Basic Financial Statement PDF

Basic financial statement Income statement (statement of comprehensive income): Over a period of time Includes revenue and expenses Retained earnings and changes to owner’s equity do not appear in the income statement The cumulative results from operating the business over a peri...

Basic financial statement Income statement (statement of comprehensive income): Over a period of time Includes revenue and expenses Retained earnings and changes to owner’s equity do not appear in the income statement The cumulative results from operating the business over a period of time Balance sheet (statement of financial position): Snapshot of the assets, liabilities and owner’s equity for a particular date Cash flow statement (statement of cash flows): Reports cash received and cash spent Over a specified period of time Statement of changes in equity Provides a detailed account of the firm’s activities in the ordinary and preference share accounts Why study financial statements? 1) Assess current performance: Basic objective of financial statement analysis The analyst performs a financial analysis so clients can see the firm's financial performance the same way an outside investor would see it 2) Monitor and control operations The performance is reported using accounting measures that compare the prices of the products and services with the estimated cost of providing them to buyers The board of directors uses these performance measures to determine executive’s bonuses Determine whether or not to extend the loán 3) Plan and forecast future performance Provide a universally understood for describing a firm’s operations Financial planning models are built using the financial statements as a prototype Accounting principles 1) The historical cost principle: Provide the basis for determining the dollar values the firm reports on the balance sheet Asset’s historical cost: assets and liabilities are reported in the financial statements on the basis of the price the firm paid to acquire them 2) The accrual basis assumption Require rev and exp to be recognized in the period where they occur Income statement Measures the amount of profit generated by a firm over a given time period Profit = Revenue - Expenses Rev represents the sales Profit: the difference between the revenue and the expense the firm incurred to generate revenue Rev and exp are determined in accordance with the accrual assumption COGS: cost of producing or acquiring the products or services the firm sold during the period Depreciation expense: non-cash expense used to allocate the cost of the long-lived assets Operating profit: the ability to earn profits from its EBIT Earnings per share: net profit divided by the number of ordinary shares outstanding Dividends per share: the per share cash distribution a firm pays by way of dividends ○ dividends a firm pays for each share outstanding  Interpreting firm profitability using the income statement Gross profit margin: ○ the firm’s ‘markup’ (phần chênh lệch) on its COGS per dollar of sales ○ The ratio of gross profit (sales less COGS) divided by sales ○ Gross profit margin = gross profit/sales = (sales - COGS)/sales Operating profit margin: ○ The ratio of operating profit to sales ○ EBIT divided by sales ○ Gross profit less the operating expenses consist of distributing the product or service to the customer (namely, selling and marketing expenses) and any general and administrative expenses in operating the business. ○ Operating profit margin = Operating profit (EBIT)/sales Net profit margin: ○ Net profit divided by sales ○ Captures the effects of all of the expenses and indicates the percentage of revenue left over after interest and tax have been considered ○ Operating profit less financing costs (interest expenses) and less income tax. ○ Net profit margin = Net profit/sales By comparing these margins to those of similar businesses => dissect (phân tích) performance and identify expenses that are out of line The balance sheet Snapshot of the firm’s financial position on a specific date Total liabilities: the total amount of money the firm owes its creditors Total shareholders’ equity: ○ the difference in the value of the firm’s total assets and the firm’s total liabilities recorded in the firm’s balance sheet ○ The book value of their investment in the firm, which includes both the money they invested to purchase its shares and the accumulation of past earnings from the firm’s operations Total assets: resources controlled by the firm ○ The firm reports assets on its balance sheet using the historical cost of acquiring them ○ Cash and assets held for resale are an exception to the historical cost principle ○ These assets are reported in the balance sheet using the lower of their cost or their current market value Market value: The price that asset would trade for in a competitive market Net Property, plant and equipment: ○ The cumulative historical cost of land, buildings, plant and equipment owned by the firm (gross property, plant and equipment) less accumulated depreciation expense that has been charged against those assets over their useful life ○ Assets whose future economic benefits are expected to decline over time ○ Book value is not intended to measure the market value of these assets The balance sheet contains the book value of the firm’s assets Book value is not equal to the current market value of the firm’s assets Book value does not reflect the value of the company if it were to be sold to another owner or liquidated by selling off the individual assets it owns Assets The distinction between current assets and non-current assets: the time it takes for them to be converted to cash Current assets Consist of the cash plus other assets the firm expects to convert into cash within 12 months Inventories: raw materials used to make the firm’s products, goods in