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Financial Statements are company-issued
accounting reports with past performance
information that a firm issues periodically
(usually quarterly and annually).
Companies in the US are required to file their
financial statements with the Securities and
Exchange Commission (SEC) on a quarterly
and annually basis.
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The information in the annual report must
also be sent to the shareholders every year.
Financial statements are important tools
through which investors, financial analysts
and other interested parties like the creditors
obtain information about a corporation.
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Financial Statements are also useful for
managers within the firm as a source of
information for corporate financial decisions.
Every public company is required to produce
four financial statements:
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The
The
The
The
Balance Sheet,
Income Statement,
Statement of Cash Flows and
Statement of Stockholders’ Equity.
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A balance sheet of a company lists the firm’s
assets and liabilities.
It provides a snapshot of the firm’s financial
position at a given point of time.
The balance sheet includes the assets, the
liabilities and the shareholders’ equity.
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The assets of a company include the long term
assets, current assets and expenses to be written
off.
Long term assets include land, buildings,
equipment, goodwill, patents, trademarks, etc.
Current assets include cash, accounts receivable,
inventories, prepaid expenses, etc.
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The liabilities of a company include long term
liabilities, current liabilities and share
holders’ equity.
Long term liabilities include long term debt,
capital lease obligations, deferred taxes and
other long term liabilities.
Current liabilities include accounts payable,
notes payable, current maturities of long
term debt.
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The sum of current liabilities and long term
liabilities is total liabilities.
The difference between the firm’s assets and
total liabilities is the shareholders’ equity.
It is also called the book value of equity. It
represents the net worth of the company.
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In the real world, this is a difficult proposition
as the firm’s market value of the asset and
liabilities differ from their book value.
The assets of the company are based on their
historical cost rather than on their market
value.
Same is the case with liabilities also.
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For these reasons the book value of equity is
an inaccurate assessment of the actual value
of the firm’s equity.
The market value of stock does not depend
on the historical cost of the company’s
assets.
Instead it depends on what investors expect
those assets to produce in the future.
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This is not surprising that it will differ
substantially from the amount investors are
willing to pay for the equity.
The total market value of a company’s equity
equals the market price per share times the
number of shares, referred to as the
company’s market capitalization.
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A great deal of useful of information from a
firm’s balance sheet can be obtained.
These include Market to Book Ratio, DebtEquity Ratio, Enterprise Value, etc.
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The Income Statement is a list of the
company’s revenues and expenses over a
period of time.
The last or the bottom line of the income
statement shows the company’s net income,
which is a measure of its profitability during
the period.
The income statement is sometimes called a
profit and loss statement and the net income
is referred to as the company’s earnings.
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The income statement provides a measure of
the company’s profit over a given time
period.
However, it does not indicate the amount of
cash the firm earned.
There are two reasons that net income does
not correspond to cash earned.
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First, there are non-cash entries on the
income statement, such as depreciation and
amortization.
Second, certain uses of cash, such as the
purchase of a building or expenditures on
inventory, are not reported on the income
statement.
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The company’s statement of cash flows
utilizes the information from the income
statement and balance sheet.
This information is used to determine how
much cash the company has generated and
how that cash has been allocated, during a
set period.
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From the perspective of an investor
attempting to value the firm, the statement of
cash flows provides what may be the most
important information of the four financial
statements.
The statement is divided into three sections:
operating activities, investment activities and
financing activities.
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