Financial statement analysis

1. Corporation
• Separate legal entity owned by
stockholders
• Easy to transfer ownership
• Greater capital raising potential
• Lower legal liability
• Unfavorable tax treatment

2. #
2 Users of Financial Information
Internal
• Managers who plan,
organize and run a
business
– Marketing managers
– Production supervisors
– Finance directors
– Company officers

3. Users of Financial Information
Internal Users Ask?
Cash to pay bills? Cost per unit?
Give raises? Which product is
profitable?

4. Users of Financial Information
External
• Investors
• Others
– Regulatory agencies
– Tax authorities
– Customers
– Labor Unions
– Economic planners
• Creditors

5. Users of Financial Information
External Users Ask?
Earning enough? Compare to competition?
Will the company be able to pay bills
when due?

6. #
3 Types of Business Activity
• Financing
• Investing
• Operating

7. Financing Activities
• Borrowing creates liabilities
– Bank loans
– Debt securities
– Goods on credit or payables
• Selling stock creates
stockholders’ equity

8. Investing Activities
• Obtaining resources or
assets to operate the
business
– Land
– Buildings
– Vehicles
– Computers
– Furniture

9. Operating Activities
• Primary activity of business
– Selling goods
– Providing services
– Manufacturing
– Cost of Sales
– Advertising
– Paying employees
– Paying utilities

10. Operating Activities
• Revenue is generated from sales or
services
• Expenses are the cost of doing business
• If revenue > expense = Net Income
• If revenue < expense = Net Loss!

11. #
4 Describe Content and Purpose
of Financial Statements
• Accountants communicate
with users through four
financial statements
• Income Statement
• Retained Earnings Statement
• Balance Sheet
• Statement of Cash Flows

12. Income Statement
• Reports operating success or failure for a
period.
• Summarizes revenues and expenses for
period: month, quarter, or year.
• If revenue > expense = Net Income.

13. Income Statement
Do this statement first!
GH¢
GH¢

14. Retained Earnings Statement
• Shows changes in retained earnings for
period: month, quarter, or year
• Beginning balance
• Add Net Income from income
statement!
• Deduct Dividends
• Ending balance

15. Retained Earnings Statement
Do this statement second!
GH¢
GH¢

16. Balance Sheet
• Reports assets and claims to assets.
• Claims of creditors, liabilities.
• Claims of owners, stockholders’ equity.
• Assets = Liabilities + Stockholders’ Equity
• Specific date – one point in time!

17. P.V. Viswanath 17
The Balance Sheet
Current Assets
Cash & Securities
Receivables
Inventories
+
Fixed Assets
Tangible Assets
Intangible Assets

Current Liabilities
Payables
Short-term Debt
+
Long-term Liabilities
+
Shareholders’ Equity

=

18. Balance Sheet
From
Retained
Earnings
Statement

19. Statement of Cash Flows
• Provides information about cash
receipts and cash payments
• Summarizes for period: month, quarter,
or year.
• Cash effects of operating, investing,
and financing activities.

20. Statement of Cash Flows
• Where did the cash come from?
• How was cash used during the period?
• What was the change in the cash
balance during the period?
• You can’t survive without cash!

21. Statement of Cash Flows
Agrees
with
Balance
Sheet

22. #5 Explain the Meaning of
Assets, Liabilities, and
Stockholders’ Equity.
State the Basic Accounting
Equation

23. Assets
• Resources owned by the
business
– Cash
– Accounts receivable
– Inventories
– Building
– Furniture and fixtures
– Equipment
– Supplies

24. Liabilities
• Obligations or debts of business
– Notes payable
– Accounts payable
– Interest payable
– Salaries payable
– Unearned revenue

25. Stockholders’ Equity
• Ownership claims on assets
• Paid-in capital
– Common stock
• Retained earnings

26. Basic Accounting Equation
Assets =
Liabilities + Stockholders’ Equity

27. Do It Problem: Ahafo Corporation
Notes payable GH¢5000
Common stock GH¢10000
Retained earnings ?
Equipment GH¢16000
Insurance expense GH¢1000
Supplies GH¢1800
Supplies expense GH¢200
Cash GH¢2000
Dividends GH¢600
• Ahafo begins on
Jan. 1, 2005
• For year ended
Dec. 31, 2005,
prepare
– Income statement
– Retained earnings
statement
– Balance sheet

