What Is a Financial Statement?

A financial statement shows you where a company’s money

Financial Accounting came from, where it went, and where it is now.

Introduction to the Financial Statements

Balance sheet Income statement Cash flow statement

Introduction to the Financial Statements Who Uses Financial Data?

Three financial statements form the basis of the financial accounts: Who uses the data? Why?
1. Income statement or profit and loss statement Investors Is it a good investment?
Suppliers Is the client able to pay us?
2. Balance sheet or statement of financial position
Management How are we doing and could we do better?
3. Cash flow statement Customers How are they doing? Recent Environmental, Social and Governance focus
Employees How are we doing? How secure is my job?
Government Are they solvent and are they acting legally?
NB: There are interchangeable names for the first two statements
Social/environmental What is their impact and can they afford to do better?
and you can use either in your assessment. interests

They can be called “stakeholders” because they have a “stake” or interest in the data
You may be able to think of others
 Why Use Financial Data? Overview of the Financial Statements
Stakeholders can use the financial statements to The balance sheet, income
statement, and cash flow
analyse the performance and position of the firm statement each offer unique
perspectives on
and determine whether any corrective action is performance, with
information that is
required. interconnected

Financial statements provide a brief summary of

financial position (aggregated data) which can be The statements can
be used to calculate
Together the three
statements give a
used to calculate ratios and other data to support ratios for comparison
with historical results
comprehensive
financial overview of
decision-making. or with competitor
performance
the company’s
operating activities

The Income Statement

Introduction to the Financial Statements

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 Income Statement/
Income/Profit and Loss Statement Profit and Loss Statement (P&L)
Simple income statement

Business owners will want to know if the business is making money

Money Money
To determine whether the business is making a profit or running at
in out
a loss, an income statement (also known as a profit and loss
statement) is used
More money in Less money in
than out – profit than out – loss or
or surplus deficit
The income statement records money going into the business and
money going out of the business

How the Income Statement

Income Statement Money in
Functions
Example
Shows the performance of your business over a
period of time – usually one year
Amazon Inc Resets at the beginning of each new accounting
Money out
income statement period
for period ending
December 2020 Summarises all revenue and expenses

Calculates the net profit or loss, or “bottom line”

= Income – Expenses

* In Millions of USD (except for per share items)

 What Can a Manager Do With the Income Statement? Income Statement Summary
Reviewing your income statement will tell you:
Managers can use data to understand how profitable the
organisation is.
• Benchmarking to other divisions, competitors, etc
• Comparison with historical performance levels
What’s your profit
Are you profitable? margin?
What can managers do to increase profitability?
• Cutting expenses is a short-term strategy, which is unlikely to be possible
year on year: it may be detrimental to long-term aims, for example, if
maintenance of equipment is reduced
Are the improvement
• Increasing revenues by improving sales volumes or improving the brand to
actions you decided to Is there a need for
enable larger profit margins provides a better long-term strategy than additional action to
cutting expenses take evident in the
• The two can be combined, for example, increasing spend on marketing, but financial results? improve profits?
keeping general costs under control

Balance Sheet or Statement of Financial

Position (SOFP)
Liabilities
Equity
Assets

Income Statement

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The balance sheet should … balance!

 Link Between Balance Sheet
SOFP/Balance Sheet
• Shows a snapshot of your business at a point in time
and Income Statement
• Profit or loss is taken from the bottom line of the income statement and
• Shows how much the owners have invested in the business, and the value of total assets recorded on the balance sheet in the retained earnings equity account.
minus the liabilities of the business
Retained earnings accumulate over the life of the business.
• Shows the net worth of your business • When a business operates at a profit, it increases in equity (is worth more).
• The balance sheet always balances • When a business operates at a loss, it decreases in equity (is worth less).

