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Chapter 2 Understanding Financial Statement and Cash Flow PDF

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Chapter 2 Understanding Financial Statement and Cash Flow PDF

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Puteri Norsuhaila
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© © All Rights Reserved
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CHAPTER 2

UNDERSTANDING FINANCIAL
STATEMENTS AND CASH FLOW
FUNCTIONS OF FINANCIAL
STATEMENT

• used by investors to evaluate the firm’s present performance


• form expectations about earnings and dividend
• to know about the riskiness of these expected values
4 BASIS OF FINANCIAL STATEMENT

a) Balance Sheet
b) Income Statement
c) Statement of Retained Earnings
d) Statement of Cash Flows
INCOME STATEMENT

• An income statement is actually a combination of trading and profit and


loss a/c in statement form. It reflects the expenses, income and hence
the profit(earning)of a company for that particular period.
• It can be prepared for a period as long as a year or as short as a day. But
normally it is prepared monthly, quarterly, semiannually and yearly.
INCOME
STATEMENT

SALES
- EXPENSES
= PROFIT
INCOME
STATEMENT
Revenue
SALES
- EXPENSES
= PROFIT
INCOME
STATEMENT

SALES •Cost of Goods Sold

- EXPENSES
= PROFIT
INCOME
STATEMENT

SALES •Cost of Goods Sold


•Operating Expenses
- EXPENSES
= PROFIT
INCOME
STATEMENT

SALES •Cost of Goods Sold


•Operating Expenses
- EXPENSES (marketing, administrative)

= PROFIT
INCOME
STATEMENT

SALES •Cost of Goods Sold


•Operating Expenses
- EXPENSES (marketing, administrative)
•Financing Costs
= PROFIT
INCOME
STATEMENT

SALES •Cost of Goods Sold


•Operating Expenses
- EXPENSES (marketing, administrative)
•Financing Costs
= PROFIT
•Taxes
SALES INCOME
- Cost of Goods Sold STATEMENT
GROSS PROFIT
- Operating Expenses
OPERATING INCOME (EBIT)
- Interest Expense
EARNINGS BEFORE TAXES (EBT)
- Income Taxes
EARNINGS AFTER TAXES (EAT)
- Preferred Stock Dividends
- NET INCOME AVAILABLE
TO COMMON STOCKHOLDERS
SALES INCOME
STATEMENT
- Cost of Goods Sold
GROSS PROFIT
- Operating Expenses
OPERATING INCOME (EBIT)
- Interest Expense
EARNINGS BEFORE TAXES (EBT)
- Income Taxes
EARNINGS AFTER TAXES (EAT)
- Preferred Stock Dividends
- NET INCOME AVAILABLE
TO COMMON STOCKHOLDERS
SALES INCOME
- Cost of Goods Sold STATEMENT
GROSS PROFIT
- Operating Expenses
OPERATING INCOME (EBIT)
- Interest Expense
EARNINGS BEFORE TAXES (EBT)
- Income Taxes
EARNINGS AFTER TAXES (EAT)
- Preferred Stock Dividends
- NET INCOME AVAILABLE
TO COMMON STOCKHOLDERS
BALANCE SHEET

• A balance sheet is prepared as soon as the income statement is


completed. It shows the financial position of a company at that point of
time.
• This means that a balance sheet will show the total amount of assets,
liabilities and equities of the company at particular time. It also shows
the total amount of a/c receivables(debtors) and a/c payable(creditors)
of the company.
BALANCE SHEET

