Student’s name

Class: ESP3
Lê Hoàng Liên
Instructor: Ms Thảo Quyên
Vũ Thị Diệu Linh

Topic: Financial and Accounting Statement

Subtopic:
Sample Income Statement
Sample Balance Sheet

Source:
J. Fred Weston, Thomas E. Copeland, Managerial Finance, 8th edition, Drylen
1995.
Nguyễn Hải Sản, Quản trị tài chính doanh nghiệp,chapter13 Phân tích báo cáo
tài chính, Thống Kê Publish House, 2001
Lưu Thị Hương, Vũ Duy Hào, Tài chính doanh nghiệp, Lao Động Publish
House, 2003
 1. Summary
In order to have an overall picture of a business’s performance during a
given year, we need to have an income statement and two balance sheets; each
provides a short description of the firm’s assets and liabilities.
To report the historical performance, a firm uses financial statement which
can be found in the annual report, the 10K and 8K and the Tax statements. There
are 2 kinds of financial statements: income statement, which measures the flows
of revenues and expenses during a period of time, and balance sheet, which
measures the asset stocking and liabilities at a point of time. To describe the full
activity during a year, a company needs 3 financial statements: a beginning-of-
year balance sheet, an income statement and end-of-year balance sheet. The first
statement gives us a piece of information about the start of the fiscal year of the
firm. The second brings the business the report about the flows of revenue and
expenses, and the last provides the picture of the ending assets and liabilities.

The sample income usually begins with the revenues of the firm which are
uncertain. It also includes the tilde differentiating the flow items which comprises
of random variables and nonrandom items. The enterprise has to be concerned
about the riskiness of the revenue stream such as the unpredictability of demand
for steel or housing. And some but not all of these risks can be limited by varying
the product lines. The sample income statement also presents the production
technology through the costs which include the ratio of fixed costs (FCC and dep)
to variable costs of production. According to the authors, fixed costs consist of
two components: fixed cash costs (FCC) (the property taxes, certain salary or
wages) and non cash fixed costs (dep) related to the depreciation. Actually,
depreciation is not a cash flow but an approximation of decline in the value of
physical capital employed in production, and the cash flow doesn’t decide the
market value.
 Back to the issue of choice of production technology, the earnings before
interest and taxes (EBIT) is reproduced by the choice of production technology.
The authors define operation leverage as the amount of fixed costs determining
the area in which EBIT is more unpredictable than revenues. For example, if the
revenue stands at zero, and its variable costs are also zero, EBIT will be zero.
However, if the fixed costs are $1 million while there is no sale or production, the
company will lose $1 million. To sum up, the greater ratio of fixed costs to total
costs, the greater operating leverage is and the higher the riskiness of EBIT stream
is.
Business risk, which is the combination of revenue risk and operating
leverage, can be modified by the choice of production lines (revenue risk) and the
production technology (operating leverage). In the income statement, rD is the
annual fixed interest charge in which r is the fixed coupon rate on a bond and D
is the face value of the bond issue. It can be proved that the interest charges rise
will lead to the increase in the riskiness of the net income stream.

Another point in the income statement is the taxable income. The actual
taxes paid (tax) are the product of the firm’s tax rate (T) and the amount of
earnings before taxes (EBT). Furthermore, net income (NI) is the remaining flow
of the shareholders’ earnings and its riskiness is affected by both the business risk
and financial risk. In order to avoid this, the board of direction has to decide the
proportion of net income which is paid out in the form of dividends (Div) and
what part to reinvest called retained earnings (Rtd.E). When the firms pay out
large proportions of dividends, it is difficult to reinvest or raise the probability due
to the less retained earnings; instead, it has to call for the funds. Therefore, the
financial leverage is closely related to the dividend policy.
 Balance sheets are done regularly, usually one at the beginning and the
other at the end of the year. By construction, the book value of total assets is equal
to that of total liabilities, which are made up by equity and various forms of debts.
The net working capital of the enterprise is defined as the difference
between the short- term assets and short- term liabilities. If a firm has more short-
term assets than liabilities, it can pay off all of its short-term obligations without
having to liquidate any long- term assets.
The tangible assets which are composed of property, plant, and equipments
are the most profitable and least liquid ones for most manufacturing enterprises.
The long-term assets account consists of three components: gross property, plant,
and equipment which represent the original purchase price of long-term assets.
Every year, a company makes an estimation of the depreciation of each asset, and
then adds it up to all prior depreciation. Next, it deducts the total depreciation from
the three components to have net property, plant, and equipment, which represents
the current depreciated book value of tangible assets.
With reference to the short-term liabilities of the balance sheet, accounts
payable which represent short-term borrowing from suppliers of goods and
services are IOUs for unpaid bills. Notes payable, usually borrowed as a line of
credit from a commercial bank, is short-term debts. Accruals are on behalf of
unpaid obligations such as salary and wages or tax due, and so on.
The most important financial decision of the firm is the choice among
sources of the financing. The ratio of debts to equity is the firm’s capital structure,
and it determines the amount of financial leverage. The company’s cost of
financing is called the weighted average cost of capital and is a weighted average
of the marginal after-tax costs of its debt and equity. The choice of capital structure
plays an important role because there may be a combination of debt and equity
which minimizes the average cost of capital and ultimately maximizes the firm’s
value in the market.
 Preferred stock has the characteristics which are the mixture of both debt
and equity. Payments to owners of preferred stock are called preferred dividends
which are similar to interest payments on debts in terms of being contractual.
However, if the company does not have enough cash flow to cover preferred
dividends, it can not be forced into bankruptcy, instead, the preferred dividends are
deferred.
The equity is broken down into four parts. When new shares are sold, the
value per share received by the firm is divided into common at par and common
in excess of par. For instance, if the firm sells a share at $20 per share for $1 par
value, then $19 is added to common in excess of par and the remainder is added to
common at par. The third item in the equity is retained earnings, which are the
chronological sum of the retained earnings taken each year from the income
statement. For a firm founded in 1930, for example, the retained earnings will be
the total sum of earnings retained from 1930. The last equity item is Treasury
stock, which represents the cost of repurchasing common stock (either through
tender offer or open market purchases). The purchase of Treasury stock results in
reducing the number of shares outstanding without changing the firm’s expected
earnings stream. As a consequence, earnings per share and the price per share of
the remaining shares rise following a repurchase of Treasury stock. As an example,
a company earns $3,000,000 and that $1,000,000 will be spent either to repurchase
shares or paid out as a cash dividend. If dividends are paid, the remaining
$2,000,000 will be added to the liabilities side of the balance sheet. But if
$1,000,000 will be spent on repurchasing Treasury stock, then the net effect on the
liabilities is still the addition of $2,000,000. Therefore, cash dividends and share
repurchase have the same effect on the book value of liabilities.
 2. My favourites.
a.

