PART 3: UNDERSTANDING FINANCIAL

STATEMENTS AND REPORTS

FDNBUSF (Week 7)
BS Marketing Mgmnt | Block 45 | PROF. Marvin Jason | SEM 1 2022

Accounting and Reporting Standards

BASIC FINANCIAL STATEMENTS
● Financial Statements
○ written records that convey
the business activities and
the financial performance of
a company
○ audited by government
agencies, accountants,
firms etc
■ Balance Sheet / Statement of
Financial Position
■ Income Statement
Statement of Profit and Loss
■ Cash Flow Statement
Using Financial Statement
Information
● investors and financial analysts
rely on financial data to
analyze the performance of a
company and make predictions
about its future direction of the
company's stock price
Why is accounting important?
● You:
○ How do I manage my P&L or
cost center?
○ How can I secure more
resources for my store,
initiative or project
● Management:
○ How do I meet my business
targets? (Sales, PBIT)
○ How do I set targets and
measure performance?
● Investors:
○ How do I
● US GAAP and IFRS are
converging
● GAAP - Generally Accepted
Accounting Principles
● IFRS - International
●
Basic Accounting Principles &
Concepts
/ ● Business Entity
○ business is considered a
separate entity from its
owners and should be
treated separately
● Monetary Entity
○ all transactions should be
recorded and reported in
monetary units
● Historical Cost
○ Transactions are recorded
at historical cost
● Going Concern
○ An entity is going to
operate indefinitely.
● Accounting Period
○ Accounting process
completed over a specific
operating time period
(month, quarter, year)
● Matching
○ Expenses are matched in
the same period the
revenue is earned.
● Consistency
○ Accounting procedures
must be consistent from
one period to the next to
allow fair comparison
● Accruals
 ○ revenues are recorded
regardless of the time the
cash is received
○ expenses are recorded in the
period they are incurred,
regardless of the time of
payment
● is one of a company’s core
financial statements that shows
their profit and loss over a
period of time
● results of business activities
over a given period

Working Capital / Current Ratio

● measures the company’s
efficiency and short-term
financial health
● (Current Assets - Current
Liabilities)

Revenues
● Working Capital Ratio ● the diversified scope of the
indicates whether a company business and the associated
has enough short term assets operating activities
to cover its short term debt. Expenses
● Higher working capital is ● cost for a business to continue
positive operation and turn a profit is
known as an expense
1.2 - 2.0 is deemed sufficient
above 2.0 indicates the company is
not investing excess assets
● In retail industry, it is desirable
to have a ratio below 1.0
indicating a negative net
working capital (short-term
liabilities > short-term assets) –
i.e. stocks are financed by
suppliers

Income Statement / Statement of

Profit and Loss

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Cost of Goods Sold or Cost of Sales ● offer a snapshot of what your
business owns and what it
Sales = number of units x selling price owes as well as the amount
invested by its owners,
COGS reported on a single day
Beg Inventory ● tells you a business’s worth at
+ Purchases a given time, so you can better
understand its financial
Total Goods Available for Sale (TGAS) position.
- Ending Inventory ● Assets are arranged in order
of liquidity
COGS

1. MDV Merchandise is selling

siomai at 5.00 per piece. The
cost for each siomai is 2.00 per
piece. At the start of the
business there was 0 inventory
so the owner purchases 3,000
pcs of siomai for starting
inventory. At the end of the
month, the owner counted the
remaining inventory of siomai Assets
and resulted to 500 pcs of ● what your business owns of
siomai left. value that can be converted
into cash.
SALES: 12,500 (2,500 x 5) ● Current Assets:
Cost of Sales: 5,000 (2,500 x 2) ○ Cash
GROSS PROFIT: 7,500 ○ Accounts Receivable
○ Prepaid Expenses
COGS ○ Inventory
Beg Inventory 0 ○ Due from Affiliates
+ Purchases 6,000 ● Non-Current Assets:
○ Long-term
TGAS 6,000 ○ Equipment
- Ending Inventory 1,000 ○ Leasehold
Improvements
COGS 5,000 ○ Buildings
○ Vehicles
Balance Sheet / Statement of ○ Long-Term Notes
Financial Position Receivable

