ELEMENTS OF FINANCIAL

STATEMENTS AND OTHER

FINANCIAL REPORTS
OBJECTIVES
• Explain and analyze the main items in the financial statements.
• Identify off-balance-sheet financing
• Discuss the component under the cash flow statement and free cash
flow.
• Describe the link under financial statement and types of footnote.
INTRODUCTION
• Important things when looking at the financial statements:
• Dates
• Comparing results among companies.
• Economic conditions are certainly different,

comparison doesn’t give you an accurate view of how well the companies
competed in similar economic conditions.
TYPES OF FINANCIAL STATEMENT:

(1) Balance Sheet

(2) Income Statement

(3) Statement of Cash Flows

(4) Statement of Retained Earnings

 (1) BALANCE SHEET

Assets = Liabilities + Shareholders' Equity

• Assets represent the resources that the business owns or controls at a given
point in time. This includes items such as cash, inventory, machinery and
buildings.
• Liabilities represent obligations, which must be paid back.
• Equity represents the value of money that the owners have contributed to the
business - including retained earnings, which is the profit made in previous years.
• The balance sheet tells investors a lot about a company's
fundamentals:

• How much debt the company has,

• How much it needs to collect from customers (and how fast it does so),
• How much cash and its equivalents it possesses and what kinds of funds the
company has generated over time.
Main Items in the Balance Sheet
• Assets
• Current Assets are resources likely to be used up or converted
into cash within one business cycle - usually treated as twelve
months. Three important current asset items found on the
balance sheet are:

• Cash - Any item of economic value owned by an individual or

corporation, especially that which could be converted to cash. Examples
are cash, securities, accounts receivable, inventory, office equipment, real
estate, a car, and other property.
• Inventories - The raw materials, work-in-process goods and completely
finished goods that are considered to be the portion of a business's assets
those are ready or will be ready for sale
 • Accounts receivables - Money owed by customers (individuals or corporations) to
another entity in exchange for goods or services that have been delivered or used, but
not yet paid for

• Long-term or Non-Current Assets are defined as resources that not classified

as current asset. This includes items that are fixed assets, such as property,
plant and equipment (PP&E).
• Liabilities
• Current Liabilities are obligations the firm must pay within a
year, such as payments to suppliers. Current liabilities
appear on the company's balance sheet and include short-
term debts, accounts payable, accrued liabilities and other
debts.

• Non-current Liabilities are those obligations of the business

that are not expected to be paid for at least one year from
the date on the balance sheet. Typically, non-current
liabilities represent bank and bondholder debts.
• Equity

Equity = Total Assets – Total Liabilities

• Equity represents what shareholders own, so it is often called

shareholder's equity. The two important equity items are:
• Paid-in capital is the amount of money shareholders paid for their
shares when the stock was first offered to the public. It basically
represents how much money the firm received when it sold its
shares

• Retained earnings are the money the company has chosen to

reinvest in the business rather than pay to shareholders (in terms of
dividend). Investors should look closely at how a company puts
retained capital to use and how a company generates a return on it.
• Off-Balance-Sheet Financing

• Companies will often use off-balance-sheet financing to keep their debt

to equity (D/E) and leverage ratios low,

• Examples of off-balance-sheet financing include joint ventures, research

and development partnerships, and operating leases (rather than
purchases of capital equipment).

• Operating leases are one of the most common forms of off-balance-

sheet financing. In these cases, the asset itself is kept on the lessor's
balance sheet, and the lessee reports only the required rental expense
for use of the asset.

Generally Accepted Accounting Principles and IRB have set numerous

rules for companies to follow in determining whether a lease should be
capitalized (included on the balance sheet) or expensed.
 ABC Corp
Comparative Balance Sheet December 31
(PHP in millions)
2007 2006
Assets 95.8 80.0
Current assets 227.2 192.4
Cash 103.7 107.5
Receivables 73.6 45.2
Inventories
Other current assets

EXAMPLE : Total current Assets

Noncurrent Assets
500.3
771.2
425.1
646.6
Gross Property, plant, & equipment (372.5) (379.9)
Accumulated depreciation & depletion 398.7 316.7
Net Property, plant, & equipment 42.2 19.7
Other noncurrent assets
Total Noncurrent assets 440.9 336.4
Total Assets 941.2 761.5
Liabilities and Stockholders’ Equity 114.2 82.4
Current liabilities 174.3 79.3
Account payable 85.5 89.6
Short-term debt
Other current liabilities
Total Current liabilities 374.0 251.3
Noncurrent liabilities 177.8 190.9
Long-term debt 94.9 110.2
Other noncurrent liabilities
Total noncurrent liabilities 272.7 301.1
Total liabilities 646.7 552.4
Stockholders equity 92.6 137.6
Common shares 201.9 71.5
Retained earnings
Total equity 294.5 209.1
Total Liabilities and Stockholders’ equity 761.5
941.2
(2) INCOME STATEMENT
• Income statement measures a company's performance over a specific
time frame
• The income statement presents information about
• Revenues
• Expenses
• Profit

• It also shows:
• how much money the company generated (revenue)
• how much it spent (expenses)
• the difference between the company’s return (profit) over a certain time period
• It also contains the numbers most often discussed
when a company announces its results - numbers such
as and

• earnings per share,

• dividend per share
REVENUE

• Revenue as a signal
Known as sales - represents all the money a company brought in during a specific time
period, although big companies sometimes break down revenue by business segment or
geography.