Equity or
Assets Liabilities net worth

Open this example of a statement of financial position from the holiday provider TUI to see what the
balance sheet includes
http://annualreport2019.tuigroup.com/financial-position

Components of the Balance Sheet Components of the Balance Sheet

Assets Liabilities
TUI annual report 2020 TUI Annual Report 2020
Assets: These are the resources used to run a
business. These may be tangible assets such as
Liabilities: These are the
machinery, inventory, and cash. Assets can amounts the business owes to
be intangible, such as internet domain names and
brand value (if it can be fairly valued). people or organisations.
• Current liabilities: These are short
Current assets: Available short term, these are in term in nature, and expected to be paid
cash form or expected to be sold within the next back within the next financial year.
financial year, including inventory, bank, petty
cash, and debtors (or accounts receivable). Examples include bank overdrafts, and
creditors (which are also referred to as
accounts payable).
Non-current assets: These are long-term • Non-current liabilities: These are long-
investments to generate wealth, which are not
expected to be sold within the next year, such as term liabilities, not expected to be paid
buildings and machinery. The assets cannot be back within the next year. Examples
turned into cash quickly, and so are non-current. include long-term loans and mortgages.
 Components of the Balance Sheet
Is It an Asset, or an Expense?
Owner’s Equity
• An asset retains its value over a period of time, and may already be in the
Owner’s equity (or shareholders’ equity in the case of a form of cash, or can be sold for cash.
publicly-held company) refers to the amount of money that • Expenses refer to resources that are consumed in the running of the
the owners or shareholders have invested in the business. business.
• Organisations can make a choice about renting or buying, for example, the
• It includes undrawn profits or retained earnings that managers may use
vehicles they use.
to invest in the business.
If owned – initial cash If rented – expenses
outflow is held in asset; incurred until lease is
can sell at end of useful ended; cash not
life; the asset will
converted to asset at
depreciate over time,
but there is no ongoing
outset; no option to
expense sell

Petrol would be an expense in either case.

Both Sides Need to Balance

Balance Sheet

Liabilities and Assets

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shareholders’
funds
 Components of a Cash Flow
Statement

The Cash Flow Statement Cash flows from operating

activities: transactions that form part of the
Cash flows from investing
activities: transactions involving the
day-to-day running of the business; for acquisition and disposal of non-current
example, cash receipts from customers and assets and investments; for example,
cash paid to suppliers, employees, for rent, buying or selling a vehicle, or investing in
etc another business

Cash flows from financing

activities: transactions involving long-term
borrowing and the owners of the business;
for example, issuing shares, getting a loan
from the bank, or the repayment of loans

How Businesses and Managers Use the

Why Is the Cash Flow Statement Important to a Manager?
Cash Flow Statement

Businesses want to
A manager who focuses on profit growth and neglects cash could experience going avoid a “cash flow crisis”
concern issues if the business is unable to pay their debts as they fall due. where the business does
not have enough cash
available to meet its
During the pandemic there were concerns that companies would not have enough current obligations.
cash to pay their suppliers and employees and meet their obligations.

Governments globally looked for ways to help companies bolster their cash to be able
to meet their salary bills, for example, as they would have run out of cash otherwise.
Managers should be Having too much
able to analyse the cash could signal
Managers need to balance investment for future growth with ensuring availability of data and change that the business
their behaviour, if should increase its
cash to pay commitments when they are due. necessary. investments.
 Cash Flow Statement Example Cash Flows Example: Earnings and Expenses
Amazon Inc cash flow Operating activities – inflows of cash Operating activities – outflows of cash

statement
12 Months: Year Ending December 2020
Interest revenue or Wages and Suppliers for Advance
Sales of goods and Receipt of customer dividends or rent Interest Tax
services to customers advances revenue or similar salary purchases of payments payments payments to
payments inventories suppliers
revenue items

Investing activities – inflows of cash Investing activities – outflows of cash

From sale of PPE and From collection of To purchase PPE and To make loans and to
other long-term assets loans other long-term assets collect such loans

Financing activities – inflows of cash Financing activities – outflows of cash

From sale of common or From issuance of short-

preferred stock or long-term debt To repay debt To pay dividends

* In Millions of USD (except for per share items)

Cash flows

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