Meaning of Financial Statements

Financial statements are summaries of the operating, financing, and investment activities of a firm. According to the Financial Accounting Standards Board (FASB), the financial statements of a firm should provide sufficient information that is useful to

Financial statement analysis helps identify

investors and creditors in making their investment and credit decisions in an informed way.
a firms strengths and weaknesses so that management can take advantage of a firms strengths and make plans to counter weaknesses of the firm.

The strengths must be understood if they are to be used to proper advantage and weaknesses must be recognized if corrective action needs to be taken

Purpose of F/S
F/S are a structured representation of the financial position and of the transactions undertaken by an entity that is useful to a wide range of users in making and evaluating decisions about the allocation of resources. Specifically, the objectives of F/S in the public sector are to provide information useful for decision-making, and to demonstrate the accountability of the entity for the resources entrusted to it. F/S can also have a predictive/prospective role, providing information useful in predicting the level of resources required for continued operations and the resources that may be generated by them.

Framework for preparing F/S

Objectives of financial statements
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Net assets and net assets maintenance

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Qualitative characteristics of financial statements

Components and elements of financial statements

Types of Financial Statements and Reports

The Income Statement The Balance Sheet Cashflow Statement Statement of Retained Earnings

Qualitative characteristics of F/S

Main objective of FS: Provide reliable information on financial position, performance and changes in financial position Main characteristic: Major qualitative characteristics: Decision usefulness
Understandability Relevance (Materiality) Substance over form Comparability Reliability

Prudence

True and fair view

The Income Statement

An income statement is a summary of the revenues and expenses
of a business over a period of time, usually either one month, three months, or one year. Summarizes the results of the firms operating and financing decisions during that time. Operating decisions of the company apply to production and marketing such as sales/revenues, cost of goods sold, administrative and general expenses (advertising, office salaries)

Major Income Statement Items

Gross Profit = Sales - Costs of Goods Sold EBITDA = Gross Profit - Cash Operating Expenses EBIT = EBDIT - Depreciation - Amortization EBT = EBIT - Interest NI or EAT = EBT- Taxes Net Income is a primary determinant of the firms cashflows and, thus, the value of the firms shares

The Balance Sheet

A summary of a firms financial position on a given date that shows total assets = total liabilities + owners equity

Major Balance Sheet Items

Assets

Current assets:
Cash & securities Receivables Inventories

Fixed assets:
Tangible assets Intangible assets

Major Balance Sheet Items

Liabilities and Equity Current liabilities:
Payables Short-term debt

Long-term liabilities Shareholders' equity

THE STATEMENT OF CASH FLOWS

The statement is designed to show how the firms operations have affected its cash position and to help answer questions such as these:
Is the firm generating the cash needed to purchase additional fixed assets for growth? Is the growth so rapid that external financing is required both to maintain operations and for investment in new fixed assets? Does the firm have excess cash flows that can be used to repay debt or to invest in new products?