
2. Cost of Goods Sold (COGS):
• The direct costs associated with the production of goods or services sold. It
includes costs like raw materials, labor, and manufacturing overhead.
3. Gross Profit:
• Calculated by subtracting COGS from revenue, it represents the profit
generated from the core business activities.
4. Operating Expenses:
• These are the costs incurred in the day-to-day operations of the business.
Common operating expenses include:
• Selling, General, and Administrative Expenses (SG&A): Includes
expenses like salaries, rent, utilities, marketing, and other general operating
costs.
• Research and Development (R&D): Costs related to developing new
products or improving existing ones.
5. Operating Income:
• Obtained by subtracting total operating expenses from gross profit, it
represents the profit from the company's core operations.
6. Non-Operating Income and Expenses:
• Includes gains or losses from activities not directly related to the core
business. Examples include interest income, interest expenses, and gains or
losses from the sale of assets.
7. Income Before Tax (EBT):
• The total income of the company before accounting for taxes. It is calculated
by adding operating income and non-operating income, then subtracting
non-operating expenses.
8. Income Tax Expense:
• The amount of taxes the company is obligated to pay based on its taxable
income.
9. Net Income:
• Also referred to as Net Profit or Net Earnings, it is the final amount left after
subtracting income tax expense from income before tax. Net income is a key
indicator of a company's profitability.
10. Earnings Per Share (EPS):
• Calculated by dividing the net income by the average number of outstanding
shares. EPS is a commonly used metric for assessing a company's
profitability on a per-share basis.
The income statement provides valuable information about a company's ability to
generate profit, its operational efficiency, and the overall financial performance during a
specific period. It is an essential tool for investors, analysts, and managers to evaluate
the financial health of a business. Keep in mind that the exact format and line items on
an income statement can vary between companies and industries.
BALANCE SHEET
The balance sheet, also known as the statement of financial position, provides a
snapshot of a company's financial position at a specific point in time. It is divided into
two main sections: assets and liabilities.
Assets:
1. Current Assets: assets that are expected to be converted into cash or used up
within one year.
• Cash and Cash Equivalents: Includes physical currency, bank accounts,
and short-term, highly liquid investments.
• Accounts Receivable: Amounts owed to the company by customers for
goods or services.
• Inventory: The value of goods held by the company for resale.
• Prepaid Expenses: Payments made in advance for goods or services yet to
be received.
2. Investments: assets held by a company for the purpose of earning a return.
• Short-term Investments: Securities or financial instruments expected to
be sold or converted into cash within one year.
• Long-term Investments: Securities or financial instruments held for
longer periods.
3. Property, Plant, and Equipment (PP&E): represents tangible assets used in
the production or operation of the business.
• Land, Buildings, and Equipment: Tangible assets used in the
production or operation of the business.
• Accumulated Depreciation: The cumulative amount of depreciation
expense recognized on assets.
4. Intangible Assets: assets lack physical substance but provide long-term
economic benefits.
• Goodwill: The excess of the purchase price over the fair value of identifiable
net assets acquired in a business combination.
• Patents, Trademarks, and Copyrights: Non-physical assets providing
long-term economic benefits.
5. Other Assets:
• Miscellaneous assets not classified in the above categories.
Liabilities:
1. Current Liabilities: obligations that are expected to be settled within one
year.
• Accounts Payable: Amounts owed to suppliers for goods or services.
• Short-term Debt: Debt obligations due within one year.
• Accrued Liabilities: Expenses incurred but not yet paid, such as salaries
and utilities.
•Current Portion of Long-Term Debt: The portion of long-term debt
due within the next year.
2. Long-term Debt: obligations with maturities extending beyond one year.
• Bonds: Long-term debt securities issued by the company.
• Bank Loans: Long-term loans from financial institutions.
• Mortgages: Loans secured by specific assets, often real estate.
3. Deferred Tax Liabilities:
• Future tax obligations that arise from temporary differences between
accounting and tax rules.
4. Other Liabilities:
• Miscellaneous liabilities not classified in the above categories.
Equity:
1. Common Stock:
• The par value of shares issued to investors.
2. Additional Paid-in Capital:
• The amount received from issuing shares above their par value.
3. Retained Earnings:
• The cumulative amount of profits retained in the business over time.
4. Treasury Stock:
• The cost of shares repurchased by the company.
5. Accumulated Other Comprehensive Income:
• The cumulative amount of gains or losses that bypass the income statement
but are included in equity.
Totals:
• Total Assets: The sum of current assets, investments, property, plant, and
equipment, intangible assets, and other assets.
• Total Liabilities: The sum of current liabilities, long-term debt, deferred tax
liabilities, and other liabilities.
• Total Equity: The residual interest in the assets of the entity after deducting
liabilities.
The balance sheet provides insights into a company's financial health, liquidity,
solvency, and overall net worth. It is a crucial document for investors, creditors, and
analysts to assess a company's financial position and make informed decisions. Keep in
mind that the specific line items and classifications may vary between companies and
industries.