T6 Financial Statements Flashcards
Annual report has 3 important financial statements
- income statement - how good the company is at making money
- cash flow statement - how they’re paying for their operations and future growth
- balance sheet - what the company owns and owes
Cash
sustain day-to-day operations and pay for its future growth
Cash flow statement
details the flow of cash between the company and the outside world
Operations
where the company makes money by selling whatever it sells
Sales revenue is cycled back to pay costs and expenses
Net result
annual profit or loss
Shareholders
money raised through sale of shares
Other creditors
money raised through the other types of debt e.g. bank loans
- interest paid on this debt is shown in the Income Statement
Dividends returned to shareholders
- detailed in Income Statement
- a profitable company will return to shareholders excess profits from operations
Interest paid to creditors
in a company with heavy debt, this can be a major drain on cash from Income Statement
Cash flow to investing
- for a company to increase its earnings from operations, larger scale
- spending cash to buy property and equipment
Cash flow from operations
- profits from operations are sustainable source of cash
- actual amount of money that has entered the company from the outside world
Cash flow from financing
- 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
Income statement
the company’s “bottom line”
- its earnings or profit
Cash flow statement
how the company is paying for its operations and future growth
- flow of cash between the company and outside world
Balance sheet
what a company owns and what it owes
- what the company is worth = assets - liabilities
Liquidity
how quickly a company can turn its assets into cash
Current ratio
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
Quick or “acid-test” ratio
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
Cash burn rate
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
