Lecture on how to read Financial Statements, but the important aspects were in the discussion not in the powerpoint.

1. Understanding
Financial
Statements
J107
Associate Prof. Rachel E. Khan
Journalism Department, College of Mass Communication
University of the Philippines

2. What are Financial
Statements?
• The FS is basically reports on managerial
performance, corporate efficiency, financial strength,
weaknesses and credit worthiness.
• They attest to the managerial success or warn
against impending difficulties of a company

3. Types of FS
There are four main financial statements:
(1) balance sheets - show what a company owns and
what it owes at a fixed point in time.
(2) income statements - show how much money a
company made and spent over a period of time.
(3) cash flow statements - show the exchange of money
between a company and the outside world also over a
period of time.
(4) statements of shareholders’ equity - shows changes in
the interests of the company’s shareholders over time.

4. Balance Sheets
A balance sheet provides detailed information about a
company’s assets, liabilities and shareholders’ equity.
Assets:
• Assets are things that a company owns that have value. This
typically means they can either be sold or used by the
company to make products or provide services that can be
sold.
• Assets include physical property, such as plants, trucks,
equipment and inventory. It also includes things that can’t be
touched but nevertheless exist and have value, such as
trademarks and patents. And cash itself is an asset. So are
investments a company makes.

5. Balance Sheets
Liabilities:
• amounts of money that a company owes to others. This can
include all kinds of obligations, like money borrowed from a
bank to launch a new product, rent for use of a building,
money owed to suppliers for materials, payroll a company
owes to its employees, environmental cleanup costs, or taxes
owed to the government. Liabilities also include obligations to
provide goods or services to customers in the future.
• Liabilities are generally listed based on their due dates.
Liabilities are said to be either current or long-term. Current
liabilities are obligations a company expects to pay off within
the year. Long-term liabilities are obligations due more than
one year away.

6. Balance Sheets
Shareholders’ equity :
• also called capital or net worth; it’s the money that
would be left if a company sold all of its assets and paid off all
of its liabilities. This leftover money belongs to the
shareholders, or the owners, of the company.
• It is the amount owners invested in the company’s stock plus
or minus the company’s earnings or losses since inception.
Sometimes companies distribute earnings, instead of retaining
them. These distributions are called dividends.

7. Balance Sheets
The following formula summarizes what a balance
sheet shows:
ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY
A company's assets
have to equal, or
"balance," the sum
of its liabilities and
shareholders'
equity.

8. Balance Sheets

9. Analyzing the Balance
Sheet
Debt-to-equity ratio - compares a company’s total
debt to shareholders’ equity.
Debt-to-Equity Ratio = Total Liabilities / Shareholders’
Equity
If a company has a debt-to-equity ratio of 2 to 1, it means
that the company has two dollars of debt to every one dollar
shareholders invest in the company. In other words, the
company is taking on debt at twice the rate that its owners
are investing in the company.

10. Analyzing the Balance
Sheet
Working capital
Money leftover if a company paid its current liabilities (that
is, its debts due within one-year of the date of the balance
sheet) from its current assets.
Working Capital = Current Assets – Current Liabilities

11. Income Statement
An income statement is a report that shows how much
revenue a company earned over a specific time period
(usually for a year or some portion of a year).
It also shows the costs and expenses associated with
earning that revenue. The literal “bottom line” of the
statement usually shows the company’s net earnings
or losses. This tells you how much the company
earned or lost over the period.

12. Income Statement
Tools of Analysis:
Net income represents the amount of money remaining after
all operating expenses, interest, taxes and preferred stock
dividends (but not common stock dividends) have been deducted
from a company's total revenue.
Net income is also referred to as the bottom line, net profit or net
earnings. The formula for net income is as follows:
Total Revenue - Total Expenses = Net Income

13. Income Statement
Tools of Analysis:
Operating Profit compares a company’s operating income to net
revenues. Both of these numbers can be found on a company’s
income statement. To calculate operating margin, you divide a
company’s income from operations (before interest and income
tax expenses) by its net revenues:
Operating Profit = Income from Operations / Net
Revenues
Operating Profit or margin is usually expressed as a percentage.
It shows, for each dollar of sales, what percentage was profit.

14. Income Statement
Tools of Analysis:
Earnings Per Share (EPS) are required to be disclosed on the face
of the income statement.
A company which reports any of the irregular items must also
report EPS for these items either in the statement or in the notes.

15. Income Statement
Tools of Analysis:
'Preferred Stock' - A class of ownership in a corporation that has a
higher claim on its assets and earnings than common stock.
Common stock - A security that represents ownership in a
corporation. Holders of common stock exercise control by electing
a board of directors and voting on corporate policy.
Preferred shares generally have a dividend that must be paid out
before dividends to common shareholders, and the shares usually
do not carry voting rights. In the event of liquidation, common
shareholders have rights to a company's assets only after
bondholders, preferred shareholders and other debt holders have
been paid in full.

16. Income Statement
Tools of Analysis:
Profit Margin
Earnings expressed as a percentage of revenue, i.e. the percentage
of sales the company has left over as profit after paying all expenses.
Book Value of Common Stock
A measure used by owners of common shares in a firm to determine
the level of safety associated with each individual share after all
debts are paid accordingly.
Cash dividend
Money paid to stockholders, normally out of the corporation's current
earnings or accumulated profits. Usually, the board of directors
determines if a dividend is desirable for their particular company
based upon various financial and economic factors.