Outstanding
Debt
Total Assets =
+
Shareholders’
Equity
BALANCE SHEET
Assets Liabilities (Debt) & Equity
Current Assets Current Liabilities
Cash Accounts Payable
Marketable Securities Accrued Expenses
Short-term notes
Accounts Receivable
Long-Term Liabilities
Inventories
Long-term notes
Prepaid Expenses Mortgages
Fixed Assets Equity
Machinery & Equipment Preferred Stock
Common Stock (Par value)
Buildings and Land
Paid in Capital
Other Assets Retained Earnings
Investments & patents
ASSETS
• Current Assets: assets that are relatively liquid, and are
expected to be converted to cash within a year.
• Cash, marketable securities, accounts receivable,
inventories, prepaid expenses.
ASSETS
• Current Assets: assets that are relatively liquid, and are
expected to be converted to cash within a year.
• Cash, marketable securities, accounts receivable,
inventories, prepaid expenses.
• Fixed Assets: machinery and equipment, buildings, and
land.
• Other Assets: any asset that is not a current asset or fixed
asset.
• Intangible assets, such as patents and copyrights.
LIABILITY
• Debt Capital: financing provided by a creditor.
• Short-term debt: borrowed money that must be repaid
within the next 12 months.
• Accounts payable, other payables such as interest or
taxes payable, accrued expenses, short-term notes.
• Long-term debt: loans from banks or other sources that
lend money for longer than 12 months.
EQUITY
• Equity Capital: shareholders’ investment in the firm.
• Preferred Stockholders: receive fixed dividends, and have
higher priority than common stockholders in event of
liquidation of the firm.
• Common Stockholders: residual owners of a business.
They receive whatever is left after creditors and preferred
stockholders are paid.
SOURCES AND USES OF FUND
STATEMENT
• This statement is also known as statement of change in the
financial position of a company or flow of funds statement.
• It indicates on a historical basis where cash came
from(sources) and how it was used(uses).
• This statement can be developed from the balance sheets
and income statement.
• It can be prepared under;
i) cash basis
ii) working capital basis
SOURCES OF FUNDS
Decrease in asset When an asset is sold by a
firm, the cash from sales will
be included as an inflow.

Increase in liability When a company borrows


money from external sources it
will increase the funds in the
firm.
Net profit after tax This is the profit from the
firm’s operations
Sales of securities Selling of securities are a means
for firms to generate funds
externally
USES OF FUNDS

Increase in asset When we purchase assets we


use funds to pay for it
Decrease in liability It is regarded as use because we
use the funds to pay off the
debt
Retirement/purchase of Funds will be used for the
securities purpose of securities
Cash dividends Part of the funds will be used to
pay for it.
SUMMARY

• SOURCES • USES
✔ DIA ✔ IIA
✔ IIL ✔ DIL
✔ IIE ✔ DIE
✔ NCE (negative value) ✔ NCE (positive value)
✔ NET INCOME ✔ DIVIDEND
✔ DEPRECIATION
FORMULA
• NCE (Net Capital Expenditure) =(NFA1 – NFA0) + Depreciation1
• NCE(Net Capital Expenditure) = [(GFA1 – Acc.Dep1) – (GFA0 – Acc.Dep0)]
+ Depreciation1
• Changes in GFA = [(GFA1 – GFA0) ]
tak bagi depreciation
• Changes in Depreciation=–[(Acc.Dep1 – Acc.Dep0)] OR
• NCE(Net Capital Expenditure) = [(GFA1 – Acc.Dep1) – (GFA0 – Acc.Dep0)]
+ (Acc.Dep1 – Acc.Dep0)

• NWC(Net Working Capital) = NWC1 – NWC0


= (CA1 – CL1) – (CA0 – CL0)

• Dividend = Net Income1 – changes in Retained Earnings


= Net Income1 – (RE1 – RE0)
HOW TO CONSTRUCT SOURCES
AND USES STATEMENT
• Format of souces and uses of fund statement on
Cash basis
• Format of souces and uses of fund statement on
Working Capital basis
• Example: Exercise Q3(Selcom Berhad)
1
STATEMENT OF RETAINED EARNINGS
Company’s name
Statement of Retained Earnings
As at …..

Beginning balance, Retained earning RM XX


Add: Net Profit After Tax RM XX
Less: Dividend paid RM XX

Ending balance, retained earnings RM XX


HOW TO CONSTRUCT CASH FLOW
STATEMENT
• Format of Cash flow statement
• Example: Dec 2014 FIN420 QUESTION 2 (a)
THANK YOU

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