Understanding Financial Statements and Balance Sheets

Financial Statements

• Financial statements explain where a firm stands financially.
• Cash flows, balance sheets, income, and retained earnings statements are important financial records.

Balance Sheet

• A balance sheet reveals a firm's financial condition at a specific moment.
• The basic accounting equation is: Assets = Liabilities + Owner’s Equity (Capital).
• Current assets include cash, accounts receivables, and inventories.
• Fixed assets include land, buildings, vehicles, furnishings, and equipment.
• Short term liabilities include accounts payables, notes payables which are short term loans, and accrued expenses.
• Long term liabilities include loans payable with terms longer than a year.
• Equity includes common stock and retained earnings.
• Assets for 2002: Cash - 7,282, A/R - 632,160, Inventories - 1,287,360, Total Current Assets - 1,926,802, Gross Fixed Assets - 1,202,950, Depreciation - 263,160 and Net Fixed Assets - 939,790, Total Assets - 2,866,592
• Assets for 2001: Cash - 57,600, A/R - 351,200, Inventories - 715,200, Total Current Assets - 1,124,000, Gross Fixed Assets - 491,000, Depreciation - 146,200 and Net Fixed Assets - 344,800, Total Assets - 1,468,800
• Liabilities and Equity Amounts for 2002: Accounts Payable - 524,160, Notes Payable - 636,808, Accruals - 489,600, Total Current Liabilities - 1,650,568, Long-term debt - 723,432, Common Stock - 460,000, Retained earnings - 32,592, Total Equity - 492,592, Total Liabilities & Equity - 2,866,592.
• Liabilities and Equity Amounts for 2001: Accounts Payable - 145,600, Notes Payable - 200,000, Accruals - 136,000, Total Current Liabilities - 481,600, Long-term debt - 323,432, Common Stock - 460,000, Retained earnings - 203,768, Total Equity - 663,768, Total Liabilities & Equity - 1,468,800.
• To analyze a balance sheet, compare current assets, non-current assets, current liabilities and equity.
• Analyze cash position inventory levels and accounts receivable under current assets.
• Under Non Current Assets check if any assets have been acquired or disposed and value of intangible assets.
• Under current liabilities, check how much the company owes its supplies, and if debt levels have increased or decreased.
• Under equity, check if any new funds have been raised from shareholders and if the common stock has accumulated capital losses.
• Working capital can be calculated by subtracting current liabilities from current assets.

Income Statement

• An income statement summarizes a firm's revenues and expenses across a specific period, and gives a summary of earnings made by a company in a specific period.
• Data from 2002: Project Revenue - 6,034,000, Direct Cost - 5,528,000, Other Expenses - 519,988, EBITDA - (13,988), Depreciation & Amortization - 116,960, EBIT - (130,948), Interest Expense - 136,012, EBT - (266,960), Taxes - (106,784), Net Income -(160,176)
• Data from 2001: Project Revenue - 3,432,000, Direct Cost - 2,864,000, Other Expenses - 358,672, EBITDA - 209,328, Depreciation & Amortization - 18,900, EBIT - 190,428, Interest Expense - 43,828, EBT - 146,600, Taxes - 58,640, Net Income - 87,960
• Other Data from 2002: Shares Outstanding - 100,000, EPS (Earnings per share) - -$1.602
• Other Data from 2001: Shares Outstanding - 100,000, EPS (Earnings per share) - $0.88

Cash Flow

• Cash-In Flow is Sources of Funds from: Capital Investment, Project Revenue (Down-payment, Progress Billings), Short term/Long term Loans
• Cash-Out Flow is Uses of Funds in: Operating (Direct materials, Direct Labor, Equipment rental, Project Overhead), Financing (Loan Payment), Investing (Purchase of Land, Purchase of Equipment)

Cash Flow Transactions

• June 25, 2012 - Received 20% down-payment for the Ph1,400,000 project estimated to be completed within 6 months starting July 1, 2012.
• June 28, 2012 - Mobilized project and spent Ph5,000.00 as mobilization cost.
• July 1, 2012 - Purchased materials and issued post-dated-check to supplier worth Ph180,000 dated August 1, 2012.
• July 5, 2012 - Purchased construction equipment worth Ph90,000, paid 20% down-payment and the remaining balance in 6 payments without interest starting August 5, 2012, ending January 5, 2013.
• July 28, 2012 - Paid salaries of direct labor for Ph40,000.
• August 5, 2012 - Purchased materials worth P140,000 and issued PDC dated Sept 5, 2012.
• August 28, 2012 - Paid salaries of direct labor for Ph48,000.
• Sept 5,2012 - Purchased materials worth P100,000 and issued PDC dated Oct 5, 2012.
• Sept 15, 2012- Received first progress billing of Ph350,000.00.
• Sept 28, 2012 - Paid salaries of direct labor for Ph50,000
• Oct 10,2012 - Purchased materials worth P80,000 and issued PDC dated Nov 10, 2012.
• Oct 15, 2012- Received second progress billing of Ph330,000.00.
• Oct 28, 2012 - Paid salaries of direct labor for Ph60,000.
• Nov 10,2012 - Purchased materials worth P50,000 and issued PDC dated Dec 10, 2012.
• Nov 15, 2012- Received third progress billing of Ph200,000.00.
• Nov 28, 2012 - Paid salaries of direct labor for Ph55,000
• Dec 8,2012 - Purchased materials worth P50,000 and issued PDC dated Jan 8, 2013.
• Dec 15, 2012- Received fourth progress billing of Ph160,000.00
• Dec 28, 2012 - Paid salaries of direct labor for Ph40,000.
• Dec 30, 2012- Demobilized project and spent P3,000.00 as demobilization cost.
• Jan 20, 2013 - Received final payment of Ph80,000.00.
• Project overhead cost at Ph16,000.00 per month during the project duration.
• Loans payable in Five (5) equal monthly installments with fix 1% interest rate on the loan amount.
• Minimum monthly cash ending balance of 5,000.00
• Progress billing is subject to 10% retention
• Retention money to be released upon issuance of guarantee bond equivalent to 3% of retention money