Course Code:

Course Title: Introduction to Business Finance

Class Day: Tuesday Timing: 12:15pm - 03.15pm

Lecture / Week No. 3 (Financial Statements)

(10/10/2023)

Instructor Name: Asim Iqbal

Management Science Department

PAF KIET, City Campus, Karachi

 Contents

1. What is financial Statements?

2. Types of financial statements
3. Income statement
4. Balance sheet
5. Cash flow statement
Reference No. 1 Topic: Financial Statements

What are Financial

Statements?
Financial Statements represent a proper and
formal record of the financial activities of an
organization. These are written reports that
evaluate the financial stability, performance and
liquidity of a company. Financial Statements
echo the financial effects of business
transactions and events on the organization.
Reference No. 1 Topic: Income Statement

Income Statement:
Income Statement, also known as the Profit and Loss
Statement, reports the company's financial performance in
terms of net profit or loss over a specified period. Income
Statement is composed of the following two elements:

•Income: What the business has earned over a period (e.g.

sales revenue, dividend income, etc)

•Expense: The cost incurred by the business over a period (e.g.

salaries and wages, depreciation, rental charges, etc)

Net profit or loss comes by deducting expenses from income.

Reference No. 1 Topic: Income Statement

Advantages:
The primary advantage of the income statement is
the information it gives on revenues.

The income statement provides information

concerning return on investment, risk, financial
flexibility, and operating capabilities.

The income statement is one of the most important

documents for investors looking to buy stock in a
particular company.
Reference No. 1 Topic: Income statement

Drawbacks:
The major disadvantage of an income statement is
that it is considered as a fiction because it is based on
accrual accounting and it does not give the cash
transactions. Cash is king and free cash cannot be
calculated through income statement.

The income statement may be useful for gauging

earnings per share and other past financial data, but it
does not give much information about future
company success.
Reference No. 1 Topic: Balance Sheet

Balance Sheet:
Balance Sheet, also known as the Statement of Financial Position, presents
the financial position of an organization at a given date. It includes the
following three elements:

Assets: Something a business owns or controls (e.g. cash, inventory,

plant and machinery, etc)

Liabilities: Something a business owes (e.g. creditors, bank loans,

etc)

Equity: What the business owes to its owners. This represents the
amount of capital that remains in the business after its assets are used to pay
off its outstanding liabilities. Equity therefore represents the difference
between the assets and liabilities.
Reference No. 1 Topic: Balance Sheet

Advantages:
Balance Sheet helps to communicate information about the
financial position of the business at a particular moment in time.

It can give an indication of the financial strength of the

business and can also indicate the relative liquidity of the assets.
It also gives some information on the liabilities of the business
and when they will fall due. The combination of this information
can assist the user in evaluating the financial position of the
business.

 It helps in comparison of assets and liabilities of business on

two dates to ascertain the progress being made by business.
Reference No. 1 Topic: Balance Sheet

Drawbacks:
One of the potential disadvantages of a balance sheet is that it
is only a financial snapshot of the condition of a company. This
means that it only take into consideration what is going onthat
moment with the business.

Another potential disadvantage of using a balance sheet is that

it does not tell you theaccurate value of a company.

One of the potential problems of using a balance sheet is that

this only evaluate a company financial factors. It doesn't evaluate
other factors that can add value to the business value.
Reference No. 1 Topic: Cash flow Statement

Cash Flow Statement:

• Cash Flow Statement, presents the movement in
cash and bank balances over a period. The
movement in cash flows is classified into the
following segments:

• Operating Activities: Represents the cash flow from primary

activities of a business.
• Investing Activities: Represents cash flow from the purchase and
sale of assets other than inventories (e.g. purchase of a factory
plant)
• Financing Activities: Represents cash flow generated or spent on
raising and repaying share capital and debt together with the
payments of interest and dividends.
Reference No. 1 Topic: Cash flow statement

Advantages:
It provides adequate information as regards to
the inflows and outflows of cash resources to
and from the enterprise.

It helps the management a lot for future cash

planning of the enterprise.

It evaluates the level of efficiency of the

management of the enterprise as regards to the
uses of its cash resources.
Reference No. 1 Topic: Cash flow Statement

Drawbacks:
One of the potential disadvantages of the statement of cash flows is that it
does not take into consideration any future growth. When looking at the
statement of cash flows, you are essentially looking at information from the
past business operations.

Another potential problem with the statement of cash flows is that

interpreting data may be difficult. The information on a cash flow statement is
not necessarily easy to interpret. You can see where all of the cash flow is
going, but you may not know if it should be going there.

 In isolation this is of no use and it requires other financial statements like

balance sheet, profit and loss etc and therefore limiting its use.
References / Resources

1. Mayo, H. B. (2015). Basic finance: an introduction to financial

institutions, investments, and management. Nelson Education.
• General Journal
• Ledger & T Accounts
• Trial Balance
• Financial Statements
- Income Statements
- Balance Sheet
- Retained Earning
- Cash Flow Statements
- Fund Flow Statements