Financial Statement Flashcards
What is a cash flow statement?
A report of all of a firm’s transactions that involve cash
What are the key elements of a cash flow statement?
revenues (money flowing in)
and
expenses (money flowing out).
Cash flow statements compare the sum of the revenues to the sum of the expenses on a regular time basis – usually monthly.
What are revenues?
Sales
Interest from firm’s investments (e.g., a company savings account)
Royalty and Licensing payments for appropriate use of firm’s intellectual property
Another source of cash inflow, but not a revenue is the cash the firm receives from borrowing money.
What are expenses?
Fixed costs:
Rent payments
Salaried employees
Capital Investments and (some) maintenance
Utilities (phone, water, electric, etc)
Insurance
Taxes (on property, plant, and equipment)
Advertising (*)
Others things that do not depend on number of units produced.
Variable costs:
Materials Cost
Supplies
Production Wages
Outside / Contracted labor
Advertising (*)
Sales Commissions / Distribution Costs
Equipment Maintenance
Other things that depend on the number of units produced (e.g.
royalties paid)
What does income statement/Profit&Loss statement show?
Shows the performance of your business over a period of time
* Resets at the beginning of each new accounting period
* Summarizes all revenue generated by the business
* Summarizes all expenses incurred by the business (by category)
* Calculates the net profit or loss, or “bottom line” = Income – Expenses
* Tells you how well your business is operated
What does the balance sheet show?
*Shows a snapshot of your business at a point in time
*Accumulates over the lifetime of your business
*Shows the net worth of your business
*The balance sheet always balances:
ASSETS –LIABILITIES = EQUITY
What is a link between balance sheet anf income statement?
Profit or loss is taken from the bottom line of the income statement and recorded on the balance sheet in the Retained Earnings equity account. Retained earnings accumulate over the life of the business.
When a business operates at a profit….
it increases in equity (is worth more)
When a business operates at a loss….
it decreases in equity (is worth less)
What is a liquidity?
Can your company meet its payment obligations?
Cash balance
Working capital:
Current assets – Current liabilities
Current ratio:
Current assets / Current liabilities
How leveraged is your company?
Debt-to-equity ratio: Total liabilities / Total equity
What is double-entry accounting?
Every business transaction will affect at least two accounts. If only one side of the entry is done, the accounting system will become out-of-balance.
What is cash based accounting?
You record transactions when payment is made or received (cash exchanges hands), not when the business event occurs
What is accrual-based accounting?
You record transactions when the business event occurs, regardless of whether payment has yet been made or received
Accounts payable and accounts receivable accounts are used
To know if your numbers are “good,” you must compare them to:
Your expectations and needs (budget-to-actual)
Your competitors and industry norms (benchmarking)
Historical performance (trending)
Each other (ratios)
