Financial Statement Framework

Financial Performance &

Financial Statements

Professor Doug Cerf

Donald Bren Graduate School of
Environmental Science and Management
Corporate Environmental Management (ESM 281)
Spring 2010
• Financial Statement Framework is
a primary channel for
communicating information about
the economics of a business

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 Objectives
• Goal: Obtain the tools to evaluate the financial
performance of a business, project or division
• Use financial statements to understand financial
performance.
– the main point is the ability to understand how to evaluate and
communicate financial performance.
• It is not the preparation of the statements
– applies to a continuum of entities
• division of a company
• start up company
• partnership
• corporation

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Lecture on the financial statement framework

• Evaluate Wal-Mart. (WMT) financial performance on

Google Finance
• Financial Statement Framework (the big picture)
– Statement of Financial Position (Balance Sheet)
• Company assets and claims to those assets
• At a point in time
– Statement of Operations (Income Statement)
• Revenue less expenses (costs necessary to generate revenue)
• For a period of time
– Statement of Cash Flows
• Inflows and outflows of cash related to the operating, financing and
investing activities of the entity
• For a period of time

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 Maria Hernandez Case

• Understand the financial condition of a

start-up enterprise.
– Has Maria made a profit? Does it matter?
– Why has the cash level declined significantly?
– Should Maria be worried?
– What are the risks?

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 Analyze financial condition

• Two phases
– Phase #1 Prior to beginning of operations
• Prior to July 1, 2004
• Go through the transactions prior to July1 to prove
balance sheet shown on page 1 of case.
• Prepare a Statement of Cash Flows
– Phase #2 First two months of operation
• July 1, 2004 through August 31, 2004
• Prepare all three statements

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 Prior to start of operations

• As a class
– prove balance sheet
– prepare statement of cash flows
• She raised $50,000 and has $12,000 left and she
has not started her business
• What does she have to show for it?
• Can you see the distribution of her assets and who
has claim to them?
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Financial condition at the end of two
months of operations
• Prepare the financial condition for the first
two months of operations 7/1/04 – 8/31/04
– Transaction by transaction
– Students work on this in groups for 15 minutes
if necessary
– Entire class prepare statements on the board

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 How is Maria doing?
• Maria had services rendered of $47,000
• Maria received a salary
– Interpretation of profit is different if owners do not receive a salary.
• From operation of the business:
– Assets have increased by about 10,300.
– Liabilities have increased by 5,700.
– Profit $4,600
• Why has the cash level declined significantly?
– Started at $50,000 and now is $6,600 2+ months later
• Should Maria be worried?
• What are the risks?
– Solvency-Can she pay salaries next month?
– Can she borrow money?
– Collection risk (from customers)

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