Power point presentation

1. Understanding
Financial Statements
By:
Megha Gupta
II Year, B.Sc. Mathematics
(H)
St. Stephen’s College, DU

2. Overview
Management of any business requires a flow of
information to make informed, intelligent decisions
affecting the success or failure of its operations.
Investors need statements to analyze investment
potential. Banks require financial statements to
decide whether or not to loan money, and many
companies need statements to ascertain the risk
involved in doing business with their customers and
suppliers.

3. Financial statements
Collection of reports about an organization's financial
results, condition, and cash flows.
• To determine the ability of a business to generate cash, and the sources and
uses of that cash.
• To determine whether a business has the capability to pay back its debts.
• To track financial results on a trend line to spot any looming profitability issues.
• To derive financial ratios from the statements that can indicate the condition of
the business.
• To investigate the details of certain business transactions, as outlined in the
disclosures that accompany the statements.

4. Shows the
entity's assets,
liabilities, and
stockholders' eq
uity as of the
report date.
Shows the
results of the
entity's
operations and
financial
activities for the
reporting
period.
Shows changes
in the entity's
cash flows
during the
reporting
period.
Balance sheet
Income
statement
Statement of
cash flows
Standard Contents

5. Balance sheet
• To inform a reader of the ending balances in a company's asset, liability,
and equity accounts as of the date stated on the report.
• It is the basis for ratio analysis, to determine the liquidity of a business.
Total
liabilities
Equity
Total
assets
Basic Formula

6. Current Assets: Non-Current Assets:
Cash and cash equivalents Property, plant and equipment
Accounts receivable Intangible assets
Investments Goodwill
Inventories
Prepaid Expenses
Equity:
Capital stock
Additional paid-in capital
Retained earnings
Current Liabilities: Non-Current Liabilities:
Trade and other payables Loans payable
Accrued expenses Deferred tax liabilities
Current tax liabilities Other non-current liabilities
Current portion of loans payable
Unearned revenue

7. This includes all liquid, short-term investments that are easily
convertible into cash. Do not include in current assets cash that is
restricted, or to be used to pay down a long-term liability
Cash and cash
equivalents
Accounts
Receivable
This includes all trade receivables, as well as all other types of
receivables that should be collected within one year.
Investments This includes payment made to acquire the securities of other
entities, with the objective of earning a return.
Inventories This includes all raw materials, work in process, and finished goods
items, less an obsolescence reserve.
Prepaid
Expenses
This includes any prepayment that is expected to be used within
one year.

8. Trade and other
payables
This is all payables related to the purchase of goods or
services from suppliers.
Accrued
expenses.
This is expenses incurred by the business, for which no
supplier invoice has yet been received.
Tax liabilities This contains the current balance of taxes owed to
government entities.
Loans payable This are loans for which payment is due within the next year
Unearned
revenue
This is advance payments from customers that have not yet
been earned by the company

9. Example of Balance sheet

10. Income statement
• Also known as statement of profit and loss.
• Presents the results of a business for a stated period of time.
• Begins with revenues, from which expenses are subtracted to arrive at a
profit or loss.
Revenue
Expenses
Operating Income
Profit or loss
General Classification

11. Revenue Contains revenue from the sale of products and services.
Compensation
expense.
Contains the costs of salaries and wages incurred during the
reporting period for all employees. This includes bonuses,
commissions, and severance pay.
Depreciation
and
amortization
expense.
Contains the periodic depreciation and amortization charges
associated with tangible and intangible fixed assets.
Tax Expenses
Contains property taxes, use taxes, and other taxes charged by local
governments.
Income taxes
If the entity is subject to income taxes, the amount is recorded in
this account.

12. Example of Income Statement

13. Cash Flow Statement
• Describes the cash flows into and out of the business.
• Its particular focus is on the types of activities that create and use cash.
General classification
Operating activities
Investing activities
Financing activities

14. Operating activities
These constitute the revenue-generating activities of a
business. Examples of operating activities are cash
received and disbursed for product sales, royalties,
commissions, fines, lawsuits, supplier and lender
invoices, and payroll.
Investing activities
These constitute payments made to acquire long-term
assets, as well as cash received from their sale.
Examples of investing activities are the purchase of
fixed assets and the purchase or sale of securities
issued by other entities.
Financing activities
These constitute activities that will alter the equity or
borrowings of a business. Examples are the sale of
company shares, the repurchase of shares, and
dividend payments.

15. Example of cash flow statement

16. With the help of financial statements ,
therefore now we can answer the three
basic questions i.e.
How much profit was generated by the
business over a particular period?
What are the assets and liabilities of the
business at the end of a particular period?
What were the sources and uses of cash
over a particular period?
Conclusion

17. -Thank you!