Universidad Nacional

Autónoma de México

Review of Financial
Statements
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Overview
Autónoma de México

9/6/2015

This module reviews three key financial statements: the

Income Statement, the Balance Sheet and the Statement of
Cash Flows. It reviews the purpose of each statement, its
format, definitions of terms and some information on the
interpretation of each statement.

Financial statements provide the basic means of corporate

communications at a management level. Statements such
as “the bottom line is most important” communicate the
critical importance of this information. Without an
understanding of financial information, management cannot
communicate the relative success of its performance.

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Learning Objectives
Autónoma de México

9/6/2015

This module is intended to be a review of prework with the following

general objectives:
Understand the structure and format of the three financial statements:
Income Statement
Balance Sheet
Cash Flow Statement
Understand the key line items and their definitions.
Understand the relationships between the three statements.

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There are Three Basic Financial Questions:
Autónoma de México

9/6/2015

How much did we earn last year?

The Income Statement

The Income Statement discusses the flow of past events.

How much are we worth?

The Balance Sheet

The Balance Sheet gives a picture of the corporation's current financial position.
Where did our Cash come from and where did it go ?

Net Change in Cash Balance

The Cash Flow Statement gives a picture of the corporation's cash resources.

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Income Statement : Common Size
Autónoma de México

9/6/2015

The Income Statement Hypo-Thetical Corporation

For the Period Ending December 31,20XX

Common
X1 Size
Revenues $7,523,000 100%
Cost of goods sold 4,849,000 65%
Gross Profit 2,674,000 35%
Selling, general, and
administrative expenses 1,524,000 20%
Operating Income 1,150,000 15%
Interest expense 160,000 2%
Net Income Before Taxes 990,000 13%
Taxes on income 396,000 5%
Net Income 594,000 8%

Example:
Common Size of Cost of Goods Sold = 4,849,000 = 65%
7,523,000
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Income Statement : Common Size
Autónoma de México

9/6/2015

Hypo-Thetical Corporation
The Income Statement For the Period Ending December 31, 20X1 and 20X2

20X2 C'Size 20X1 C'Size

Revenue $8,426,000 100% $7,523,000 100%
Cost of Goods Sold 5,625,000 67% 4,849,000 65%
Gross Margin 2,801,000 33% 2,674,000 35%
Selling, General & Administrative
Expenses 1,799,000 21% 1,524,000 20%
Operating Income 1,002,000 12% 1,150,000 15%
Interest Expense 160,000 2% 160,000 2%
Net Income Before Taxes 842,000 10% 990,000 13%
Taxes on Income 337,000 4% 396,000 5%
Net Income 505,000 6% 594,000 8%

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Percent Change Analysis
Autónoma de México

9/6/2015

Hypo-Thetical Corporation
For the Period Ending December 31,20X1 and 20X2

20X2 20X1 % Change

Revenue $8,426,000 $7,523,000 12%

Cost of goods sold 5,625,000 4,849,000 16%
Gross Profit 2,801,000 2,674,000 5%
Selling, general, and
administrative expenses 1,799,000 1,524,000 18%
Operating Income 1,002,000 1,150,000 (13%)
Interest expense 160,000 160,000
Net Income Before Taxes 842,000 990,000 (15%)
Taxes on income 337,000 396,000 (15%)
Net Income 505,000 594,000 (15%)

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Income Statement Ratios
Autónoma de México

9/6/2015

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆
Return on Sales (ROS) = 𝑺𝒂𝒍𝒆𝒔 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝒙𝟏𝟎𝟎

𝑺𝒂𝒍𝒆𝒔 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 −𝑪𝒐𝒔𝒕 𝒐𝒇 𝑮𝒐𝒐𝒅𝒔 𝑺𝒐𝒍𝒅 𝑺𝑮&𝑨

Gross Margin (GM) = 𝒙𝟏𝟎𝟎 𝒐𝒓 𝒙 𝟏𝟎𝟎
𝑺𝒂𝒍𝒆𝒔 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝑺𝒂𝒍𝒆𝒔 𝑹𝒆𝒗𝒆𝒏𝒖𝒆

𝑺𝑮&𝑨
Selling, General & Administrative Expense Ratio (SG&A) = 𝑺𝒂𝒍𝒆𝒔 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝒙 𝟏𝟎𝟎

𝑬𝒂𝒓𝒏𝒊𝒏𝒈 𝑩𝒆𝒇𝒐𝒓𝒆 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 & 𝑻𝒂𝒙𝒆𝒔 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑰𝒏𝒄𝒐𝒎𝒆

Interest Coverage = 𝒐𝒓
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒙𝒑𝒆𝒏𝒔𝒆 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒙𝒑𝒆𝒏𝒔𝒆

