Financial Statements

What are Financial Statements?

• Reports summarizing activities and financial performance of a business.
• Prepared at the end of each accounting period.
• Designed to give investors and lenders a feel for a business's financial health.
• Three main financial statements:
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement

Balance Sheet

• Definition: Gives a snapshot of a business's assets, liabilities, and equity at a single point in time.
• Also Known As: Statement of Financial Position.
• Components:
  • Assets: Everything the business owns.
  • Liabilities and Equity: Everything the business owes.
• Example: Tea-licious
  • Total Equity: $129.5 million
  • Total Assets: $169 million
  • Total Liabilities and Equity: $169 million
  • Balance: Assets = Liabilities + Equity

Accounting Equation

• Formula: Assets = Liabilities + Equity
• Balance sheet must always balance.

Income Statement

• Definition: Summarizes a business's revenues and expenses over a period of time.
• Also Known As: Statement of Profit and Loss.
• Components:
  • Revenue: Income earned from selling products
  • Expenses: Costs of running the business
  • Net Profit: Revenue - Expenses
• Example: Tea-licious
  • Revenue: $255 million
  • Expenses: $248 million
  • Net Profit: $7 million
• Key Point: Profitability; however, profit ≠ cash flow.

Cash Flow Statement

• Definition: Shows a business's cash inflows and outflows over a period of time.
• Necessity: Required if using accrual accounting.
• Accounting Methods:
  • Cash Method: Revenue recognized when cash is received; expenses recorded when cash is paid out.
  • Accrual Method: Revenue recognized as earned; expenses recorded as incurred.
• Components:
  • Opening and Closing Cash Balances: Related to the financial year.
  • Cash Flow from Operating Activities: Selling products and services.
  • Cash Flow from Investing Activities: Investments, buying/selling property and equipment.
  • Cash Flow from Financing Activities: Loans or equity funding.
• Example: Tea-licious
  • Opening Cash Balance: $11 million
  • Closing Cash Balance: $12 million
  • Net Increase in Cash: $1 million

Recap

• Balance Sheet: Snapshot of assets, liabilities, and equity at a single point in time.
• Income Statement: Revenues and expenses over a period of time.
• Cash Flow Statement: Cash inflows and outflows over a period of time, reconciled back to the movement in cash in the balance sheet.

Additional Resources:

• Videos and cheat sheets available in the description
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