FINACIAL STATEMENT

Income

statement Cash flow statement Balance sheet

INCOME STATEMENT
The income statement is the first component of our financial statements. It is also known as the profit and loss statement. The income statement is a report showing the profit or loss for a business during a certain period, as well as the incomes and expenses that resulted in this overall profit or loss. The amount of the profit or loss for a business during a certain period indicates the financial performance of the business.

An income statement usually covers a year; however this statement may be drawn up for shorter periods, such as one month, three months (quarters) or six months. The period of time that is covered by the income statement (and other financial statements) is called the accounting period. A regular 12-month accounting period does not necessarily have to begin on the first day of the year and end on the last. Accounting periods can, for example, run from March 1st to February 28th, or July 1st to June 31st, etc. The choice of the accounting period rests with the enterprise itself.

The format of an income statement for a service business is shown below.

CASH FLOW STATEMENT

Cash flow statement may provide considerable information about what is really happening in a business beyond that contained in either the income statement or the balance sheet. Analyzing this statement should not present an intimidating task, instead it will quickly become obvious that the benefits of understanding the sources and uses of a companys cash far outweigh the costs of undertaking some very straightforward analyses.

Who cares about a Cash Flow Statement? Executives want to know if the cash generated by the company will be sufficient to fund their expansion strategy Stockholders want to know if the firm is generating enough cash to pay dividends Suppliers want to know if their customers will be able to pay if offered credit Investors want to evaluate future growth potential Employees are interested in the overall viability of their employer as indicated by its ability to fund its operations

Format of the Cash Flow Statement The cash flow statement is divided into three sections:

Cash flow from operating activities: shows the results of cash inflows and outflows related to the fundamental operations of the basic line or lines of business in which the company engages. (Example: cash receipts from the sale of goods or services and cash outflows for purchasing inventory and paying rent and taxes.) Cash flow from investing activities: associated with purchases and sales of non-current assets (Example: building and equipment purchases or sales of investments or subsidiaries.)

Cash flow from financing activities: associated with financing the firm (Example: selling and paying off bonds and issuing stock and paying dividends)

Exceptions Short-term marketable securities are treated as long-term investments and appear in cash flow from investing activities Short-term debt is treated as long-term debt and appears in cash flow from financing activities Although dividends are handled as a cash outflow in the cash flow from financing activities section, interest payments are considered an operating outflow, despite the fact that both are payments to outsiders for using their money.

Example of a Statement of Cash Flows Cash flow from operating activities Net Income Adjustments to reconcile to net income to net cash provided by operating activities: Depreciation and amortization Changes in other accounts affecting operations: (Increase)/Decrease in accounts receivable x,xxx xx,xxx xxx,xxx

(Increase)/Decrease in inventories
(Increase)/Decrease in prepaid expenses Increase/(Decrease) in accounts payable Increase/(Decrease) in taxes payable Net cash provided by operating activities
Cash flow from Investing Activities

x,xxx
x,xxx x,xxx x,xxx xxx,xxx

Capital Expenditures
Proceeds from sales of equipment Proceeds from sales of invetments Investments in subsidiary Net cash provided by investing activities Cash flow from Financing Activities

(xxx,xxx)
xx,xxx xx,xxx (xxx,xxx) (xxx,xxx)

Payments of long-term debt

Proceeds from insurance of long-term debt Proceeds from issuance of common stock Dividends paid Purchase of treasury stock Net cash provided by financing activities Increase (Decrease) in Cash

(xx,xxx)
xx,xxx xxx,xxx (xx,xxx) (xx,xxx) (xx,xxx) xx,xxx

Operating Activities: The cash flow from operating activities section of a cash flow statement can be presented using the direct format or the indirect format. The bottom line is the same, but the two begin at different points. Companies are free to use either format. Below is an example of both formats. a. Direct method: shows how much cash came in for sales and how much cash went out for inventory and other operating expenditures. b. Indirect method: starts with net income as a figure that summarizes most of the cash transactions for operating activities in a firm. However, net income also includes transactions that ere not cash, so we must eliminate the non-cash transactions from the net income figure to arrive at an accurate presentation of cash flow from operating activities.

Cash Flow From Operating Activities (two formats)

Direct
Cash received from customers Cash paid to suppliers Cash paid to employees Other cash operating expenditures Net cash provided by operating activities P 40,000.00 P400,000.00 260,000.00 70,000.00 Net Income

Indirect
P30,000.00 Adjustments to reconcile net income to net cash provided, by operating activities Depreciation 25,000.00

Changes in other accounts

affecting operations: (Increase) in receivables (Decrease) in inventory (Decrease) in payables Net cash provided by operating -12,000.00 5,000.00 -8,000.00

activities

P40,000.00

BALANCE SHEET

Balance Sheet reflects structure of the company's assets and financing sources used to finance these assets (i.e. equity and/or liabilities) as of particular date. This means that in this financial statement we can find information on what kind of assets business had on the particular day and how these assets were financed, i.e. either by the own means of shareholders (equity) or by the borrowed financial means (liabilities), or by the mix of these two sources. From the name of this financial statement, i.e. Balance Sheet, we can understand that there should be a balance between its parts, i.e. Assets must be equal to the sum of Equity and Liabilities.

Items On The Balance Sheet The following items can be found on the Balance Sheet and will be included into the sample Balance Sheet:
I. Assets - these are physical (tangible) things or intangible items which have a monetary value and are owned by the business. On the Balance Sheet assets are divided into: a) current assets - which are reasonably expected to be realized in cash or sold within one year or less in the normal operations of the business; b) long-term (fixed) assets - permanent assets or relatively fixed in nature and used by the business in its operations for the period longer than one year. II. Equity (Owners' equity) - residual claim against total assets of business after all the liabilities are deducted. In other words equity represents right of the shareholders to get share of the assets the business owns after all liabilities have been paid. Equity is not classified into current and long-term part since it does not have maturity date and there is no obligation to pay back equity to the shareholders. It might be done only after the liquidation of the business. III. Liabilities - debts owed to third parties, i.e. creditors, which have a certain maturity date and must be repaid. Liabilities are also divided into 2 groups: a) current liabilities - payable within the period of one year or shorter. Usually to be repaid back from the current assets b) long-term liabilities - payable within the period longer than one year

Sample Balance Sheet