The best way for a company to improve profitability is by increasing sales. Consistent
sales growth has been a strong driver of company’s profitability.

The best revenues are those that continue year in and year out. Temporary increases,
such as those that might result from a short-term promotion, are less valuable and
should garner a lower price-to-earnings multiple for a company.
What is Expenses?

• Two most common are:

• Cost of goods sold (COGS) - the expense most directly involved in
creating revenue. It represents the costs of producing or purchasing the
goods or services sold by the company
For example, if Mydin pays a supplier 4 PHP for a box of soap, which it sells to customers
for 5 PHP. When it is sold, Mydin’s cost of goods sold for the box of soap would be 4 PHP.

• Selling, general and administrative expenses (SG&A) -

marketing, salaries, utility bills, technology expenses, other general costs
associated with running a business, depreciation and amortization( a
cost of replacing worn out assets), costs of taxes and interest payments.
What is Profit?
Profits = Revenue - Expenses

• Several commonly used profit subcategories that tell investors

how the company is performing.

Gross Profit = Revenue - COGS

• Gross profit is calculated as revenue minus cost of sales.

Operating Profits = Gross Profit – Operating Expenses

• Operating profit - the profit a company made from its actual operations,
and excludes certain expenses and revenues that may not be related to
its central operations.
What is net income?
• The company's profit after all expenses, including financial expenses, have
been paid.
•
• Often called the "bottom line" and is generally the figure people refer to
when they use the word "profit" or "earnings".

• When a company has a high profit margin, means that it has more
advantages over its competitors. Companies with high net profit margins
have a bigger cushion to protect themselves during the hard times.

• Companies with low profit margins can get wiped out in a downturn.

• Companies with profit margins reflecting a competitive advantage is able to

improve their market share during the hard times - leaving them even better
positioned when things improve again.
 ABC Corp
Income statements
Fiscal year ended December 31
(PHP in millions)

2007 2006

Net sales 1,938.0 1,766.2

Cost of goods sold 1,128.5 1,034.5

Gross operating profit 809.5 731.7

Selling, administrative, and other 497.7 445.3
operating expenses 77.1 62.1
Depreciation & authorization 0.5 12.9
Other income, net

Earnings before interest & taxes 234.2 237.2

Interest expense 13.4 7.3
Earning before taxes 221.8 229.9
Income taxes 82.1 88.1
Net profit after tax 138.7 116.0
Dividends paid per share
Earnings per share (EPS) 0.15 0.13
Number of common shares outstanding ( 2.26 2.17
in millions) 61.8 65.3
 (3) STATEMENT OF CASH FLOW

• Three core activities:

• Cash is raised from the capital suppliers - cash flow from financing, (CFF)

• Cash is used to buy assets - cash flow from investing (CFI)

• Cash is used to create a profit - cash flow from operations (CFO)

 “Natural” Cash Flow Statement
Cash Flow Classifications

Sell Equity Sell Equity Financing

Issue Debt Issue Debt (CFF)
< Pay Dividend >
< Buy Assets >
< Buy Assets > Investing
< Buy Inventory >
(CFI)
Make Sales!
Make Sales! < Buy Inventory >
< Pay Costs > < Pay Costs > Operating
< Pay Taxes > < Pay Taxes > (CFO)
< Pay Interest >
< Pay Dividend >
< Pay Interest >
= NET CASH FLOW
• Statement of cash flows is broken into three sections:

• Cash flow from financing (CFF) includes cash received (inflow) for
the issuance of debt and equity. As expected, CFF is reduced by
dividends paid (outflow).

• Cash flow from investing (CFI) is usually negative because the

biggest portion is the expenditure (outflow) for the purchase of
long-term assets such as plants or machinery.

• Cash flow from operations (CFO) naturally includes cash collected

for sales and cash spent to generate sales. This includes operating
expenses such as salaries, rent and taxes. But notice two
additional items that reduce CFO: cash paid for inventory and
interest paid on debt.

CFF + CFI + CFO = net cash flow.

• A statement of cash flows focuses on the following cash-related
activities:

• Operating Cash Flow (CFO): Cash generated from day-to-day business operations

• Cash from investing (CFI): Cash used for investing in assets, as well as the proceeds from the
sale of other businesses, equipment or long-term assets

• Cash from financing (CFF): Cash paid or received from the issuing and borrowing of funds
 Cash Flow Statement
Company XYZ
FY Ended 31 Dec 2007
All figures in PHP
Cash Flow From Operations

Net earnings 2,000,000

Additional Cash

Depreciation 10,000
Decrease in Accounts Receivable 15,000
Increase in Accounts Payable 15,000
Increase in Taxes Payable 2,000
Subtractions From Cash

Increase in Inventory (30,000)

Net Cash From Operations 2,012,000
Cash Flow From Investing

Equipment (500,000)
Cash Flow From Financing

Notes Payable 10,000

Cash Flow for FY Ended 31 Dec 2007 1,522,000