4. Financial Statements
IS: Report financial performance over a period
BS: Assets, liabilities and equity for a specific time
CF: Summary of cash inflows and outflows over a period
Cash Flow
(CF)
Balance Sheet
(BS)
Income Statement
(IS)
Provide information on the financial position and
performance of a company
Financial Statements and why they exist
6. IS - Revenue, COGS, Gross Profit
Revenue: Earnings recognized
when product/service actually
delivered.
COGS: Per unit expense of
selling product/service. E.g. cost
of material, cost of labor etc.
Gross Profit: Potential profit per
sale, before fixed expenses like
offices, rent, marketing etc.
Income Statement: FY2016
Revenue: 650$
Cost of Goods Sold (COGS): 70
Gross Profit: 580
Gross Margin %: 89.2%
Operating Expenses:
Sales & Marketing: 150
General & Administrative: 125
Total Operating Expenses: 275
Depreciation&Amotrization (D&A): 20
Operating Income (EBIT): 285
Operating Margin: 43.8%
Other Income / (Expenses): 20
Interest Income / (Expense): -
Pre-Tax Income (EBT): 305
Income Taxes: 122
Net Profit: 183$
Net Profit Margin: 28.2%
7. IS – OpEx, D&A, EBIT
Operating Expenses: Expenses
that cannot be linked directly to
individual units sold.
D&A: Non-cash expenses,
represent cost of assets being
used over time.
Operating Income (EBIT):
Earnings before non-core
activities, interest, and taxes.
Income Statement: FY2016
Revenue: 650$
Cost of Goods Sold (COGS): 70
Gross Profit: 580
Gross Margin %: 89.2%
Operating Expenses:
Sales & Marketing: 150
General & Administrative: 125
Total Operating Expenses: 275
Depreciation&Amotrization (D&A): 20
Operating Income (EBIT): 285
Operating Margin: 43.8%
Other Income / (Expenses): 20
Interest Income / (Expense): -
Pre-Tax Income (EBT): 305
Income Taxes: 122
Net Profit: 183$
Net Profit Margin: 28.2%
8. IS – Other Income, EBT, Net Profit
Interest/Other Income/Expense:
Income (expense) from non-core
business activities including debt
investments.
Pre-Tax Income (EBT): Earnings
before taxes, the amount used to
pay taxes on.
Net Profit: Amount generated
from core and non-core activities
after expenses and taxes.
Income Statement: FY2016
Revenue: 650$
Cost of Goods Sold (COGS): 70
Gross Profit: 580
Gross Margin %: 89.2%
Operating Expenses:
Sales & Marketing: 150
General & Administrative: 125
Total Operating Expenses: 275
Depreciation&Amotrization (D&A): 20
Operating Income (EBIT): 285
Operating Margin: 43.8%
Other Income / (Expenses): 20
Interest Income / (Expense): -
Pre-Tax Income (EBT): 305
Income Taxes: 122
Net Profit: 183$
Net Profit Margin: 28.2%
9. Income Statement Summary
Income Statement: Shows revenue to net profit over a
PERIOD of time e.g. 1 year. Records only if product/service
has been DELIVERED – irrelevant when payment occurs.
To appear on the Income Statement:
1. Must correspond to the CURRENT period (i.e. only what
you're paying an employee this quarter/month/year);
AND
2. Must impact the company's taxes.
11. BS – Assets, Liabilities, Equity
Assets = Liabilities + Equity
Assets: What the company owns
that increases cash flow in the
future.
Liabilities: Obligations which
reduce cash flow in the future.
Equity: Funding source, relates
to funds raised internally.
Balance Sheet: 31-Dec-16
Assets:
Current Assets: 420
Long-Term Assets: 1,580
Total Assets: 2,000$
Liabilities & Equity:
Current Liabilities: 500
Long-Term Liabilities: 500
Equity: 1,000
Total Liabilities & Equity: 2,000$
12. BS – Current Assets
Cash: Physical currency and
highly liquid investments.
Accounts Receivable: Amount
the company is owed by its clients
after delivering product/service.
Prepaid Expenses: Paying for
expenses in advance.
Inventory: Raw materials, in-
process products, finished goods
ready for sale.
