Basics of Financial Statements

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Agenda

In the Accounting Primer, we will discuss about following:

Basics of Income statement, line items discussion and sample structure
Basics of Balance sheet, line items discussion and sample structure
Basics of Cash flow statement, line items discussion and sample structure
Financial statements linking and relationship

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Income Statement
 Reports financial performance of a firm over a period of time. Major components include:
 Revenues / Sales: Inflows a firm get from delivering products and offering services
– For example, Big Bazar selling grocery products to consumer and an advisory firm offering taxation and advisory
services etc
 Operating expenses: Outflows related to cost of goods sold, sales and advertising expenses, official expenses,
administration expenses etc
– Cost of goods sold: COGS includes all the Direct cost related to manufacture a product / services like raw
material, labor costs, factory electricity etc
– Selling, general and administrative expenses: SG&A includes all the indirect and operating costs like advertising,
rent, electricity, office expenses, salaries etc
– Depreciation and amortization expenses: D&A is a decrease in the value of assets over time. Depreciation is
charged on tangible assets whereas, Amortization is charged on intangible assets. Moreover, D&A are both non-
cash expenses
 Interest expenses and income: Interest income / expenses which we earn / spend on cash / debt in our balance
sheet
 Taxes: Firm are liable to pay taxes to the government over the earned income. Its is charged after paying the
interest to the debt holders i.e. on PBT
 Net Income: Post tax the amount which is left is called Net Income

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Income Statement Sample
Description Amount Comments
Revenue 95,000
Cost of revenues -30,000 May have D&A Portion
Gross Profit 65,000
Sales and marketing exp -10,000 May have D&A Portion
General & administrative exp -12,000 May have D&A Portion
Depreciation & Amortization (D&A) -9,000
Other operating exp -3,000
Operating Profit (EBIT) 31,000
Interest expenses / income -3,000
Profit before tax (PBT) 28,0clarsu00
Provision for taxes -12,000
Net Income 16,000
Minority Interest -3200
Net Income available to common
shareholders’ 12,800

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Balance Sheet
 Balance sheet reports the firm financial position at a point of time. There are 3 primary sections of Balance sheet
 Assets: These are firms resources to carry out the business. Major line items include
– Cash & cash equivalents
– Account receivables: Credit sales create account receivables
– Inventory or stock
– Financial assets: Include held for trading and available for sale
– Prepaid expenses: expenses incurred and benefits / services yet to be received
– PP&E: Property plant and equipment
– Investment in affiliates: Investments in companies with substantial stake i.e. > 20%
– Deferred tax assets
– Intangibles assets
 Liability: Liabilities are the obligation which are to be fulfilled
– Accounts Payable: Credit purchases create account payables
– Short / long term debt
– Unearned revenue: Yet to billed and to be shown as revenues
– Deferred tax liabilities
 Owners Equity: This remains with the owners of the company after paying all of their liabilities
– Includes Share capital, premium, retained earnings and AOCI

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Balance Sheet Sample
Assets Amount Liabilities Amount
Current Assets Current Liabilities
Cash & cash equivalents 1,000 Short term debt 10,000
Inventory 20,000 Account payables 10,000
Account receivables 2,000 Outstanding expenses 2,000
Financial assets (HTM, AFS, HFT) 1,500 Unearned income 3,000
Prepaid expenses 1,500 Non-current Assets
Accrued income 1,000 Long-term debt 15,000
Non-current Assets Deferred tax liabilities 5,000
PP&E 35,000 Owners’ Equity
Investments in affiliates 10,000 Share capital 10,000
Deferred tax assets 3,000 Additional paid-in capital 25,000
Intangible assets 10,000 Retained earnings 10,000
Goodwill 5,000 Other comprehensive income (OCI) 5,000
Other assets 10,000 Minority / Non-controlling interest 5,000
Total Assets 100,000 Total Liabilities and owners’ equity 100,000

Assets = Liabilities + Equity

where,
Equity = Shareholders equity (SE) + Minority Interest (MI)

