Financial Statement Analysis

FINANCIAL STATEMENT ANALYSIS

Understanding the financial statements of a firm is critical since it is often the only source of information with which we must make investment decisions; i.e., whether or not to loan the company money or invest some equity. There is a rationale behind the construction of the financial statements that helps us to interpret the information that is contained within them.

Income Statements:

Revenues

Less: Cost of Goods Sold Manufacturing

Gross Profit

Less: Salaries

Advertising

Rent Selling & Administrative

Depreciation

Utilities

Operating Income

Less: Interest Expense Finance

Taxable Income

Less: Taxes Government (Tax accounting)

Net Income

The income statement is broken down by functional area. This allows us to more accurately determine where our strengths or weaknesses lie.

Balance Sheets

As with the income statement, the balance sheet is constructed in a very methodical manner. On the Asset side, the assets are listed in order from the most liquid to the least liquid. Similarly, on the Liability & Equity side, the accounts are listed in order from the most immediately due to the least.

Cash Accounts Payable Marketable Securities Wages Payable Accounts Receivable Bank Note Payable Inventory Current Portion of L-T Debt Prepaid Expenses

Total Current Assets Total Current Liabilities

Plant & Equipment Long-Term Debt

(Accumulated Depr.) Common Stock

Net Plant & Equip. Retained Earnings

Total Assets Total Liabilities & Equity

Statement of Cash Flows

From a financial perspective, the Statement of Cash Flows is the most important financial statement because it integrates the Income Statement and Balance sheet while adjusting the accounting figures based upon accrual accounting into actual cash flow.

From Operations:

Net Income

Plus: Depreciation