3 MAJOR FINANCIAL STATEMENTS

 Balance Sheet
The balance sheet is one of the three fundamental financial statements and is key to
both financial modeling and accounting. The balance sheet displays the company’s total
assets, and how these assets are financed, through either debt or equity. It can also be
referred to as a statement of net worth, or a statement of financial position. The balance
sheet is based on the fundamental equation: Assets = Liabilities + Equity.

 Income Statement
The Income Statement is one of a company’s core financial statements that shows
their profit and loss over a period of time.  The profit or loss is determined by taking all
revenues and subtracting all expenses from both operating and non-operating activities.

 Cash Flow Statement

The Statement of Cash Flows (also referred to as the cash flow statement) is a

financial statement that reports the cash generated and spent during a specific
period of time (i.e., a month, quarter, or year). The statement of cash flows acts as a
bridge between the income statement and balance sheet by showing how money
moved in and out of the business.

Three Sections of the Statement of Cash Flows:

1. Operating Activities: The principal revenue-generating activities of an organization and

other activities that are not investing or financing; any cash flows from current assets
and current liabilities
2. Investing Activities: Any cash flows from the acquisition and disposal of long-term
assets and other investments not included in cash equivalents
3. Financing Activities: Any cash flows that result in changes in the size and composition
of the contributed equity capital or borrowings of the entity (i.e., bonds, stock, dividends)

Cash Flow Definitions

Cash Flow: Inflows and outflows of cash and cash equivalents.

Cash Balance: Cash on hand and demand deposits (cash balance on the balance

sheet)

Cash Equivalents: Cash equivalents include cash held as bank deposits, short-term

investments, and any very easily cash-convertible assets – includes overdrafts and
cash equivalents with short-term maturities (less than three months)

 
Cash Flow Classifications

1. Operating Cash Flow

Operating activities are the principal revenue-producing activities of the entity. Cash
Flow from Operations typically include the cash flows associated with sales, purchases,
and other expenses.

2 types of methods used in Operating Cash Flow:

 Direct Presentation: Operating cash flows are presented as a list of cash flows; cash in
from sales, cash out for capital expenditures, etc. Simple but rarely used method, as the
indirect presentation is more common.
 Indirect Presentation: Operating cash flows are presented as a reconciliation from
profit to cash flow:

Profit P

Depreciation D

Amortization A

Impairment expense I

Change in working capital ΔWC

Change in provisions ΔP

Interest Tax (I)

Tax (T)

Operating cash flow OCF

The items in the cash flow statement are not all actual cash flows, but “reasons why
cash flow is different from profit.”

Depreciation expense reduces profit but does not impact cash flow (it is a non-cash
expense). Hence, it is added back. Similarly, if the starting point profit is above interest
and tax in the income statement, then interest and tax cash flows will need to be
deducted if they are to be treated as operating cash flows.

There is no specific guidance on which the profit amount should be used in the
reconciliation. Different companies use operating profit, profit before tax, profit after tax,
or net income.  Clearly, the exact starting point for the reconciliation will determine the
exact adjustments made to get down to an operating cash flow number.
 

2. Investing Cash Flow

Cash Flow from Investing Activities includes the acquisition and disposal of non-current
assets and other investments not included in cash equivalents. Investing cash flows
typically include the cash flows associated with buying or selling property, plant, and
equipment (PP&E), other non-current assets, and other financial assets.

Cash spent on purchasing PP&E is called capital expenditures (or CapEx for short).

3. Financing Cash Flow

Cash Flow from Financing Activities are activities that result in changes in the size and
composition of the equity capital or borrowings of the entity. Financing cash flows
typically include cash flows associated with borrowing and repaying bank loans, and
issuing and buying back shares. The payment of a dividend is also treated as a
financing cash flow.