13. Financial Statements Flashcards
What are the three types of financial statements?
- Balance sheets
- Income statements
- Cash flow statements
What factors affect stock prices?
External constraints, engineer’s decisions, strategic decisions by management
Accounting info (financial statements)
Expected projections
What’s the difference between the balance sheet and the other financial statements?
The balance sheet is a “snapshot” reported as an end of year summary.
What are the four quadrants on a balance sheet?
Assets (current + long-term) = liabilities and equity
Current liabilities are loans and costs for the year
Long-term liabilities are future payments
What are current assets?
- Assets that can be converted into cash or its equivalent within 1 year
- Include cash, cash equivalents, accounts receivable, inventory
Is it good to have machine working at max capacity to produce the most inventory possible?
It’s best to have the least inventory possible because it is not that easy to liquidate. This may mean reducing machine’s productivity
What are fixed assets?
Relatively permanent assets, take longer than a year to liquidate
- Land
- Building
- Factory machinery
- Office equipment
- Furniture and fixtures
- Vehicles
What are examples of intangible assets?
- Licenses, Patents, Goodwill, Copyrights, Franchises
What’s goodwill?
Added value to an asset that comes from global brand awareness (hype)
What are liabilities?
The money a company owes? Debt
Short-term liabilities include: accounts payable, wages, rent and interest
Long-term liabilities: bonds, mortgages, amount due more than 1 yr in the future
What is shareholders’ equity?
The portion of the assets that is provided by the investors/owners
(therefore, shareholder’s equity is actually the liability of the company to its owners)
- it consists of stocks, capital surplus, and retained earnings
Which ones of these are fixed assets and which are current assets?
Fixed: Land, plant and equipments
Current: Cash, accounts receivable, inventories
What are retained earnings?
Retained earnings indicate the amount of
assets that have been financed by putting profits back into the
business.
- it is the net income - total dividends paid to stockholders
What are the two ways a company gets equity?
- Owner’s contributions (selling shares)
- Retained earnings (retaining profits instead of paying out dividends)
What goes on the income statement?
Revenue (registered when G&S are sold) + Other income - Production costs of G&S sold, expenses (OP+R&D+Financial) and taxes
= Net income
What contribute to revenues and income?
- Revenues from operation: selling G&S
- Investment income: come from investment activities
- Other income (ex: capital gains)
What contributes to costs and expenses?
- Cost of goods (= variable direct costs of labour and material, largest expense)
- Indirect costs (ex: depreciation, building rent, manager salary)
- Expenses (overhead costs, marketing, admin, etc)
What’s the gross margin?
Marginal revenue expressed on a “per sale” basis:
(Revenue - COGS) / Revenue
Whats the operating margin?
- like gross margin but include depreciation cost and indirect costs
Operating Income = Revenue - Costs
(Revenue - COGS - depreciation) / revenue
Do you want a high or low operating margin?
High
How do you calculate net/accounting income?
- Find taxable income (Total income - all expenses)
2. Apply taxes
Why are corporate taxes lower for small businesses in Canada?
Because they provide many jobs and they are trying to be supportive.
What kind of financial statement is this?
Income statement.
What can you do with the net income?
- Pay dividends to stakeholders
2. Reinvest in the company
Explain what’s going on here.
Balance sheet is a snapshot in time, of beginning and end of 2019. It shows the assets, liabilities and equity.
Income statement shows the total revenues and costs for the year.
Are investment decisions based on cash flows or profits?
Cash flows
What do cash flow statements show?
Sources and uses of funds
What are the 3 activities shown in a cash flow diagram?
- Operating activities (cash flows related to producing and selling G&S + expenses like depreciation)
- Investing activities (cash flows related to investment activities like buying new fixed or financial assets, selling old equip, etc)
- Financing activities (borrowing, selling stock, paying debt)
What does this diagram show?
All cash flows recorded in cash flow statement
What kind of financial statement is this?
A cash flow statement
What is working capital?
The measure of the company’s liquidity position
working capital = current assets - current liabilities
What happens if working capital is negative over a long period of time?
Bankruptcy
Company can not pay off liabilities