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The Income Statement - Hypo-Thetical Corporation
Autónoma de México

9/6/2015

20X2
Ratio Formula Calculation 20X2 20X1

Return on Net Income 505,000 6% 8%

Sales Revenue 8,426,000
(ROS)

Gross Margin Revenue - COGS 8,426,000 - 33% 36%

(GM) Revenue 5,625,000
8,426,000

Selling, SG&A 1,799,000 21% 20%

General, and Revenue 8,426,000
Administrative
Expense

Interest Operating Income 1,002,000 6.3% 7.2%

Coverage Interest Expense 160,000

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The Balance Sheet
Autónoma de México

9/6/2015

The Balance Sheet is a financial snapshot -- showing what the

company owns at a particular point in time and how it was
financed. It is a static statement of the financial position of the
firm. It attempts to highlight the differing nature of the company’s
assets and provide an indication of the claims against these
assets.

 How much did we invest?

 How is the investment financed?
 What assets did we acquire?
 Book value / acquisition cost?
 Tangible / intangible assets?
 Historical book value of firm?
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The Balance Sheet Expanded - A Visual
Autónoma de México

9/6/2015

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What information is found on the Balance Sheet?
Autónoma de México

9/6/2015
Hypo - Thetical Corporation
As of December 31, 20XX

Current Assets
Current Liabilities
Cash 250,000 1,500,000
Accounts Payable
Marketable Securities 350,000 200,000
Wages Payable
Accounts Receivable 1,000,000 100,000
Advance Payments
Inventory 2,700,000 1,800,000
Total Current Liabilities
Prepaid Expenses 200,000
Total Current Assets 4,500,000 Long-term Liabilities
Notes Payable 500,000
Fixed Assets 3,800,000 1,600,000
Bonds Payable
Plant, Property, & Equipment
Total Long-term
Less: Accumulated Depreciation 1,500,000 2,100,000
Liabilities
Net Fixed Assets 2,300,000
Owners' Equity
Other Assets 100,000 1,500,000
Common Stock
Investments 200,000 1,700,000
Retained Earnings
Total Owners' Equity 3,200,000
Total Assets 7,100,000
7,100,000
Total Liabilities & Owners' Equity

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Fixed Assets and Depreciation
Autónoma de México

9/6/2015

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Fixed Assets and Depreciation
Autónoma de México

9/6/2015

Investment in Fixed Assets

Depreciation Expense
Economic Value
Accumulated Depreciation
Depreciation Methods
 Straight Line
 Accelerated - sum of the year's digits
Book Value
Useful Life
Non- Cash Expense

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Working Capital
Autónoma de México

9/6/2015

Investment in Working Capital

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Working Capital
Autónoma de México

9/6/2015

Working Capital = Current Assets - Current Liabilities

Working Capital measures the net investment into the company’s

operating cash cycle.

Working Capital is necessary to:

 Support production
 Maintain day-to-day operations
 Cover time variations in receipts and disbursements

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Invested Capital (Capital Employed)
Autónoma de México

9/6/2015

Any investment that provides a return to investors

is part of capital.
 Debt: interest
 Preferred Stock: fixed dividends
 Equity: dividends and stock price appreciation

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Invested Capital (Capital Employed)
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9/6/2015

The Balance Sheet shows how assets were financed.

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The Balance Sheet Common Size Analysis
Autónoma de México

9/6/2015
Hypo-Thetical Corporation as of December 31, 20X2 and December
31, 20X1

Assets Liabilities & Owners’ Equity

Common Common Common Common
20X2 Size 20X1 Size 20X2 Size 20X1 Size
Current Assets Current Liabilities
Cash 300,000 4% 250,000 4% Accounts Payable 2,200,000 27% 1,500,000 21%
Marketable Securities 400,000 5% 350,000 5% Wages Payable 300,000 4% 200,000 3%
Accounts Receivable 1,400,000 17% 1,000,000 14% Advance Payments 100,000 1% 100,000 1%
Inventory 3,300,000 40% 2,700,000 38% TOTAL CURRENT LIABILITIES 2,600,000 31% 1,800,000 25%
Prepaid Expenses 200,000 2% 200,000 3
TOTAL CURRENT ASSETS 5,600,000 67% 4,500,000 63 Long-term Liabilities
Notes Payable 500,000 6% 500,000 7%
Fixed Assets Bonds Payable 1,600,000 19% 1,600,000 23%
Plant, Property, &Equip. 4,000,000 48% 3,800,000 54 TOTAL LONG-TERM LIABILITIES 2,100,000 0 2,100,000 30%
Less: Accum. Depreciation 1,700,000 20% 1,500,000 21%
NET FIXED ASSETS 2,300,000 28% 2,300,000 32%
Owners' Equity
Common Stock 1,500,000 16% 1,500,000 21%
Other Assets 100,000 1% 100,000 1 Retained Earnings 2,100,000 25% 1,700,000 24%
TOTAL OWNERS' EQUITY 3,600,000 43% 3,200,000 45%
Investments 300,000 4% 200,000 3
TOTAL LIABILITIES
TOTAL ASSETS 8,300,000 100% 7,100,000 100% & OWNERS' EQUITY 8300000 100% 7100000 100%