● includes assets, liabilities,

and shareholders equity

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TYPE OF SECURITIES
Liabilities
● Current Liabilities
○ Accounts Payable
○ Accrued Expenses
○ Unearned Revenue
○ Lines of Credit
○ Current Portion of
Long-term debt
● Non-Current Liabilities
○ Long term liabilities
○ Mortgage Payable
○ Notes Payable
○ Loans Payable
Equity
● Changes depending on the
type of entity
● Corporations list common
stock, preferred stock, retained
earnings, treasury stock
● Partnerships list members’
capital and sole proprietorship
list owner’s capital
Security
● is a negotiable instrument that
represents a financial claim
● can take the form of ownership
(stocks) or a debt agreement
● securities market allows
businesses and individual
investors to trade the securities
issued by public corporations
● Common Stock
○ represents equity ownership
in a corporation, provides
voting rights, and entitles the
holder to profits in the form
of dividends.
● Preferred Stock
○ equity security. It gives
preference, relative to
common stockholders, with
regard to dividends and
claims on assets.
Stockholder’s Equity
● Par value of common stock +
Paid in Capital + Retained
Earnings.
● Shareholders' equity = Total
Assets – Total Liabilities
Cash Flow Statement
● used by firms to explain
changes in their cash balances
over a period of time by
identifying all of the sources
and uses of cash for the period
spanned by the statement.
● only includes inflows and
outflows of cash
● Type of Financial Activities:
Operating, Investing,
Financing
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 ● Source of Cash
INCREASE DECREASE
○ any activity that brings
cash into the firm. For Cur Cash Outflow Cash Inflow
example, sale of Asset Ex.Purchased Ex.Collected Acc
equipment. supplies Receivable (A/R)
● Use of Cash
Cur Cash Inflow Cash Outflow
○ any activity that causes Liab Ex.Bought Ex.Payment of
cash to leave the firm. For supplies on credit Accounts Payable
example, payment of
taxes Fixed Cash Outflow Cash Inflow
Assets Ex.Bought Ex.Disposed
Machine Equipment
Direct Method
Long Cash Inflow Cash Outflow
Term Ex.Borrowed Ex.Pay Loan
Debt Capital

Equity Cash Inflow Cash Outflow

Ex.Raised Capital Ex.Withdrawal from
equity

● PBIT (or EBIT) is the

company’s profit including both
cash and non-cash items like
depreciation.
● EBITDA is the company’s cash
profit.
● EBITDA stands for Earnings
Indirect Method Before Interests, Taxes,
Depreciation and
● more commonly used
Amortizations.
● easier to prepare
Two-Finger Approach

●
MOVEMENT IN CA, CL, FA, LTL,
EQUITY AND THE IMPACT TO CASH
FLOW ● Inventories (stocks) and
Accounts Payable (creditors)

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 are the biggest working capital
items impacting cash flow
Importance of Cash Flows
Is it possible for a business to be
profitable but insolvent due to lack
of cash?
● YES
What can tie up cash?
● slow nad non-moving stocks
● unproductive assets (due store
opening delays or such)
● uncollected buying income
Many businesses fail due of lack of
cash even if it has significant fixed
assets.
● provides valuable information
about company’s gross
payments and receipts and
allows insights into it’s future
income needs.
● useful in determining the
short-term viability of a dividends
company, particularly its ability
to pay bills.
● Format of Cash Flow
Beginning Cash Balance
+ Cash flow from Operating Acts
+ Cash flow from Investing Acts
+ Cash flow from Financing Acts
= Ending Cash Balance
● Operating Activities
○ represent the company’s
core business (meaning
regular business
activities), including sales
and expenses.
● Investing Activities
○ include the cash flows that
arise out of the purchase
and sale of long-term
assets such as plant and
equipment
○ includes purchases of
physical assets,
investments in securities,
or the sale of securities or
assets.
● Financing Activities
○ represent changes in the
firm’s use of debt and
equity such as the issue of
new shares, the
repurchase of outstanding
shares, and the payment
of dividends
○ net flows of cash that are
used to fund the company
○ include transactions
involving debt, equity, and
Cash Flow Statement
● Why did the cash balance
decline by $4.50m?.
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Cash Flows from Investing Activities
● Purchase of fixed assets -
cash flow negative
● Purchase of investments
(stocks or securities) - cash
flow negative
● Lending money - cash flow
negative
● Sale of fixed assets - cash
flow positive
● Sale of investment securities
- cash flow positive
● Collection of loans and
insurance proceeds - cash
flow positive