Balance Sheet: 31-Dec-16
Current Assets:
Cash & Cash-Equivalents: 20$
Short-Term Investments: 100
Accounts Receivable: 100
Prepaid Expenses: 100
Inventory: 100
Total Current Assets: 420
Long-Term Assets:
Plants, Property & Equipment: 1,000
Other Intangible Assets: 480
Long-Term Investments: 100
Total Long-Term Assets: 1,580
Total Assets: 2,000$
13. BS – Long-Term Assets
PP&E: Physical and illiquid
assets (land, building, machinery)
vital to core operations.
Other Intangible assets:
Intellectual property – patents,
trademarks, copyrights etc.
Investments: Company invests
excess cash in stocks, bonds,
money-markets, real estate etc.
Balance Sheet: 31-Dec-16
Current Assets:
Cash & Cash-Equivalents: 20$
Short-Term Investments: 100
Accounts Receivable: 100
Prepaid Expenses: 100
Inventory: 100
Total Current Assets: 420
Long-Term Assets:
Plants, Property & Equipment: 1,000
Other Intangible Assets: 480
Long-Term Investments: 100
Total Long-Term Assets: 1,580
Total Assets: 2,000$
14. BS – Current Liabilities
Short-Term Debt: Incurred debt
due within a year e.g. bank loans.
Accounts Payable: Delivered
items with specific invoices (legal,
tax, marketing services, inventory
etc.) with delayed payment.
Accrued Expenses: Ongoing
items (wages, monthly rent,
utilities) with delayed payment.
Balance Sheet: 31-Dec-16
Current Liabilities:
Short-Term Debt: 100$
Accounts Payable: 200
Accrued Expenses: 200
Total Current Liabilities: 500
Long-Term Liabilities & Equity:
Deferred Revenue: 200
Deferred Tax Liability: 200
Long-Term Debt: 100
Equity: 1,000
Total Long-Term Liabilities & Equity: 1,500
Total Liabilities & Equity: 2,000$
15. BS – Long-Term Liabilities
Deferred Revenue:
Unrecognized revenue for
products/services paid by
customers, but not yet delivered.
Deferred Tax Liability:
Difference between accounting
taxes and deferred taxes.
Long-Term Debt: Incurred debt
exceeding 1 year (bank loans,
mortgage, bonds etc.).
Balance Sheet: 31-Dec-16
Current Liabilities:
Short-Term Debt: 100$
Accounts Payable: 200
Accrued Expenses: 200
Total Current Liabilities: 500
Long-Term Liabilities & Equity:
Deferred Revenue: 200
Deferred Tax Liability: 200
Long-Term Debt: 100
Equity: 1,000
Total Long-Term Liabilities & Equity: 1,500
Total Liabilities & Equity: 2,000$
16. BS - Equity
Equity: Funding source for the
business (money contributed by
the owners, money raised by
selling ownership, saved-up
cumulative profits over time).
Balance Sheet: 31-Dec-16
Current Liabilities:
Short-Term Debt: 100$
Accounts Payable: 200
Accrued Expenses: 200
Total Current Liabilities: 500
Long-Term Liabilities & Equity:
Deferred Revenue: 200
Deferred Tax Liability: 200
Long-Term Debt: 100
Equity: 1,000
Total Long-Term Liabilities & Equity: 1,500
Total Liabilities & Equity: 2,000$
17. Balance Sheet Summary
Balance Sheet: Shows the company's resources (Assets)
and how it acquired those resources (Liabilities & Equity) at
a specific date/point in time.
Rule: Assets = Liabilities + Equity (BS should balance).
Assets get acquired either through savings or by borrowing.
Assets: Items owned, that result in additional future cash.
Liabilities: Borrowings, that result in less cash in the future.
Equity: Funding source, refers to money raised internally.
19. CFS - Introduction
CF: Tracks cash flow changes
over a period of time e.g. 1 year.
Operating: Change in cash flow
from core business operations.
Investing: Change in cash flow
from purchasing investments and
spending on increasing capital.
Financing: Change in cash flow
from raising debt or equity.