b.

3.Glossary

New words Meaning

1. Assess (n)a thing of value, especially property, that a person or company
owns, which can be used or sold to pay debts
2. Liability (n)the amount of money that a company or a person owes
3. Book value the value that a business gives to an asset in its financial records
(books), which is the original cost of the asset minus depreciation
(= its decrease in value over a period of time)
4. Equity (n)the money for business activities (capital) that a company
obtains by selling shares rather than from loans
5. Accrual (n) an estimated amount of money that a business owes for goods
or services that have been supplied to it but for which no request
for payment has been received. This amount is recorded in the
accounts at the end of the accounting period
6. Liquidate (v)to sell sth in order to get money or to avoid losing money
7. Property (n)land and buildings
8. Net value the value that remains when nothing more is taken away
9. Gross (about an amount of money) being the total before tax or other
costs are taken away
10 IOU a written promise that you will pay sb the money that you owe
. them
11. Ratio (n)the relationship between two groups of people, things or
amounts of money that is represented by two numbers or a
percentage showing how much larger one group is than the other
12 Leverage (n)the relationship between the amount of money that a company
. owes (debt) and the value of its shares (equity)
13 Nominal (a)something in name only, and not in reality
.
14 Treasury stock (n)shares that a company has issued but has bought back from
. public investors
15 Par value (n) The value given to a share when it is first made available for
. sale, which may be greater or smaller than the price paid for it
16 Retained (n) the part of the profit made by a company after tax has been
earnings paid that is invested in the company rather than being paid to
shareholders as dividends
17 Dividends (n) an amount of the profits that a company pays to shareholders
. The company will pay a dividend of 10 cents a share
18 Shareholder (n) a person or group that owns shares in a company or business
19 Stream (n)a continuous flow of sth
. a steady stream of orders
20 The balance (n) a written statement that shows the financial state of a company
. sheet at a particular time. It lists the company’s assets and all money
owed (liabilities)
21 Preferred (n) a type of share in a company that gives the owner the right to
. stocks receive regular fixed payments (dividends) but does not usually
give them the right to vote at meetings of shareholders. People
who hold them must be paid before owners of all other shares
22 Deferred (a) (adj) delayed until a later time
. deferred payments a deferred pension
Flows of (n) The continuous movement of the money that is received by a
23 revenue business usually from selling goods or services:_
24 Stock (n) goods owned by a company, such as raw materials or parts,
products being made and finished products:_
25 Snapshot (n) A piece of information that quickly gives you an idea of what
the situation is like at a particular time.
26 Fiscal year (n) Financial year
27 Variable (n) a situation, number or quantity that can vary or be varied and
affect a situation in different ways:_
28 Variable cost (n) an amount of money used to produce goods that varies
according to the quantity made
29 Fixed cost (n) an amount of money used to run a business that remains the
same whatever quantity of goods is produced
30 Revenue (n) a source of income
stream
31 Output (n) the amount of sth that a person, a machine, an organization or
an industry produces
32 Input (n) any person or thing that is involved in producing goods or
providing services
33 Depreciation (n) a gradual reduction in the value of machinery, a vehicle or
other asset over a particular period of time, as stated in a
company’s accounts
34 Cash flow (n) the movement of money into and out of a business as goods
are bought and sold; the difference between the amount of money
a business receives and the amount it pays during a particular
period of time
35 Physical (n) items such as land, factories, machinery and materials that are
capital used to produce goods and provide services
36 EBIT = the amount of profit that a company makes during a particular
earning before period, without taking away the tax that it owes or the interest that
interest and it has paid to its lenders
taxes
37 Leverage (n) using borrowed money to buy an investment or to add to the
amount invested, in order to try to increase possible profits from
the investment
38 Dividend (n) an amount of the profits that a company pays to shareholders
39 Property tax (n) tax that is paid on buildings or other things that you own,
based on a percentage of their value
40 Inventory (n) all the goods owned by a business, including raw materials,
parts, work not yet finished and finished products
41 Income an official financial record that gives details of all a company’s
statement income and expenses for a particular period and shows if it has
made a profit or a loss_