Professional Documents
Culture Documents
WRMAS 2
Needs of Financial Statements
In Malaysia, Company Act 1965 required companies to
expose their annual report to Company Registrar.
WRMAS 3
INCOME STATEMENT
Also known as Profit and Loss Statement.
It measures the results of a firms operation over a specific
period.
The bottom line of the income statement shows the firms profit
or loss for a period.
Usefulness of income statement:
-Evaluate the past performance of the firm.
-Provide a basis for predicting future performance.
WRMAS 4
Income Statement Terms
Revenue (Sales)-Money/Income derived from selling the
companys product or service
Cost of Goods Sold (COGS)-Cost of producing the
goods/services to be sold
Operating Expenses-Expenses related to marketing and
distributing the product or service and administration cost
(Example: marketing & selling, general & administrative,
depreciation expenses)
Financing Costs-The interest paid to creditors/bondholders
Tax Expenses-Amount of taxes owed, based upon taxable
income
WRMAS 5
Income Statement Form
SALES
- Cost of Goods Sold (COGS)
GROSS PROFIT
Operating Activities
- Operating Expenses
OPERATING INCOME (EBIT)
- Interest Expense
EARNINGS BEFORE TAXES (EBT)
- Income Taxes
Financing
EARNINGS AFTER TAXES (EAT) Activities
- Preferred Stock Dividends (if any)
NET INCOME (EARNING AVAILABLE FOR STOCKHOLDERS)
WRMAS 6
Example of Income Statement
WRMAS 7
Three additional important issues:
WRMAS 8
BALANCE SHEET
Provides a snapshot of firms financial position at a
particular date.
It includes three main parts: assets, liabilities and equity.
Assets (A) -Productive resources owned by the firm
Liabilities (L) - Creditors claim
how those resources
Equity (E) - Owner claim are financed
A=L+E
The items are recorded at historical cost, so the book value
of a firm may be very different from its market value.
WRMAS 9
Balance Sheet A = L + E
Assets Liabilities (Debt) & Equity
Current Assets Current Liabilities
Cash Accounts Payable
Accounts Receivable Accrued Expenses
Short-term notes
Inventories Long-Term Liabilities
Prepaid Expenses Long-term notes
Fixed Assets Mortgages
Machinery & Equipment Equity
Buildings and Land Preferred Stock
Other Assets Common Stock (Par value)
Paid in Capital
Copyrights, Goodwill &
Retained Earnings
patents
Treasury Stock
WRMAS 12
Balance Sheet Terms: Liabilities (Debt)
CURRENT LIABILITIES (Short-term Liabilities/Debts)
Liability that must be paid within 12 months.
Accounts payable (Credit extended by suppliers to a firm
when it purchases inventories)
Accrued expenses (Short term liabilities incurred in the
firms operations but not yet paid for)
Short-term notes (Borrowings from a bank or lending
institution due and payable within 12 months)
LONG-TERM LIABILITIES/DEBTS
Covers loan from banks or other sources that provide capital for
liability term more than 1 year.
(Example: buying machinery and building for period of 25 to 30
years using bank loan)
WRMAS 13
Balance Sheet Terms: Equity
EQUITY
Shareholders investment in the firm in the form of preferred
stock and common stock.
Preferred Stock (received dividend in fixed amount)
Common Stock
Treasury Stock (stock that has been re-purchased by the firm)
Retained Earnings (earnings retained and will be reinvest in
the firm)
Paid in Capital (money that a firm gets from potential
investors in addition to the stated value of the stock)
WRMAS 14
Example of Balance Sheet
WRMAS 15
STATEMENT OF CASH FLOWS
Definition: Shows the changes of cash for the company in
certain period of time.
Profits in the income statement are calculated on accrual
basis rather than cash basis.
Thus profits are not equal to cash.
Accrual basis is the principle of recording revenues when
earned and expenses when incurred, rather than when cash is
received or paid.
Thus sales revenue recorded in the income statement
includes both cash and credit sales.
Treatment of long-term assets: Asset acquisitions (that will last
more than one year, such as equipment) are not recorded as an
expense but are written off every year as depreciation expense.
WRMAS 16
Statement Of Cash Flows
Divided sources and uses of cash into THREE components:
Cash flow from operations (ex. Sales revenue, labor expenses)
Cash flow from investment (ex. Purchase of new equipment)
Cash flow from financing (ex. Borrowing funds, payment of div)
WRMAS 17
Income Statement Conversion:
From Accrual to Cash Basis
Two steps:
Add back depreciation (as it is a non-cash expense) to net income
Subtract any uncollected sales (i.e. increase in accounts receivable)
and cash payment for inventories (i.e. increase in inventories less
increase in accounts payables)
WRMAS 18
Example: Statement Of Cash Flows
WRMAS 19
The Concept of Cash Flow (CF Identity)
Cash flow is one of the most important pieces of information
that a financial manager can derive from financial statements
The statement of cash flows does not provide us with the same
information that we are looking at here
We will look at how cash is generated from utilizing assets and
how it is paid to those that finance the purchase of the assets
WRMAS 20
Cash Flow Summary
WRMAS 21
Statement of Retained Earnings
Statement of retained earnings reports how net
income and dividends affect a companys financial
position during the period.
WRMAS 22