Period 31-Dec-2015 to 31-Dec-2016
Cash Flow Statement:
Cash Flow from Operating Activities:
Net Income: 183$
Non-cash Expenses: 20
Change in Operating Working Capital:
Change in Current Assets: (18)
Change in Current Liabilities: 15
Cash Flow from Operations (A): 200$
Cash Flow from Investing Activities:
Capital Expenditures (CapEx): (200)$
Purchases of Investments: -
Cash Flow from Investing (B): (200)$
Cash Flow from Financing Activities:
Debt Raised: 10$
Equity Issuance: 10
Cash Flow from Financing (C): 20$
Net Change in Cash (A+B+C): 20$
Beginning Cash Balance: -$
Ending Cash Balance: 20$
20. CFS - Operations
Net Income/Profit: Starts off with
Net Income/Profit, then tracks
changes in operating items.
Non-cash expenses: Get added
back (+) as these don’t represent
real cash expenses e.g. D&A.
Working Capital: Factors in
changes in Operational BS items
over the period. Proxy of current
assets & current liabilities.
Period 31-Dec-2015 to 31-Dec-2016
Cash Flow Statement:
Cash Flow from Operating Activities:
Net Income: 183$
Non-cash Expenses: 20
Change in Operating Working Capital:
Change in Current Assets: (18)
Change in Current Liabilities: 15
Cash Flow from Operations (A): 200$
Cash Flow from Investing Activities:
Capital Expenditures (CapEx): (200)$
Purchases of Investments: -
Cash Flow from Investing (B): (200)$
Cash Flow from Financing Activities:
Debt Raised: 10$
Equity Issuance: 10
Cash Flow from Financing (C): 20$
Net Change in Cash (A+B+C): 20$
Beginning Cash Balance: -$
Ending Cash Balance: 20$
21. CFS - Investing
CapEx: Spending on a long-term
tangible asset e.g. purchasing
machinery.
Purchases/Sale of Investments:
Spend extra cash on short and
long term investments.
Period 31-Dec-2015 to 31-Dec-2016
Cash Flow Statement:
Cash Flow from Operating Activities:
Net Income: 183$
Non-cash Expenses: 20
Change in Operating Working Capital:
Change in Current Assets: (18)
Change in Current Liabilities: 15
Cash Flow from Operations (A): 200$
Cash Flow from Investing Activities:
Capital Expenditures (CapEx): (200)$
Purchases of Investments: -
Cash Flow from Investing (B): (200)$
Cash Flow from Financing Activities:
Debt Raised: 10$
Equity Issuance: 10
Cash Flow from Financing (C): 20$
Net Change in Cash (A+B+C): 20$
Beginning Cash Balance: -$
Ending Cash Balance: 20$
22. CFS - Financing
Debt and Equity issuances:
Includes items like debt and
equity issuances used to fund
business operations.
Ending Cash Balance: Final
cash balance after accounting for
cash changes over the period.
Period 31-Dec-2015 to 31-Dec-2016
Cash Flow Statement:
Cash Flow from Operating Activities:
Net Income: 183$
Non-cash Expenses: 20
Change in Operating Working Capital:
Change in Current Assets: (18)
Change in Current Liabilities: 15
Cash Flow from Operations (A): 200$
Cash Flow from Investing Activities:
Capital Expenditures (CapEx): (200)$
Purchases of Investments: -
Cash Flow from Investing (B): (200)$
Cash Flow from Financing Activities:
Debt Raised: 10$
Equity Issuance: 10
Cash Flow from Financing (C): 20$
Net Change in Cash (A+B+C): 20$
Beginning Cash Balance: -$
Ending Cash Balance: 20$
23. Cash Flow Summary
Cash Flow Statement: Tracks money inflows and outflows
over a period of time. Includes changes in cash flow from
operating, investing and financing activities.
It exists for 2 reasons:
1. Adjusts for non-cash revenues and expenses on the IS;
AND
2. There may be additional cash inflows and outflows that
have not appeared on the IS.
24. Summary
Income Statement: Reports revenues, expenses, and
taxes over a PERIOD of time (1 year, 1 quarter etc.). Total
revenues all the way down to the after-tax profit.
Balance Sheet: The Balance Sheet shows the company's
resources (Assets) and how it acquired those resources
(Liabilities & Equity) at a specific point in time.
Cash Flow Statement: Tracks money inflows and outflows
over a period of time. Includes changes in cash flow from
operating, investing and financing activities.