28. Do It Problem: Ahafo Corporation
Notes payable GH¢5000
Common stock GH¢10000
Retained earnings ?
Equipment GH¢16000
Insurance expense GH¢1000
Supplies GH¢1800
Supplies expense GH¢200
Cash GH¢2000
Dividends GH¢600
• Action step 1:
Report the
revenues &
expenses for a
period of time,
Income Statement

29. Do It Problem: Ahafo Corporation
Service revenue GH¢17000
Accounts receivable GH¢4000
Accounts payable GH¢2000
Building rental expense GH¢9000
Notes payable GH¢5000
Common stock GH¢10000
Retained earnings ?
Equipment GH¢16000
Insurance expense GH¢1000
Supplies GH¢1800
Supplies expense GH¢200
Cash GH¢2000
Dividends GH¢600
• Action step 1:
Report the
revenues &
expenses for a
period of time,
Income Statement

30. Do It Problem: Ahafo Corporation
Ahafo Corporation
Income Statement
For the Year Ended December 31, 2005
Create the heading
Name of the
statement
Name of the
company
Period
of time

31. Do It Problem: Ahafo Corporation
Ahafo Corporation
Income Statement
For the Year Ended December 31, 2005
Revenues
Service revenue GH¢17,000
List the revenues
Use cedi signs to denote Ghana currency

32. Do It Problem: Ahafo Corporation
Ahafo Corporation
Income Statement
For the Year Ended December 31, 2005
Revenues
Service revenue GH¢17,000
Expenses
Rent expense GH¢9,000
Insurance expense 1,000
Supplies expense 200
Total expenses 10,200
________
List the expenses & underline sub-totals
________

33. Do It Problem: Ahafo Corporation
Ahafo Corporation
Income Statement
For the Year Ended December 31, 2005
Revenues:
Service revenue GH¢17,000
Expenses:
Rent expense GH¢9,000
Insurance expense 1,000
Supplies expense 200
Total expenses 10,200
Net Income GH¢ 6,800
Calculate net income: revenues - expenses
________
________
________
________

34. Do It Problem: Ahafo Corporation
Service revenue GH¢17000
Accounts receivable GH¢4000
Accounts payable GH¢2000
Building rental expense GH¢9000
Notes payable GH¢5000
Common stock GH¢10000
Retained earnings ?
Equipment GH¢16000
Insurance expense GH¢1000
Supplies GH¢1800
Supplies expense GH¢200
Cash GH¢2000
Dividends GH¢600
• Action step 2:
Show amounts
and causes of
changes in
retained earnings
• Use Net Income
from Income
Statement
• Dividends

35. Do It Problem: Ahafo Corporation
Ahafo Corporation
Retained Earnings Statement
For the Year Ended December 31, 2005
Retained earnings, January 1 GH¢ 0
Add: Net income 6,800
6,800
Less: Dividends 600
Retained earnings, Dec. 31 GH¢ 6,800
________
________
________
________

36. Do It Problem: Ahafo Corporation
Service revenue GH¢17000
Accounts receivable GH¢4000
Accounts payable GH¢2000
Building rental expense GH¢9000
Notes payable GH¢5000
Common stock GH¢10000
Retained earnings GH¢6800
Equipment GH¢16000
Insurance expense GH¢1000
Supplies GH¢1800
Supplies expense GH¢200
Cash GH¢2000
Dividends GH¢600
• Action step 3:
Present assets and
claims to those
assets at a
specific point in
time on the
Balance Sheet
• Use GH¢6,800
Retained earnings
from previous
statement!

37. Ahafo CORPORATION
Balance Sheet
December 31, 2005
Assets
Cash GH¢2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets GH¢23,800
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable GH¢2,000
Bank overdraft 5,000
Total liabilities 7,000
Stockholders’ equity
Common stock GH¢10,000
Retained earnings 6,800
Total Stockholders’ equity 16,800
Total liabilities and stockholders’ equity GH¢23,800