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Cash Flow Statement
 Cash flow statement helps firms determining the cash position of the firm for a particular period of time
 Under Indirect method, activities of the cash flows are recorded in 3 sections:
 Cash Flow from Operating (CFO): Items reported on income statement on accrual basis are reported on cash
basis in operating activities like D&A, Stock based compensation, Change in current assets / liabilities, Income
tax expense etc
– In other words, all operating activities on CASH basis comes here
 Cash Flow from Investing (CFI): Reports purchase & sales of assets i.e. capital expenditure, investments in
associates, long term securities
– In other words, all the asset based investing comes here
 Cash Flow from Financing (CFF): Reports issuance and repurchase / redemption of company’s equity and debt,
Dividend paid and share repurchase activity
– In other words, all the financing activities, be it equity or debt, are reported here
 Key Takeaways:
 Operating activities (CFO) convert accrual net income to cash net income by adjusting the non cash line items
 Under US GAAP, Dividend paid is considered financing activities; Dividend received, Interest paid and interest
received are considered operating activities
 Repurchase are also considered financing activities
 Free Cash flows are true measure to value a company
 CFO helps us determining if the firm has a huge differences between its accrual and real position; Also helps us
understand if the firm need to change their credit policy for sales and purchase

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Cash Flow Statement Sample
Operating Activities (CFO) Amount Comments
Net Income +++
(+) Depreciation &Amortization (D&A) +++
(+) Stock based compensation +++
(+) Income tax expense +++
Change in working capital
Decrease / (Increase) in A/R Any change in Current assets
Increase / (Decrease) in A/P Any change in Current liabilities
Decrease / (Increase) in Inventory Any change in Current assets
Cash Flows from Operating Activities (CFO)
Investing activities
Capital expenditure ---
Investments ---
Disposal +++
Cash Flows from Investing activities (CFI)
Financing activities (CFF)
Dividends paid ---
Stock repurchase ---
Issue / (repayment) of debt
Issue / (repayment) of shares
Cash Flows from Financing activities (CFF)
Net increase / (Decrease) is Cash & cash equivalents Addition of CFO + CFI + CFF

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3 statement linking
Income Statement Balance Sheet Cash Flow
+ Revenue Current Assets: Net Income
- Cost of goods sold + Cash & cash-equivalents + D&A
+ Short-term investments
= Gross profit + Stock-Based Comp.
+ Accounts receivable (AR)
+ Inventory + Deferred Income Taxes
- Operating exp (SG&A) Long-Term Assets: Changes in working capital:
- Depreciation and Amortization + Long-term investments – Increase (Decrease) in AR
(D&A) + Goodwill – Increase (Decrease) in Inventory
- Stock based compensation + Property & equipment (PP&E) + Increase (Decrease) in AP
= Total Assets
= Operating Income (EBIT) = Cash Flow from Operations (CFO)
Current Liabilities:
+ Short-term debt Cash Flow from Investing:
+ Interest Income + Accounts payable (AP) – Capital Expenditures
- Interest expense + Accrued expenses – Buy (Sell) Short-Term Investments
= Pre tax Income (PBT) Long-Term Liabilities: – Buy (Sell) Long-Term Investments
+ Unearned revenue = Cash Flow from Investing (CFI)
+ Long-term debt
- Income tax provision Cash Flow from Financing:
+ Deferred tax liabilities
= Net Income = Total liabilities – Dividends Issued
Shareholders’ equity (SE) = + Debt issued (repayment)
EPS = Net Income / Share Common Stock + Additional Paid-In + Issue (Repurchase) Shares
outstanding Capital + Treasury Stock + Accumulated = Cash Flow from Financing (CFF)
Other Comprehensive Inc Net Change in Cash = CFO + CFI +
+ Retained Earnings (Net Income post Div)
EBITDA = EBIT + D&A CFF
Minority Interest (MI)
Assets = Liabilities + (SE + MI) Ending Cash = Beginning Cash + Net
Change in Cash

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 Questions!!!
Info@cfieducation.in

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