2. 1. Needs of financial statements
2. Financial statements
1. Income Statement
2. Balance Sheet
3. Statement of Cash Flows
Objectives :Objectives :
3. Needs of Financial StatementsNeeds of Financial Statements
• Company Act 1965 required companies to expose their
annual report to Company Registrar.
• Among the content of the report is financial statement,
covers; income statement, balance sheet, cash flow
statement, and explanation notes about those accounts.
• Financial statements can be classified into 2 types:
• External users
• Internal users
4. Income StatementIncome Statement
Also known as profit and loss account.
Shows the performance / achievement for
a firm in certain period (annually, semi
annually, monthly etc)
The answer for “how profitable is the
business?”
6. 5 activities related to business:
Sales
Cost of good sold
Operating expenses
Financing cost
Tax expenses
7. 1. Sales – Income from sales of products or services
2. Cost of good sold – Cost of produce the product /
services
3. Operation expenses – expenses related to marketing
and distributing the products or services, and also
administration cost
4. Financing cost – Interest paid to debtors and dividend
paid to preferred stock holders (excluding dividend paid
to common stock holders)
5. Tax expenses – Amount of tax depends on company’s
taxable income.
8. SALES
- Cost of Goods Sold
GROSS PROFIT
- Operating Expenses
OPERATING INCOME (EBIT)
- Interest Expense
EARNINGS BEFORE TAXES (EBT)
- Income Taxes
EARNINGS AFTER TAXES (EAT)
- Preferred Stock Dividends
- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
IncomeIncome
StatementStatement
Financing
Activities
Operating Activities
9. Three additional important issues:Three additional important issues:
Operating income is NOT affected by
how the firm is financed.
Interest expense is subtracted from
income before computing the firm’s tax
liability. i.e Interest is not taxable
expenses
Firm that has a +ve net income does
NOT necessarily mean it has any cash.
10. Balance SheetBalance Sheet
Balance sheet is a statement that shows the financial
position for a company at certain time.
Give information about assets, liabilities and
equities of a company.
Asset – Productive sources that give return to the
company.
Liability – Creditor claim
Equity – Owner claim.
Total Asset = Total Liability + Total Equity
11. Balance SheetBalance Sheet
Assets Liabilities (Debt) &
Equity
Current Assets
Cash
Marketable Securities
Accounts Receivable
Inventories
Prepaid Expenses
Fixed Assets
Machinery & Equipment
Buildings and Land
Other Assets
Investments & patents
Current Liabilities
Accounts Payable
Accrued Expenses
Short-term notes
Long-Term Liabilities
Long-term notes
Mortgages
Equity
Preferred Stock
Common Stock (Par value)
Paid in Capital
Retained Earnings
12. Balance SheetBalance Sheet
Types of assets :
Current asset
Fixed asset
Other asset
Types of financing :
Liability (Debt)
Long-term liability
Owners’ equity
13. Current AssetsCurrent Assets
It includes the assets with high liquidity (can be
converted within 1 year.)
Among the current assets are:
• Cash
• Marketable securities
• Account receivable
• Inventory
• prepaid expenses
14. Cash – currency or coins owned by company either in
bank account or hand.
Marketable security – investment on short term
financial assets with high liquidity. Example: T-bill,
bankers acceptance, etc.
Account receivable – the cash payment agreement
by customers whose bough by credit.
Inventory – raw materials, working in process and
final products that will be sold.
Prepaid expenses – it is reported in profit and loss
account and deducted as expenses income statements
after has been used. Example: rent expenses and
insurance.
15. Fixed AssetsFixed Assets
Cannot be converted into cash in short
period..
Including plant and machinery, building and
land.
Some businesses have more fixed assets than
the other. Example: factory
16. Other AssetsOther Assets
Besides current and fixed assets. Example the assets
that can’t be touched or saw physically such as
pattern, right and goodwill.
Information exposed is different because it reported
based on cost in the time transaction occur. The value
appeared known as ‘accounting book value’ of the
company.
Accounting book value – Value of assets as shown in
balance sheet of a firm. It represents historical cost
compare to present value of the asset.
17. Debt CapitalDebt Capital
Liability is money borrowed and must be pay
back at fixed date. It includes credit give by
suppliers and bank loans.
Current debt/short-term liabilities-liability that must
be paid within 12 months.
Sources of short term liability:
Account payable
Other payable
Accrued expenses
Short-term notes
18. Long-term DebtLong-term Debt
Covers loan from bank or other sources
that provide capital for liability term more
than 1 year.
Example; loan from bank where the period
of payment is 5 years or loan of buying
machinery, building, equipment or land for
period 25 to 30 years.
19. EquityEquity
Equity investment by shareholders in the company and the
profit which is not distributed to them will be pooled in
company.
Preferred stockholders
Received dividend in fixed amount.
Priority after creditor pay the liability.
Common stockholders
Receive whatever left over-good or bad.
The firm common stock value as reported in balance sheet
includes sales value of the stocks and the firm’s retain earning.
Retain earning-earning assembled and retained and will be
reinvest in the firm.
20. Net working capitalNet working capital
Differentiate between current assets and current
liabilities.
Working Capital = Current assets – Current
liabilities
It is important for lenders because it give a picture of
company’s liability to determine the ability to pay back.
Liquidity means how fast & how easy an asset can be
converted into cash without losing its value.
More current assets than current liabilities in a company
means higher liquidity.
21. EquityEquity
Equity shows the company’s financing structure
, it means how many percent of the assets
finance by debt and how many contribute by
owners.
Relationship between debt and equity is
important to the debtors and investors in
certain situation. We will discuss about it in
others topic later.