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The Balance Sheet - $ Change
Autónoma de México

9/6/2015

Hypo-Thetical Corporation

For the Period Ending December 31, 20X1 and 20X2

Assets Liabilities & Owner's Equity

20X2 20X1 $ Change 20X2 20X1 $ Change
Current Assets Current Liabilities
Cash 300,000 250,000 50,000 Accounts Payable 2,200,000 1,500,000 700,000
Marketable Securities 400,000 350,000 50,000 Wages Payable 300,000 200,000 100,000
Accounts Receivable 1,400,000 1,000,000 400,000 Advance Payments 100,000 100,000 0
Inventory 3,300,000 2,700,000 600,000 TOTAL CURRENT LIABILITIES 2,600,000 1,800,000 800,000
Prepaid Expenses 200,000 200,000 0
TOTAL CURRENT ASSETS 5,600,000 4,500,000 1,100,000 Long-term Liabilities
Notes Payable 500,000 500,000 0
Fixed Assets Bonds Payable 1,600,000 1,600,000 0
Plant, Property, &Equip. 4,000,000 3,800,000 200,000 TOTAL LONG-TERM LIABILITIES 2,100,000 2,100,000 0
Less: Accumulated Depreciation 1,700,000 1,500,000 200,000
NET FIXED ASSETS 2,300,000 2,300,000 0 Owners' Equity 1,500,000 1,500,000 0
Common Stock 2,100,000 1,700,000 400,000
Other Assets 100,000 100,000 0 Retained Earnings 3,600,000 3,200,000 400,000
TOTAL OWNERS' EQUITY
Investments 300,000 200,000 100,000
TOTAL LIABILITIES
TOTAL ASSETS 8,300,000 7,100,000 1,200,000 & OWNERS' EQUITY 8,300,000 7,100,000 1,200,000

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Balance Sheet - Percent Change
Autónoma de México

9/6/2015

Hypo-Thetical Corporation
For the Period Ending December 31, 20X1 and 20X2

Assets Liabilities & Owners’ Equity

20X2 20X1 % Change 20X2 20X1 % Change
Current Assets Current Liabilities
Cash 300,000 250,000 20% Accounts Payable 2,200,000 1,500,000 47%
Marketable Securities 400,000 350,000 14% Wages Payable 300,000 200,000 50%
Accounts Receivable 1,400,000 1,000,000 40% Advance Payments 100,000 100,000 0%
Inventory 3,300,000 2,700,000 22% TOTAL CURRENT LIABILITIES 2,600,000 1,800,000 44%
Prepaid Expenses 200,000 200,000 0%
TOTAL CURRENT ASSETS 5,600,000 4,500,000 24% Long-term Liabilities
Notes Payable 500,000 500,000 0%
Fixed Assets Bonds Payable 1,600,000 1,600,000 0%
Plant, Property, &Equip. 4,000,000 3,800,000 5% TOTAL LONG-TERM LIABILITIES 2,100,000 2,100,000 0%
Less: Accumulated Depreciation 1,700,000 1,500,000 13%
NET FIXED ASSETS 2,300,000 2,300,000 0% Owners' Equity
Common Stock 1,500,000 1,500,000 0%
Other Assets 100,000 100,000 0% Retained Earnings 2,100,000 1,700,000 24%
TOTAL OWNERS' EQUITY 3,600,000 3,200,000 13%
Investments 300,000 200,000 50%
TOTAL LIABILITIES
TOTAL ASSETS 8,300,000 7,100,000 17% & OWNERS' EQUITY 8,300,000 7,100,000 17%

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Balance Sheet Ratios
Autónoma de México

9/6/2015

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Balance Sheet Analysis
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9/6/2015

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The Cash Flow Statement
Autónoma de México

9/6/2015

Reconciles beginning and ending cash

balances

Categorizes cash flow by major activity:

Operations, Investment and Financing
 Operations
 Cash from income
 Working capital changes
 Investment
 Fixed asset and long-term asset investments
 Financing
 Debt
 Equity

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