Financial Statement and Analysys

8/6/2019 Financial Statement and Analysys

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FINANCIAL MANAGEMENT

FINANCIAL STATEMENT AND ANALYSYS

Definition of Income Statement

A financial statement that measures a company's financial performance over a specific accounting period.

Financial performance is assessed by giving a summary of how the business incurs its revenues and

expenses through both operating and non-operating activities. It also shows the net profit or loss incurredover a specific accounting period, typically over a fiscal quarter or year.

Also known as the "profit and loss statement" or "statement of revenue and expense".

Explanation

The income statement (sometimes called the profit-and-loss statement or P&L) is the first financial statement

that you'll find in the annual report. It shows the revenue, expenses and profit for the company during the past

year. You can use theIncome statement to figure out cash flow, profit margins, and other financial metrics for the business. Most

importantly, though, the income statement contains the proverbial bottom line: profits.

You should be careful when looking at the income statement since companies can sometimes engage ingymnastics with their accounting methods. The statements are audited by outside firms, however, so there

should be footnotes or other markers whenever anything deviates from standard accounting practices. The

following list will teach you how to read an income statement and use the information from them to make somesimple calculations regarding the firm's operations.

Revenues: The revenue section will tell you how much money the company took in for a specified

period of time. Sometimes companies will break down revenues according to business sector orgeographic region, but usually there will just be one number. Some companies, especially retailers

and manufacturers, use the term sales instead of revenues, but it's the same idea.

Expenses: The expense section will show you how the company spent its money. Companies spend

their money on a lot of different activities, so this section is usually broken down into specific sub-

sections. You might see expenses such as the following:

Cost of Sales: This number includes expenses directly associated with creating revenue, such aslabor and materials.

Operating Expenses: This number includes activities such as marketing, research and development,

and administration. It usually also includes depreciation expenses and any special non-recurring

charges.

Interest Expenses: This figure includes all the interest the company paid out on its bonds (if any)

and/or long-term debt. Taxes: The amount of money paid in taxes by the firm.

Extraordinary Expenses: This figure shows any unusual or one-time charges that the firm must pay

(e.g. a lawsuit settlement).

Profit: The profit section of the income report is the part to which investors pay the most attention. Itshows whether the company made money or lost money. It usually includes these specific sections:


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Net Income: This is the company's bottom-line profit after all expenses and revenues have beenaccounted for. If this number is positive, then the company turned a profit for the period. If it's

negative, then the company suffered a loss.

Number of Shares: This is the average number of shares outstanding during the specified time

period; it is used primarily in order to calculate earnings.

Definition of Balance sheet

A Balance Sheet is a statement of the financial position of a business which states the assets,

liabilities, and owners' equity at a particular point in time. In other words, the Balance Sheet

illustrates your business's net worth.

Explanation of balance sheet

The second financial statement that you'll encounter in the annual report is the balance sheet. The basic

concept underlying a balance sheet is simple enough: total assets equals total liabilities plus equity. A lot of

investors tend to focus on theincome statement, but the balance sheet is just as important a source of information. You can use the balance

sheet to determine the firm's liquidity, to see how leveraged the company is, or just to see all the specific assetsand liabilities of the company. The following list will teach you how to read a balance sheet and use the

information from it to find out the company's current financial standing.

Current Assets are the first numbers you'll encounter on the balance sheet. Current assets are defined

as assets that can or will be converted into cash quickly (generally within one year). Current assetsinclude, of course, cash and cash equivalents (money market accounts, etc.), but it also includes the

company's inventories (unsold stock) and its accounts receivable (uncollected bills from its debtors).

Current Liabilities are the opposite of current assets. They are the money that the company expects topay out within the next year. Current liabilities include accounts payables (bills the company must pay),

interest on long term debt, taxes, and dividends.

Non-Current Assets and Liabilities are assets that cannot be turned into cash quickly or liabilities thatare not due for over a year, respectively. This includes assets such as the company's plants, property,

and equipment, and liabilities like long-term loans.

Ratios and Other Calculations can be calculated to analyze the balance sheet, just like you can

calculate several different types of margins to help you analyze a company's income statement.

Debt/Asset Ratio: The debt/asset ratio can show you what percentage of the companys assets is

financed through debt. You can calculate it by taking total liabilities and dividing by total assets. If theratio turns out to be less than one, then that means that most of the company's assets are financed

through equity. If the ratio turns out to be greater than one, then the company is financing most of its

assets through debt. Companies that have high ratios are said to be "highly leveraged." This means that

they are carrying excessive amounts of debt and could be in danger if creditors start to demandrepayment.


