OVERVIEW OF FINANCIAL STATEMENTS AND INCOME STATEMENT - So these financial institutions will be reviewing these financial statements to

make sure that they want to take the risk on lending money.
KEY TOPICS:
c. Suppliers
1. Financial Statement Stakeholders - They also take risks when the join forces with a company.
2. Inherent limitations of the financial statements - Assurance that if they do business with a company that they’re actually going to
3. Introduce the four main financial statements be paid. (Financial statements will help them make that determination.)
a. Income Statement
b. Statement of Changes in Equity d. Customers
c. Balance Sheet - Looking for a long-term relationship with their suppliers.
d. Statement of Cash Flows - Particularly if they have a product or service that’s going to require a longer term
4. A detailed look at the income statements relationship, they want to make sure that the company will be around to help
service when they need it
First, let’s take a moment to look at who the financial statements stakeholders are

- They depend on the financial statements for decision making purposes e. Competitors
- For benchmarking
2 MAIN GROUPS - They want to see how they compare with others in their industry

1. INTERNAL f. Regulators
- Compliance with the law and regulations and accounting standards.
a. Managers
- Interested in the financial statements largely because that’s what they LIMITATIONS IN THE FINANCIAL STATEMENTS
were hired to manage
- They are working to make sure that the company does exactly what its 1. Periodicity
intended purpose was (and financial statements report that) - Financial Statements are prepared in a periodic fashion. We cut them up into
arbitrary periods such as: years, quarters, months
b. Employees - This isn’t the natural cycle for business. So we need to remember that the
– Because they are hired by the company and they want to make sure that financial statements are used using these periods just to present us timely
they’re going to be able to receive their paycheck on time, and they will also information
be interested if they have participation in employee stock option plan 2. Historical Information
- The financial statements we’ll be looking at though are more geared towards - FS are prepared in a historical fashion. None of the information given is a crystal
external users ball to the future. It is all historical. It is useful in helping us predict what might
happen in the future, but it isn’t the future.
2. EXTERNAL 3. Valuation
a. Shareholders and Prospective Investors - We also have valuation differences within many of the elements in the financial
- Surely they are interested in these financial statements because they want to statements
evaluate if they want to continue their investment or perhaps make additional a. Historical Cost – used for things like receivables or PPE
investment in the company b. Estimates – used in many of the accounts in FS like allowance for bad debts
or warranty accounting
b. Financial Institutions c. Fair value – sometimes used as well for things like investments in securities
- Companies often need financial institutions to help them finance their - So all of these different elements are using varying valuation techniques and we
operations. need to understand which ones are used in which places so that we can get good
information from the financial statements.
 4. Available accounting methods 4. Statement of Cash Flows
- We also have varying accounting methods that are available to companies. - This is where the company details for us all of the change in their cash position
- For example, if I want to investigate what’s happening in inventory, I would want and why it changed.
to understand whether the company was choosing FIFO for costing, LIFO, or - It’s separated into three main categories: Operating, Investing, and Financing.
maybe they’re not using either one and they’re using specific identification. Those three are summed to give us our total change in cash, which is then
combines with whatever we had at the beginning of the year to give us our
All of that will be interesting for me to know before I can properly evaluate what’s ending balance in cash.
happening in the financial statements
DEEPER DIVE ON THE INCOME STATEMENT
5. Omissions
- There are many things in the business that just aren’t in the financial statements This will talk about

Example:

The value of an employee workforce. None of that information shows up in the

financials

So we need to combine what we do know about the company with that is reported to
us by the company to get a full picture of what is really going on

FOUR MAIN FINANCIAL STATEMENTS

1. Income Statement
- Where management shows us the results of their operations for the period.
- Include revenue, expenses, gains, losses. All of those will be combined to give us
the number that everyone is interested in, the bottom line or NET INCOME
2. Statement of Changes in Equity
- Place where management shows us the changes in all of their various equity
a. Preferred stock
b. Common Stock
c. Additional Paid-in Capital
d. Treasury Stock
e. Retained Earnings

Typically, it will take each account, start with the beginning balance, show us the activity
for the period, and give us the ending balance in that same account

3. Balance Sheet
- The management shows us the balances at a point in time for assets, liabilities
and equity.
- This is the only FS that shows us information at one point in time as opposed to
over a period of time like the other three