WEEK 2 - Understanding Financial Statements Flashcards
Annual Financial Report:
Annual financial report is a comprehensive document produced at the end of each financial year.
Serves the needs of stakeholders (investors, employees, customers and regulators).
Balance sheet:
The Balance Sheet shows resources (assets) and claims on those resources (liabilities and equity) at a point in time.
- It’s not over the financial year (30 June 2020 to 30 June 2021)
Shows companies resources (assets) and how items were financed (liability + equity)
Provides information on:
- Financial structure - Debt-to-equity ratio
- Liquidity - ease of converting assets to cash (short term focus) –working capital, current ratio
- Solvency - ability to pay debts when they fall due (longer term focus) – Debt to equity ratio
Income statements:
Financial performance if a company over a specific time
- Sometimes referred to as Statement of Financial Performance or Profit & Loss Statement (P&L) by companies such as Woolies
Illustrates how effective a company is at generating revenue over a period of time.
- If revenue are greater than expenses, there is a net profit
- If expenses are greater than revenues, there is a net loss
NOTE: Uses accural accounting.
Cash flow statements:
Measures cash inflows (sources of cash) and cash outflows (uses of cash) over a period of time.
- Uses cash accounting
Activities often seen in Cash Flow statements:
Operating activities: Main revenue-producing activities
E.G Receipts from customers, payments to supplies and employees
Investing activities: acquisition and disposal of long-term assets
E.g Sale of property, dividends received
Financing activities: Equity capital and borrowing (debt)
E.G proceeds from borrowing and repayment of borrowing
Why might a company be profitable but face cash flow problems?
A company can face challenges with negative cash flow despite reporting profits on the income statement due to timing differences in cash receipts and expenses.
NOTE:
- Cash flow statements are important to inform user of the company’s cash position
- A successful business must always have sufficient cash
- Companies need cash to pay its expenses, bank loans and to purchase new assets
Assets + the types:
Resources used by the company this year or in future years.
E.g cash, property, inventory and accounts receivable
Current (Short term): Expect to realise the benefits in the next 12 months.
- These assets can be converted to cash or used up within a year.
E.G. cash, accounts receivable, inventory
Non-current (long term): Realise benefits** in the next 12 month period**
Used by business to generate revenue for company over a long period of time.
E.G. property, plant and equipment, buildings, land
NOTE: This distinction is to assist user in understanding the company’s short term financial position.
Liabilities + types:
A list of debts and other financial obligations.
E.G accounts payable, wages payable, taxes payable and loan payable
Current (Short term): Liabilities that will be paid off within one year of the balance sheet date
E.G Accounts payable or wages
Non current (long term): Liabilities that will take over a year to pay off.
E.G loan payable
NOTE: This distinction is to assist user in understanding the company’s short term financial position.
Shareholder equity / Owners equity/ net assets:
What belongs to the shareholders if all operations ceased and assets sold and liabilities were paid off i.e baseline resources.
- Calculated through SE = A - L
Consists of:
Share capital: amount invested by owners in the company – also known as “contributed capital” or “contributed equity”; and
Retained profits: the total cumulative amount of profit that the company has retained in the business rather than paid as dividends
The accounting equation:
Assets (Resources) = Liabilities + Equity (Sources)
Rules for balance sheet:
Resources (assets) used will generate revenue for the company
Liability/equity relate to how assets are financed
ASSETS = LIABILITIES + EQUITY
NOTE: Sum of assets must ALWAYS equal the sum total of liabilities and shareholders equity.
Retained profits:
Retained profits represents the sum of all previous profits (measured since the company began)
- But results in less all dividends paid to shareholders
NOTE: Retained Profits connect the income statement and the balance sheet (apart of the Shareholders’ Equity).
Dividends are NOT AN EXPENSE:
- Thus Dividend are reported on the Statement of Retained Profits not on the Income statement