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Current Ratio: The current ratio is the opposite of the debt/asset ratio: it takes the total number of

current assets owned by the company and divides by its total current liabilities. If this number is greaterthan one, then the company has enough current assets to cover its short term liabilities. A number that is

much higher than one, however, might indicate that the company is hoarding its assets instead of putting

them to use. A number less than one indicate that the company may experience problems with liquidity.

Acid Test: The acid test ratio is similar to the current ratio except that it subtracts out inventory fromcurrent assets. To calculate this ratio, you take current assets minus inventory and then divide by

current liabilities. The reason why the acid.

Definition of cash flow statement

A financial statement that reflects the inflow of revenue vs. the outflow of expenses resulting from

operating, investing and financing activities during a specific time period.

Explanation of cash flow statement

The cash flow statement organizes and reports the cash generated and used in the following categories:

1.

Operatingactivities

Converts the items reported on the income statement fromthe accrual basis of accounting to cash.

2

.

Investing

activities

Reports the purchase and sale of long-term investments

and property, plant and equipment.

3

.

Financing

activities

Reports the issuance and repurchase of the company's own

bonds and stock and the payment of dividends.

4

.

Supplemental

information

Reports the exchange of significant items that did not

involve cash and reports the amount of income taxes paid

and interest paid.

Here are a few ways the statement of cash flows is used.

1. The cash from operating activities is compared to the company's net income. If the cash from operatingactivities is consistently greater than the net income, the company's net income or earnings are said to

be of a "high quality". If the cash from operating activities is less than net income, a red flag is raised as

to why the reported net income is not turning into cash.2. Some investors believe that "cash is king". The cash flow statement identifies the cash that is flowing in

and out of the company. If a company is consistently generating more cash than it is using, the companywill be able to increase its dividend, buy back some of its stock, reduce debt, or acquire anothercompany. All of these are perceived to be good for stockholder value.

3. Some financial models are based upon cash flow.


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Definition of Retained earnings

Financial statementshowing the net income of afirmset aside as a reserve,paidout to thestockholders

(shareholders), and consumed by the losses. It usually accompanies an income statementorstatement of

owners' equity.

Explanation of Retained earnings

Generally, retained earnings are a corporations cumulative earnings since the corporation was formed minusthe dividends it has declared since it began. In other words, retained earnings represent the corporations

cumulative earnings that have not been distributed to its stockholders.

The amount of retained earnings as of a balance sheets date is reported as a separate line item in

the stockholders equity section of the balance sheet.A negative amount of retained earnings is reported as deficit or accumulated deficit.

Types of Ratio comparisons

Time series analysis

Cross sectional analysisFollowing are the explanations of these analyses.

Time series analysis

Definition

Trendforecasting(extrapolation) techniques (such as auto regression analysis,exponential smoothing,movingaverage) basedon the assumption that 'the bestestimate for tomorrow is the continuation of the yesterday's

trend.' TSA is more suitable forshort-termprojections and is used where (1) five to six year'stime series data is

available and

(2) Where relationships between differentvaluesof avariable and their trend is clear and relativelystable. Instead ofbuildinga cause-and-effect (causal) model, TSAaimsto isolate thesources ofvariations in a set of

dataso that theireffecton a variable can be determined.

Explanation

Many types of data are collected over time. Stock prices, sales volumes, interest rates, and quality

measurements are typical examples. Because of the sequential nature of the data, special statistical techniques

that account for the dynamic nature of the data are required.

STATGRAPHICS Centurion provides an extensive set of procedures designed for analyzing time series data:

1. Descriptive Methods - time sequence plots, autocorrelation functions, partial autocorrelation functions,

period grams, and cross-correlation functions are all important tools for characterizing time series data.

2. Smoothing- a variety of smoothers are available to estimate the underlying trend in a time series.

3. Seasonal Decomposition - decomposes time series data into trend, cycle, seasonal, and irregularcomponents, and returns seasonally adjusted data if desired.
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4. Forecasting- creation of forecasts beyond the end of the data, using trend models, moving averages,

exponential smoothers, or ARIMA models.

5. Automatic Forecasting- selects the best forecasting method for a time series by optimizing a specified

information criterion.

Cross sectional analysis

A type of analysis an investor, analyst or portfolio manager may conduct on a company in relation to that

company's industry or industry peers. The analysis compares one company against the industry it operateswithin, or directly against certain competitors within the same industry, in an attempt to discover the best of the

breed.

Explanation

When conducting a cross-sectional analysis, the analyst seeks to identify, by using comparative metrics, the

valuation, debt-load, future outlook and/or operational efficiency of the target company. This allows the analystto evaluate the target company's efficiency in these areas, and to make the best investment choice among a

group of competitors or the industry as a whole.

When comparing the target firm to competitors, the analyst must be careful to consider the unique operating

characteristics of each company and how that will affect any comparative metrics used.
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Financial Statement and Analysys