T6 Financial Statements

Question 1

Annual report has 3 important financial statements

Answer 1

1. income statement - how good the company is at making money
2. cash flow statement - how they’re paying for their operations and future growth
3. balance sheet - what the company owns and owes

Question 2

Cash

Answer 2

sustain day-to-day operations and pay for its future growth

Question 3

Cash flow statement

Answer 3

details the flow of cash between the company and the outside world

Question 4

Operations

Answer 4

where the company makes money by selling whatever it sells

Sales revenue is cycled back to pay costs and expenses

Question 5

Net result

Answer 5

annual profit or loss

Question 6

Shareholders

Answer 6

money raised through sale of shares

Question 7

Other creditors

Answer 7

money raised through the other types of debt e.g. bank loans
- interest paid on this debt is shown in the Income Statement

Question 8

Dividends returned to shareholders

Answer 8

• detailed in Income Statement

- a profitable company will return to shareholders excess profits from operations

Question 9

Interest paid to creditors

Answer 9

in a company with heavy debt, this can be a major drain on cash from Income Statement

Question 10

Cash flow to investing

Answer 10

• for a company to increase its earnings from operations, larger scale
• spending cash to buy property and equipment

Question 11

Cash flow from operations

Answer 11

• profits from operations are sustainable source of cash

- actual amount of money that has entered the company from the outside world

Question 12

Cash flow from financing

Answer 12

• issue shares in the company and sell them to the public => dilute shares
• take on other types of debt e.g. bonds, bank loans => debt commits company to paying interest

Question 13

Income statement

Answer 13

the company’s “bottom line”

- its earnings or profit

Question 14

Cash flow statement

Answer 14

how the company is paying for its operations and future growth
- flow of cash between the company and outside world

Question 15

Balance sheet

Answer 15

what a company owns and what it owes

- what the company is worth = assets - liabilities

Question 16

Liquidity

Answer 16

how quickly a company can turn its assets into cash

Question 17

Current ratio

Answer 17

dividing current assets by current liabilities

• measure of a company’s ability to pay off its short-term debt as it comes due
• low ratio = have difficulty paying bills
• high ratio = not using funds efficiently

Question 18

Quick or “acid-test” ratio

Answer 18

calculated by dividing sum of cash and equivalents and accounts receivable by current liabilities
- eliminates inventories from consideration, least liquid of the major current asset categories

Question 19

Cash burn rate

Answer 19

expressed in cash spent per month and is calculated by dividing the company’s most recent annual change in cash and equivalents by 12

• rate at which the company is using up cash
• can determine how long it will take of spending before the company needs to refinance