FINANCIAL STATEMENTS : Important Components to be considered

Financial Statements Definition

Financial statements are written reports created by a company’s management to summarize the business’s
financial condition over a certain period (quarter, six-monthly, or yearly). These statements, which comprise the
balance sheet, income statement, cash flow statement, and statement of shareholders’ equity, must be prepared by
specified and standardized accounting standards to ensure that reporting is consistent.

Key Notes:
 Financial Statements provide a representation of a company’s financial performance over time.
 The balance sheet provides the details of the company’s sources and uses of funds.
 An income statement provides an understanding of the revenues and expense.
 Cash flows, on the other hand, tracks the movement of cash in the business.
 Statement of Changes in Shareholders’ equity summarizes shareholders’ accounts for a given period.

Income Statement :

The income statement presents revenue, expenses, and net income. The components of the income statement
include: revenue; cost of sales; sales, general, and administrative expenses; other operating expenses; non-
operating income and expenses; gains and losses; non-recurring items; net income; and EPS.

The income statement is one of three statements used in both corporate finance (including financial modeling) and
accounting. The statement displays the company’s revenue, costs, gross profit, selling and administrative expenses,
other expenses and income, taxes paid, and net profit in a coherent and logical manner.

Components of an Income Statement

The information disclosed in an income statement covers a given period and the performance of a company is
revealed in the Revenue, expenses, and profit before tax. The earnings per share can also be a pointer to the
profitability of a company for a period under review.
The Income Statement displays information under the operating and non-operating segments. Income and
expenditure that arose from the regular operations of a company come under the operating segment.
Other income and expenditure that arose from operations that are not regular are shown under the non-operating
segment
A business that deals in fashion merchandise will have regular income from Revenue of fashion accessories. If the
business decides to sell off some of its office buildings, then the profit on the Revenue proceeds will be listed under
the non-operating segment of the income statement.
In brief, The Income statement has the following components:

 Revenues,
 Costs of Goods Sold,

 Gross Profit,

 Operating Expenses,

 Operating Income,

 Other Income/Expenses,

 Profits.

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Balance Sheet

What Is a Balance Sheet?

The term balance sheet refers to a financial statement that reports a company's assets, liabilities, and shareholder
equity at a specific point in time. Balance sheets provide the basis for computing rates of return for investors and
evaluating a company's capital structure.

In short, the balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as
well as the amount invested by shareholders. Balance sheets can be used with other important financial statements
to conduct fundamental analysis or calculate financial ratios.

KEY TAKEAWAYS
 A balance sheet is a financial statement that reports a company's assets, liabilities, and shareholder equity.
 The balance sheet is one of the three core financial statements that are used to evaluate a business.

 It provides a snapshot of a company's finances (what it owns and owes) as of the date of publication.

 The balance sheet adheres to an equation that equates assets with the sum of liabilities and shareholder
equity.

 Fundamental analysts use balance sheets to calculate financial ratios.

Components of a Balance Sheet

Assets
Accounts within this segment are listed from top to bottom in order of their liquidity. This is the ease with which
they can be converted into cash. They are divided into current assets, which can be converted to cash in one year or
less; and non-current or long-term assets, which cannot.

Here is the general order of accounts within current assets:

 Cash and cash equivalents are the most liquid assets and can include Treasury bills and short-term
certificates of deposit, as well as hard currency.
 Marketable securities are equity and debt securities for which there is a liquid market.

 Accounts receivable (AR) refer to money that customers owe the company. This may include an allowance
for doubtful accounts as some customers may not pay what they owe.

 Inventory refers to any goods available for sale, valued at the lower of the cost or market price.

 Prepaid expenses represent the value that has already been paid for, such as insurance, advertising
contracts, or rent.

Long-term assets include the following:

 Long-term investments are securities that will not or cannot be liquidated in the next year.
 Fixed assets include land, machinery, equipment, buildings, and other durable, generally capital-intensive
assets.

 Intangible assets include non-physical (but still valuable) assets such as intellectual property and goodwill.
These assets are generally only listed on the balance sheet if they are acquired, rather than developed in-
house. Their value may thus be wildly understated (by not including a globally recognized logo, for
example) or just as wildly overstated.
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Liabilities
A liability is any money that a company owes to outside parties, from bills it has to pay to suppliers to interest
on bonds issued to creditors to rent, utilities and salaries. Current liabilities are due within one year and are listed in
order of their due date. Long-term liabilities, on the other hand, are due at any point after one year.

Current liabilities accounts might include:

 Current portion of long-term debt is the portion of a long-term debt due within the next 12 months. For
example, if a company has a 10 years left on a loan to pay for its warehouse, 1 year is a current liability and
9 years is a long-term liability.
 Interest payable is accumulated interest owed, often due as part of a past-due obligation such as late
remittance on property taxes.

 Wages payable is salaries, wages, and benefits to employees, often for the most recent pay period.

 Customer prepayments is money received by a customer before the service has been provided or product
delivered. The company has an obligation to (a) provide that good or service or (b) return the customer's
money.

 Dividends payable is dividends that have been authorized for payment but have not yet been issued.

 Earned and unearned premiums is similar to prepayments in that a company has received money upfront,
has not yet executed on their portion of an agreement, and must return unearned cash if they fail to execute.

 Accounts payable is often the most common current liability. Accounts payable is debt obligations on
invoices processed as part of the operation of a business that are often due within 30 days of receipt.

Long-term liabilities can include:

 Long-term debt includes any interest and principal on bonds issued
 Pension fund liability refers to the money a company is required to pay into its employees' retirement
accounts

 Deferred tax liability is the amount of taxes that accrued but will not be paid for another year. Besides
timing, this figure reconciles differences between requirements for financial reporting and the way tax is
assessed, such as depreciation calculations.

Some liabilities are considered off the balance sheet, meaning they do not appear on the balance sheet.

Shareholder Equity
Shareholder Equity is the money attributable to the owners of a business or its shareholders. It is also known as net
assets since it is equivalent to the total assets of a company minus its liabilities or the debt it owes to non-
shareholders.

Retained Earnings are the net earnings a company either reinvests in the business or uses to pay off debt. The
remaining amount is distributed to shareholders in the form of dividends.

Treasury stock is the stock a company has repurchased. It can be sold at a later date to raise cash or reserved to
repel a hostile takeover.

Some companies issue preferred stock, which will be listed separately from common stock under this section.
Preferred stock is assigned an arbitrary par value (as is common stock, in some cases) that has no bearing on the
market value of the shares. The common stock and preferred stock accounts are calculated by multiplying the par
value by the number of shares issued.

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Additional paid-in capital or capital surplus represents the amount shareholders have invested in excess of the
common or preferred stock accounts, which are based on par value rather than market price. Shareholder equity is
not directly related to a company's market capitalization. The latter is based on the current price of a stock, while
paid-in capital is the sum of the equity that has been purchased at any price.

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