This document provides an overview of key financial statements - the balance sheet and income statement - and how to analyze them. It discusses the components of the balance sheet, including assets, liabilities, and equity. It also explains how to distinguish between current and long-term accounts. For the income statement, it outlines revenue, expenses, and the difference between accrual and cash accounting. Finally, it introduces several common financial ratios used to evaluate a company's performance and financial health.

1. Reading and
Understanding
Financial Statements
Presented by:
Cheryl Heusser, CPA

2. The Basic Internal Financial
Statements
1) Balance Sheet
2) Income Statement

3. Balance Sheet
 Assets
 The means used to operate the business
 Create future cash flows
 Liabilities
 The Company’s financial obligations that is a source of
support for the assets
 Require future cash flows
 Equity
 Another source of support for the assets
 Assets minus Liabilities
Assets = Liabilities + Equity

4. Balance Sheet – In Depth
 Assets
 Examples
 Cash
 Accounts receivable
 Investments
 Inventory
 Prepaid expenses
 Equipment
 Patents/trademarks/copyrights
 Notes receivable

5. Balance Sheet – In Depth
 Assets
 Current vs. Noncurrent
 Current– Company expects to convert to cash
within one year
 Noncurrent – Company does not expect to convert
to cash within one year

6. Balance Sheet – In Depth
 Liabilities
 Examples
 Accounts payable
 Accrued expense
 Deferred revenue
 Lines of credit
 Notes payable

7. Balance Sheet – In Depth
 Liabilities
 Current vs. Long-term
 Current – Company expects to pay off within the
year
 Long-term – Company obligations with maturity
dates greater than one year

8. Balance Sheet – In Depth
 Equity
 Sometimes called “Shareholders’ Equity” or “Net
Book Value”
 Calculated as follows:
The amount owners invested +/-
The Company’s earnings or losses since
inception +
Any additional contributions from owners –
Any distributions or withdrawals made by owners
 If the above calculation is negative, then the
Company will have a deficiency instead of equity

9. Balance Sheet – In Depth
 Time Frame
 Balance sheets represent a snapshot of a
company’s standing
 A balance sheet as of 12/31/2009 represents the
company’s assets, liabilities and equity on that date

10. Income Statement
 Shows revenue and expenses that occurred over a
specific time period
 Presents income over a period of time rather than as
of a certain date

11. Income Statement
 Revenues
 Gross income generated through operations
 Cost of Sales
 Costs directly related to generating revenues
 General and Administrative Expenses
 Operating expenses related to running the
business
 Other Income and Expenses
 Interest and other non-operating revenues and
expenses

12. Accrual Versus Cash
 Accrual basis
 Revenues and expenses are recognized in the
period they relate to
 Matches revenues and expenses
 Cash basis
 Revenues are recognized when cash is received
 Expenses are recognized when payments are
made
 Modified cash basis
 Hybrid– will often capitalize certain expenses (i.e.
- equipment)

13. Analyzing Financial Statements
 Financial Statement Ratios
 Ratioscan be used to evaluate the health of an
individual company or to compare different
companies
 Whichratio to use is best determined a case by
case basis

14. Common Financial Statement
Ratios
 Working Capital =
Current Assets - Current Liabilities
 Current Ratio =
Current Assets / Current Liabilities
 Measures the Company’s efficiency and its short-
term financial health

15. Common Financial Statement
Ratios
 Debt-to-Equity Ratio =
Total Liabilities
Shareholders’ Equity
 Measures a company’s financial leverage
 The higher the ratio, the more aggressive the
Company is in financing its growth with debt

16. Common Financial Statement
Ratios
 Days sales =
Average trade receivables (net)
* 365
Total sales
 Measures the average number of days to
collect on accounts receivable

17. Common Financial Statement
Ratios
 Rate of return on assets =
Net income
Average total assets
 Measures overall profitability of the Company
relative to its total assets

18. Common Financial Statement
Ratios
 Debt service coverage ratio =
Annual net operating income
Annual debt service payments (principal and
interest)
 Measures the amount of cash available to meet
annual interest and principal payments on debt
(debt service).

19. Analyzing Financial Statements
 EBITDA
 EarningsBefore Interest, Taxes, Depreciation and
Amortization

20. Valuation Concepts
 Income approach
 Market approach
 Asset based approach

21. Income Approach Methods
 Discounted net cash flow
 Discounted future earnings
 Capitalization of net cash flow
 Capitalization of earnings

22. Market Approach Methods
 Price/earnings
 Price/dividends
 Price/gross cash flow
 Price/revenues

23. Asset Approach Methods
 Net Asset Value
 Adjusted Net Asset Value
 Liquidation Value
 Excess Earnings

24. Thank you for your
participation!