Understanding the Financial

Statements
Financial Statements
 Contain a wealth of useful information
regarding the financial position of a
company, the success of its
operations, the policies and strategies
of management, and insight into its
future performance.
Financial Statements
 How well does the company compete
in its operating environment?
 Would an investment generate
attractive returns?
 Should existing investment holdings
be continued or liquidated?
 Will cash flows be sufficient to meet
interest and principal payments?
Basic Financial Statements

Balance Sheet
Income statement
Statement of retained
earnings
Statement of cash flow
Balance Sheet

 Shows the financial position-

assets, liabilities and owner’s
equity of the firm on a
particular date.
Balance Sheet

Gilbert Company
Balance Sheet
December 31, 2000
ASSETS: LIABILITIES AND CAPITAL
Cash 150,000 Accounts Payable 140,000
Accounts Receivable 220,000 Taxes Payable 156,000
Inventories 592,000 current portion LT debts 83,000
Other current assets 23,000
Total current 985,000 total current 379,000
PPE 2,475,000 Capital stock 350,000
Less: Acc. Dep 850,000 Retained Earnings 1,305,000
Total Assets 2,610,000 Total Equities 2,610,000
==================================
Balance Sheet

 CurrentAssets:
Cash and those assets
expected to be converted into
cash, used or consumed within
one year or one operating
cycle whichever is longer.
Balance Sheet

 Cash- coins and bills awaiting deposit or in

a bank account.
 Accounts Receivable- customer balances
outstanding on credit sales.
 Inventories- items held for sale or used in
the manufacturing of products.
 Prepaid expenses- certain expense, such
as insurance, taxes, utilities paid in
advance.
Balance Sheet

 PropertyPlant and Equipment

and other non-current assets:
Fixed assets of the company
that are not consumed in
annual business operations.
Balance Sheet

 CurrentLiabilities:
Claims against assets that must
be satisfied in one year or one
operating cycle, whichever is
longer.
Balance Sheet

 Accounts Payable- short-term obligations

that arise from credit extended by suppliers
for the purchase of goods and services.
 Notes payable- short-term obligations in the
form of promissory notes.
 Accrued liabilities- result from the
recognition of an expense in the accounting
records prior to the actual payment of cash.
Balance Sheet

 Long-term debt and other

liabilities
-obligations with maturities
beyond one year.
Balance Sheet

 Stockholder’s equity/Capital
- Ownership interest in the
company.
• Stocks
• Additional paid in capital
• Retained earnings
Income Statement

 Represents the results of

operations – revenues,
expenses, net profit or loss, for
the accounting period.
Income Statement

 Net sales- sales revenues

 Costs of goods sold- cost to the seller of the
products sold to customers.
 Gross profit- difference between sales and
COGS
 Operating Expenses- selling and
administrative expenses
 Operating Profit- measures the overall
performance of the company