FINANCIAL STATEMENT

INTRODUCTION:-

 The primary purpose of financial statement is to summarize the financial information of a company and comply with the law by providing an honest and transparent view of the financial situation and performance of the company. As a company is a complex thing to summarize, it cannot be done on a single document. And this is why four documents are needed. 

4 DOCUMENTS:-

• BALANCE SHEET• INCOME STATEMENT• CASH FLOW STATEMENT• STATEMENT OF OWNER EQUITY

BALANCE SHEET:-

The Balance Sheet describes a business’s financial situation at a moment In a time.

The Left side details the assets a business has. The right side details how those assets were

acquired. Both sides must be equal.

Assets How We Acquired Assets

CASH ORIGNAL INSVESTMENTS

How to understand the balance sheet:-

• Company’s equity is same as your personal net worth

Owners situation: Assets - liabilities = equity Company position: Assets = liabilities + equity

Assets

Liabilities

Equity

What to focus on when presenting the balance sheet:-

1. Liquidity – near term financial situation

2. Changes in cash/bank

3. Types of assets and liabilities

4. Individual line items

The liquidity issues:-

The ability of the business to pay it’s debts as they come due.

Like to pay for the short term liabilities we use short term assets and for the long term we use long term assets.

The changes in cash/bank:-

0

50

100

150

200

J F M A M J J A S O N D

The types of assets and liabilities:-

Current liabilities

Currentassets

Non current liabilities

Non current assets Equity

The balance sheet relationships:-

1. Equity – assets less liabilities

2. Leverage – assets financed with debt

3. Debt to equity – assets available to repay debt (cushion)

Assets: What is owned by the organization:-

Current Assets - assets that could be expected to be available as cash within 12 months. Examples: cash equivalents and receivables

Non-current Assets - assets with a relatively long useful life. Example: equipment, furniture, buildings & land

Net Assets: The difference between total assets and total liabilities

Liabilities – What the organization owes to others:-

Short-term Liabilities – liabilities payable within 12 months (invoices, payroll)

Long-term Liabilities – obligation with a due date of longer than one year (loans)

TEMPLATE FOR BALANCE SHEET

ASSETS LIABILITIES+EQUITY

CURRENT ASSETS CURRENT LIABILITIESNON-CURRENT

NON-CURRENT ASSETS EQUITIES

TOTAL TOTAL

ASSETS=LIABILITIES+EQUITIE

EQUITY=(TOTAL ASSETS)-(TOTAL LIABILITIES)

Company nameStatement of financial position As on ……

INCOME STATEMENT:-

Income reported on income statement

is based on Accrual(note) Accounting, all revenues earned in the year & all expenses occurred in that year (NOT on the cash generated or cash paid during accounting period)

A summary of a company’s profit and loss over a specific time period(usually a full year or a part of a year).

The format of the income statement or the profit and loss statement will vary according to the complexity of the business activities. However, most companies will have the following elements in their income statements:

ELEMENTS:-

 Revenues and Gains1. Revenues from primary activities 2. Revenues or income from secondary activities Expenses and Losses 1. Expenses involved in primary activities2. Expenses from secondary activities 

WHAT THE INCOME STATEMENT SHOWS:-

The income statement shows the income earned and expenses payed by the business during the period being reported overall it helps you to determine how well the business is doing by showing:-

SALES

COSTS

UNEXPECTED EXPENSES

INCOME TAX LIABILITY

SIMPLE INCOME STATEMENT FORMULA:-

Sales – Cost Of Good Sold = GROSS MARGIN(Gross Profit)

Gross Margin – Operating Expenses = NET INCOME

The top line is also called GROSS REVENUES(Sales or Income)(Sales:-represents all the money earned but not necessarily collected yet. It is called GROSS because on top line no expenses have been deducted yet.

From Gross figure then u can deduct returns & discounts.

GROSS REVENUE – Returns & DISCOUNTS = NET SALES

COST OF GOOD SOLD associated with making your product (e.g. raw materials , labors and shipping). It is also referred to as a variable expense.

NET SALES – COST OF GOOD SOLD = GROSS MARGIN

OPERATING EXPENSES:- Fixed cost to operate your business, such as marketing and advertising, salaries, rent, insurance and utilities.

GROSS MARGIN – OPERATING EXPENSES = OPERATING INCOME

Operating Income is also known as Earning Before Interest And Taxes(EBIT).

INCOME STATEMENT SHOWS:-

GROSS REVENUE – RETURNS AND DISCOUNTS = NET SALES

NET SALES – COST OFGOOD SOLD = GROSS MARGIN

GROSS MARGIN - OPERATING EXPENSES = OPERATING INCOME

Interest income money you make from savings.

Interest expense money you pay on loans.

INCOME STATEMENT TEMPLATE

HEADS

SALES ------

LESS: CGS

(----)

GROSS PROFIT (SALES-CGS)

LESS: OTHER EXPENSES

(------)

-------

ADD: OTHER INCOME

-------

NET PROFIT ------

COMPANY NAME INCOME STATEMENT FOR THE PERIOD ------

STATEMENT OF CANGES IN EQUITY:-

PROFIT

DIVIDENDS

SHARE CAPITAL

OTHER ITEMS

Used to monitor and evaluate equity for financing purposes.

WHAT IS EQUITY:-

Equity is made up of two or more items. We cover two:-

SHARE CAPITAL

RETAINED EARNINGS

DIRET INVESTMENTS:-

SHARE CAPITAL

Can be from common or preferred shares sold for cash or exchanges for goods or services.

INDIRECT INVESTMENTS:-

RETAINED EARNINGS:-

Increased by profits, decreased by dividends and loses.

Represent profits retained by business for future growth and expansion.

USES OF SATEMENT OF CHANGES IN EQUITY (RETAINED EARNINGS):-

INVESTORS:-

used past dividends payouts to predict future dividends.

is company reinvesting enough profit to support future growth?

LENDERS:-

are dividends payouts reasonable, leaving enough cash to repay debts?

OTHER CREDITORS:-

is the company reinvesting enough profit to ensure future growth?

EQUITY STATEMENT TEMPLATE

OPENING OWNER EQUITY ------

ADD:INCOME FOR THE YEARLESS:LOST OF THE YEAR

-------(-----)

ADD:ADDITIONAL INVESTMENT BY OWNER

-------

LESS:DRAWING BY OWNERLESS:DIVIDENT PAID DURING YEAR

(-----)(-----)

TOTAL -------

COMPANY NAME STATEMENT OF OWNER EQUITY AS ON ------

CONNECTION TO OTHER STATEMENT:-

TOTALS FROM STATEMENT OF CHANGES IN EQUITY

SATEMENT OF FINANCIAL POSITION

INCLUDED IN

SHARE SHOLDERS’ EQUITY

INCOME STATEMENT, EQUITY STATEMENT AND BALANCE SHEET RELATIONSHIP:-