A financial statement is a quantitative way of showing how a company is doing.
Information reported in the Financial Statements:
1. How well the company perform during the year? Income Statement
Net Income (or Net Loss)
2. Why did the company’s retained earnings change during the year? Statement of Retained earnings Beginning Retained Earnings + Net Income (or – Net Loss) - Dividends Ending Retained Earnings 3. What is the company’s financial position at December 31? Balance Sheet Assets = Liabilities + Owners’ Equity 4. How much cash did the company generate and spend during the year? Statement of Cash Flows Operating cash flows ± Investing cash flows ± Financing cash flows Increase (decrease) in cash
ABC, Inc. Income Statement Years Ended December 31, 2008 and 2007 2008 2007 Net Sales $ 3000.0 $2850.0 Operating costs excluding depreciation and amortization 2616.2 2497.0 Earnings before interest, taxes, depreciation, and amortization (EBITDA) $ 383.8 $353.0 Depreciation $ 100.0 $90.0 Amortization 0.0 0.0 Depreciation and Amortization $100.0 $90.0 Earnings before interest and taxes (EBIT or operating income) $283.8 $263.0 Less Interest 88.0 60.0 Earnings before taxes (EBT) $195.8 $203.0 Taxes (40%) 78.3 81.2.0 Net Income $117.5 $121.8.0
Tells us how much of the net income has been retained by the company
and how much has been paid out to the shareholders.
Companies retain profits to finance operations and capital expenditures and to pay off debt.
The rest is usually returned to the shareholders in the form of dividends.
Retained earnings is a cumulative measure of the amount of company assets that comes from profitable operations rather than fund raising (debt or equity).
Beginning retained earnings balance + Net Income − Dividends = Ending retained earnings balance
ABC, Inc. Statement of Retained Earnings Years Ended December 31, 2008 Balance of Retained earnings, Dec 31, 2007 $ 710.0 Add: Net Income, 2008 113.5 Less: Dividends (57.5) Balance of Retained earnings, Dec 31, 2008 $766.0
The three basic activities of businesses and the financial flows of the statement of cash flows: Operating revenues Operating costs Sale of assets Purchase of assets Operating activities Investing activities Financing activities Equity, debt Dividends, debt payments Financial boundaries of the company (Cash flows only) (Cash flows only) (Cash flows only) (Cash flows only) (Cash flows only) (Cash flows only)
ABC, Inc. Balance Statement Years Ended December 31, 2008 and 2007 Operating Activities Net Income $117.5 Depreciation 100.0 Increase in Account receivable (60.0) Increase in Inventories (200.0) Increase in Account Payable 30.0 Increase in Accruals 10.0 Net Cash provided by Operating Activities $ (2.5) Investing Activities Cash used to acquire fixed assets $ (230.0) Sale of short-term investment 65.0 Net Cash provided by Investing Activities $ (165.0) Financing Activities Increase in Notes Payable $50.0 Increase in Bonds Outstanding 174.0 Payment of dividends (61.5) Net Cash provided by Financing Activities $ 162.5
Balance Sheet–12/31/07 Assets Cash Other current assets Long-term investments Long-lived assets Intangible assets Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Contributed capital Retained earnings Balance Sheet–12/31/08 Assets Cash Other current assets Long-term investments Long-lived assets Intangible assets Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Contributed capital Retained earnings Statement of Cash Flows–1/1/08–12/31/08 Net cash flow from operating activities Net cash used by investing activities Net cash provided by financing activities Change in cash balance Beginning cash balance (12/31/7) Ending cash balance (12/31/08) Income Statement–1/1/08–12/31/08 Revenues − Expenses = Net income Statement of Retained Earnings 1/1/08–12/31/08 Beginning retained earnings balance + Net income − Dividends Ending retained earnings balance