Unit 3 Flashcards
3 primary financial statements
balance sheet
income statement
statement of cash flows
Balance Sheet
aka Statement of Financial Position
Assets, Liabilities, Equity
Can company pay short term liabilities (liquidity position)
Will debt structure allow long term survival (solvency)
Income Statement
aka Statement of Earnings
Annual and Quarterly Net Income
Measures performance
Statement of Cash Flows
Reports cash collected and paid in operations, investing, financing.
Annual and Quarterly reports
Measures change in cash during a time period
Statement of Retained Earnings
shows accumulated profits and losses since inception
links Income Statement and Balance Sheet
Form 10-K, 10-Q
SEC required form that contains all 3 major financial statements
Q - quarterly
K - annual, within 60 of end of fiscal year
EDGAR
resource used to access public Form 10-K filings
CIK
Central Index Key
uniquely identifies companies in the SEC online database
Types of assets
Cash
AR
Inventory
Buildings
Types of Liabilities
AP
Taxes Payable
Mortgage Payable
Unearned Revenue
Types of Owners Equity
Capital Stock
Retained Earnings
aka Shareholders Equity
Creditors claims against Assets
Liabilities
Owners claims against Assets
Owners Equity
Factors that increase/decrease owners equity
Decrease - dividends, losses
Increase - additional investments, profit
Classified Balance sheet
distinguishes between current(liquid) assets and long term (iliquid) assets.
types of current vs long term assets
cash vs land
types of current vs long term liabilities
AP vs mortgage
comparative financial statements
compare current year to previous year
limitations of balance sheet
discrepancy between balance sheet value and market value
balance sheet records purchase cost, market value uses current cost
not all assets are in balance sheet ie name recognition, distribution channels, reputation
Shows results of operations for a period of time
Income Statement
What does income statement summarize?
Revenues, costs to generate revenue (expenses)
Bottom line is net income/loss (revenues - expenses)
What does income statement assess?
Company’s profitability.
Revenue definition
Assets created through sales.
Expenses definition
Assets consumed through operations to generate revenues.
Net Income/Loss definition
aka earnings/profit
revenues - expenses
R>E = net income
R
Difference between revenue and net income
revenue is gross
net income is net after expenses
Gross Profit(Margin) formula, meaning
Sales - Cost of Goods Sold
higher GM means higher stock market price multiples
Operating Income
Gross Profit - Operating Expenses
Net Income formula
Operating Income - interest and tax expenses
Non operating expenses
Interest
Income tax
EPS equation, meaning
Earnings(Loss) per Share
Net Income/Number of Stock Shares
gain/loss
Money made/loss outside normal business activities
retained earnings formula
old RE + Net Income-Dividends
Statement of Cash Flows description
shows operating, investing, and financing cash inflows/outflows over a time period
retained earnings description
shows accumulated earnings at a point in time
examples of cash inflows
selling goods or providing services
selling assets
borrowing
receiving cash
examples of cash outflows
pay operating expenses
purchase assets
repay loans
pay returns on investments to owners
3 categories of cash flows
Operations (in - sell, out - pay wages, taxes, etc.)
Investments - in - sell assets, out buy assets
Financing - in - borrow, out repay; distributions
Articulation
relationship between operating statements and balance sheets
Statement of cash flows feeds to cash assets in Balance Sheet
Income statement feeds RE sheet, feeds RE statement in Balance Sheet
Four categories of Notes to Financial Statements
Summary of significant accounting policie
Additional information about summary totals in financial statements - detailed data feeding a summary
Disclosure of important information not added to financial statements - recognition
Supplementary information required by FASB or SEC
Recognition
include estimates/judgements in financial statements
Disclosure
include estimates/judgements in notes
financial statement analysis
examining relationships among financial statements and trends within
common size financial statements
using percentages of sales/revenues/assets to compare financial data between companies
- divide all income statement numbers for a given year by sales (or revenues) for the year.
Horizontal analysis
comparing results from year to year, using absolute values or percentages
Vertical analysis
comparison to other companies in the same industry at the same point in time
divide all numbers by biggest number, typically revenue for
