1. FINANCIAL STATEMENTSFINANCIAL STATEMENTS
AND ANALYSISAND ANALYSIS

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?”

5. Income StatementIncome Statement
SALES
- EXPENSES
= PROFIT
•Cost of Goods Sold
•Operating Expenses
• Financing Costs
•Taxes
Revenue

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.