Module One: Understanding Financial Statements

● Purpose: To provide an overview of how to read a company's annual report, focusing on

understanding financial statements.

Three Key Financial Statements:

1. Balance Sheet (Statement of Financial Position):

● Snapshot of the company's financial position at a specific point in time.
● Includes assets, liabilities, and equity.
● It is important for assessing financial strength.
2. Income Statement (Profit and Loss Statement):
● Records transactions over a period, showing revenues, expenses, and net profit.
● Indicates company profitability.
3. Statement of Cash Flows:
● Acts as a "bank statement" for the company.
● Shows cash transactions categorised into operating, investing, and financing
activities.
● It helps understand cash generation and usage.

Balance Sheet Overview:

● Presented in horizontal or vertical format.

● Divided into assets, liabilities, and equity.
● Reflects financial position or strength.
● Includes current and non-current assets/liabilities.

Specific Balance Sheet Accounts:

1. Investments:
● It can be short-term or long-term.
● Reflects excess cash or planned large purchases.
2. Deferred Income Taxes:
● Arises from timing differences between accounting and tax rules.
● Recorded as asset or liability based on future tax payable.
3. Goodwill:
● Recorded when a company is purchased for more than the fair value of its assets.
● Represents intangible value like brand or customers.
4. Intangible Assets:
 ● Includes trademarks, patents, etc., with no physical substance.
● Amortized over time.
5. Unearned Revenue:
● Arises when a company receives payment for goods/services not yet delivered.
6. Commitments:
● Future obligations like construction projects or leases.
7. Contingencies:
● Potential liabilities depending on certain circumstances (e.g., lawsuits).
8. Common vs Preferred Shares:
● Common shares offer profit participation and voting rights.
● Preferred shares offer fixed dividends and preference in payment.
9. Contributed Surplus:
● Excess amount received for shares above their par value.
10. Other Comprehensive Income (OCI):
● Gains/losses not recorded in the income statement, such as unrealised gains on
investments.
11. Statement of Shareholders' Equity:
● Reflects all equity transactions for the year.

Full Disclosure Principle:

● Notes accompany financial statements to provide additional details.

● Includes significant accounting policies, direct information, and indirect information.
● It is essential to understand the complete financial picture of the company.