The document discusses the three main financial statements - the income statement, balance sheet, and statement of cash flows. It provides examples of each statement for a company called EPI for 2019-2020. It also discusses common-size financial statements, which show each item in a statement as a percentage of a base value like sales or total assets, making it easier to analyze trends and compare companies. Excel tools like the outline tool and data validation are used to help build and ensure accuracy of the financial statements.

1. Chapter 2
The Basic Financial Statements
Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2. Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Financial Statements
• We cover three basic financial statements:
• Income Statement – Summarizes the results of operations over some time period
• Balance Sheet – Lists the assets, liabilities, and equity of the firm at a given point in
time
• Statement of Cash Flows – Shows the sources of the firm’s cash inflows and where
the cash outflows went
• These financial statements are typically prepared for each quarter of the fiscal
year as well as the year as a whole
• These statements help investors to judge the performance of the firm and,
ultimately, the value of an investment in the company
• Each of these statements should be in its own worksheet within the workbook as
this will make it easy to have formulas that reference other statements

3. Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Income Statement
• The image at right shows income statements
for EPI for 2019-2020
• Sales represents the revenue produced over
the period. The rest of the items are either
categories of expenses or intermediate profit
measures.
• The basic formulas for an income statement’s
profit measures are:
Gross Profit = Sales − Cost of Goods
EBIT = Gross Profit − Operating Expenses
EBT = EBIT − Interest Expense
Net Income = EBT − Taxes

4. Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Balance Sheet
• The image at right shows the balance
sheets for EPI for 2019-2020
• Assets are things that the firm owns,
while liabilities are the debts that it owes
• Equity is the difference between total
assets and total liabilities
• The balance sheet equations are:
Total Assets = Total Liabilities + Equity
Total Assets = Current Assets + Long−term Assets
Total Liabilities = Current Liabs + Long−term Liabs
Total Equity = Total Assets − Total Liabilities

5. Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Statement of Cash Flows (1 of 2)
• The image at right shows the statement of cash flows for EPI for 2020
• There are three sections:
• Cash Flows from Operations
• Cash Flows from Investing
• Cash Flows from Financing
• Other than net income, depreciation expense, and dividends paid, each item
is the change in a balance sheet item
• Positive numbers represent cash inflows and negative numbers represent
cash outflows
• The table below shows how to set up your formulas so that you always get
the correct sign

6. Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Statement of Cash Flows (2 of 2)
Direction of
Change
Direction of
Change
Order of
Subtraction
Type of
Item
Increase Decrease
Asset − + Older − Newer
Liability or
Equity
+ − Newer − Older

7. Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Common-Size Financial Statements
• Common-size financial statements show each item as a percentage of some
base value:
• Income statement – Every item is shown as a percentage of sales
• Balance sheet – Each item is shown as a percentage of total assets
• Statement of cash flows – All items are shown as a percentage of either sales
or the beginning cash balance (you can set up a formula using the Choose
function in the denominator to toggle between these different base values)
• Common-size statements make it easy to:
• See trends over time
• Compare financial statement across differing companies

8. Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Common-Size Income Statement
• The image at right shows EPI’s
common-size income statements
for 2019-2020 along with a
contribution analysis
• Recall that each item is shown as
a percentage of that year’s sales
(note that row 5 is shown as 100%
for each year)
• We will see in Chapter 3 that some
of the profitability ratios can be
read directly from this statement
(e.g., the gross profit margin)

9. Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Common-Size Balance Sheet
• The image at right shows EPI’s
common-size balance sheet
• Recall that each item is shown as a
percentage of the year’s total assets
(notice that row 12 shows as 100%)

10. Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Common-Size Statement of Cash Flows
• The image at right shows EPI’s
common-size statement of cash flows
for 2020 with 2020 sales as the
denominator

11. Timothy R. Mayes, Financial Analysis with Microsoft Excel, 9th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Excel Tools Used
• In addition to the formulas used to create the financial statements, we also
saw the following Excel tools used:
• Outline Tool – This tool is used to selectively show or hide sections of a
worksheet (we used it to hide parts of the statement of cash flows, but it could be
used to hide excess detail on the other statements)
• Data Validation Tool – This tool is used to make sure that the user only enters
acceptable values into a cell
• Both tools are useful in many situations; not just for financial statements