process and finished goods that are ready for sale Accounts receivable: reflects the value of prior credit sales that have not been collected Non-current assets Assets that the firm does not expect to sell within one year Include PPE and other investments that are expected to be held for an extended period of time and frequently cannot be easily converted to cash Gross property, plant and equipment: ○ the sum of the historical cost of the land, buildings, plant, and equipment ○ Changes over time as new assets are acquired and others are sold ○ Example: When a firm purchases a new computer system, it does not immediately report the cost as an expense in its income statement for the period. Instead, the computer system is considered to be an asset and is included on the balance sheet. Then the cost of the computer system is depreciated over time Net property, plant, and equipment: the undepreciated value of the firm’s ○ Net PPE = Gross PPE - Accumulated depreciation Accumulated depreciation: the sum of all depreciation expenses that have been deducted from the firm’s income statement in previous periods for the PPE the firm currently has on its balance sheet Some assets, such as land, are not expected to depreciate, as they are expected to provide future economic benefit for an indefinite period ○ These assets are carried on the firm’s balance sheet at their original cost until they are sold for a profit or a loss Liabilities and shareholders equity Indicates how the firm finances its assets Current liabilities The debts of the firm that must be repaid within 12 months or less Accounts payable: the credit suppliers extend to the firm when it purchases items for its inventories Accrued expense: ○ liabilities that were incurred in the firm’s operations but not yet paid ○ Example: the company’s employees might have done work for which they will not be paid until the following week or month. The wages owed by the firm to its employees are recorded as accrued wages. Notes payable: ○ A loan contract reflecting the fact that a firm has borrowed money that it promises to repay according to the terms of the agreement ○ short-term loans from banks and other creditors  Non-current liabilities: Loans from banks and other lenders that have maturities longer than one year as well as bonds sold by the firm in the public markets Shareholders’ equity Ordinary shares, preference shares Retained earnings: the accumulation of prior-year net profit that was retained and reinvested in the firm Reserves: ○ There may be reserves of various kinds, such as general reserves or revaluation surplus ○ Ordinary shareholders are the residual owners of everything listed under “Shareholders’ equity’ except the preference shares Shareholders’ equity = amount received for ordinary shares and preference shares + retained earnings + reserves Firm liquidity and net working capital Liquidity: the speed with which the asset can be converted into cash without loss of value ○ Bank account is perfectly liquid because it consists of cash that can be readily spent Net working capital: the difference between the current assets and current liabilities ○ The function of both the liquidity of the current assets and the size of the bills: convert its current assets into cash so that it can pay its bills on time ○ NWC = Current assets - Current liabilities Current assets > current liabilities (high levels of working capital): good position to repay its debt on time and consequently very liquid Working capital levels which are extremely: indicate a poor use of resources Cash flow statement Explain changes in the cash balances over a period of time by identifying all of the sources and uses of cash for the period spanned by the statement A financial statement reports cash spent and cash received by the firm over a period of time Change in cash balance = ending cash balance - beginning cash balance Another way to look at the change in cash balance: compare the sources and uses of cash Sources and uses of cash Source of cash: any activity brings cash into the firm, ○ Such as when the firm sells goods and services or sells a piece of equipment it no longer needs Use of cash: any activity causes cash to leave the firm ○ Such as the payment of tax, the purchase of new piece of equipment Increases in assets as an indication of the use of cash, whereas a decrease in an assets account is a source of cash An increase in a liability account indicates a source of cash, whereas a decrease in a liability is a use of cash  Operating activities Represent the company’s core business Including sales and expense (any cash activity that affects net profit for the period) Investment activities Include cash flows that arise out of the purchase and sale of non-current assets Example: PPE Financing activities Represent changes in the use of debt and equity Include the sale of new shares, the repurchase of outstanding shares and the payment of dividends Quality of earnings Quality of earnings ratio: the ratio of cash flow from operations divided by net profit Quality of earnings = Cash flow from operations/net profit Cash flow from operations: portion of the total cash flow from resulting from its operating activities Sustainable capital expenditure: Raising the funds needed to finance the capital expenditure from operations means that a firm has less need for external financing, and would be less dependent on the whims of the capital market Capital acquisitions ratio: the ratio of cash flow from operations dividend by cash paid for capital expenditure ○ Cash acquisition ratio = cash flow from operations/cash paid for capital expenditure ○ This ratio indicates whether there are sufficient operating cash flows to pay for capital expenditure ○ The higher the ratio, the less dependent is the firm on capital markets for financing the expenditure on new capital equipment