Key Financial Statements

There are three main financial statements that are used to assess financial health of a business.

  • Balance Sheet- It provides a snapshot view of a business’s assets, liabilities and equity  
  • Cash Flow Statement- A consolidated view of all cash flow in and out of the business in a given period
  • Income Statement or P&L Statement-  Shows revenues, expenses, profit (or loss) in a given period

Let’s look at each one of them in more details.

The Balance Sheet

A balance sheet has following main components at a given date (snapshot view)

  • Assets (A)- Things of value that a business owns. This could be tangible or intangible  
  • Liabilities (L)- Things of value that a business owes to others or its obligations
  • Shareholder’s Equity(SE)- A business’s total assets – total liability to satisfy the equation  A = L + SE

Let’s look at each one of them in more details.

Key_Financial_Statements

The Balance Sheet- Assets

Assets are things of value that will benefit the business and its stockholders. This may include some of the following and other items–  

Current Assets-

  • Cash and cash equivalent (deposits, short term investment etc.)
  • Account receivables- Cash or equivalent that others owe the business
  • Inventory
  • Prepaid insurance and expenses
  • Short term investment

Non Current Assets-

  • Property, plant and equipment
  • Real estate and long term investments
  • Long term investments

Intangible Assets-

  • Goodwill
  • Brand
  • Patents
  • Copyrights

The Balance Sheet- Assets (Activity #1)

    • Walmart
    • Sears Holdings
    • Infosys
    • Apple
    • Google
    • Alibaba
    • American Airlines
    • Makemytrip
    • Macy’s
  • Jot down your key findings such as-
    • Which company has the highest/lowest asset now?
    • What is the trend over the years?
    • What could be driving the trends?

The Balance Sheet- Liability

Liabilities are things that the businesses owes to others. This may include some of the following and other items-

Current Liabilities-

  • Accounts payable
  • Short term debts
  • Accrued liabilities
  • Dividends payable
  • Wages
  • Taxes

Other Liabilities-

  • Long term debts
  • Negative goodwill
  • Other liabilities

The Balance Sheet- Liabilities (Activity # 2)

  • Go to www.finance.yahoo.com and look at the liabilities in the balance sheet of the following companies
    • Walmart
    • Sears Holdings
    • Infosys
    • Apple
    • Google
    • Alibaba
    • American Airlines
    • Makemytrip
    • Macy’s
  • Jot down your key findings such as
    • Which company has the highest/lowest liabilities now?
    • What is the trend over the years?
    • What could be driving the trends?

The Balance Sheet- Stockholders Equity

Stockholders equity is the difference between Assets and Liability and it highlights the net value for the owners or the shareholders of the business if all assets are liquidated to repay liabilities.  This may include some of the following and other items-

  • Retained Earnings
  • Stock Options
  • Common Stocks
  • Capital Surplus
  • Paid in Capital
  • Initial Investments

Income Statement

This is also known as Profit and Loss (P&L) statement. This statement plays a vital role in ascertaining a business profitability during a particular time period.

It follows “Accrual Basis of accounting” i.e.  sales and expenses are shown in the period when these occur rather than when the cash is collected or paid. Actual cash receipt could be before or after a revenue or expense is shown in the P&L

A typical P&L statement may have following and other line items-

REVENUES

-COST OF GOODS SOLD (COGS)

=GROSS PROFIT

-OPERATING EXPENSES AND OVERHEAD (such as SG&A, Administrative, R&D)

=NET PROFIT

Cash Flow Statement

Cash flow statement shows how the cash is coming in and moving out of the business during a particular time period.

Cash is King- A company which is highly profitable but doesn’t have cash and liquidity may find it difficult to keep going. For a specific period

There are three main sources of cash flows-

  1. Cash Flow from Operating Activities- related to business’s main operations. For a healthy business, cash from operating income should be higher or roughly equal to net income from the income statement. Moreover, a healthy business should be generating most of its cash from operating activities rather than investing or financing activities
  2. Cash Flow from Investing Activities- Related to buying and selling of investment
  3. Cash Flow from Financing Activities- Related to company’s stocks and bonds sale and purchase

At overall level, a healthy business should be generating more cash than it uses and this available cash should be growing over a period of time.

Activity # 3

  • If you have to invest $ 1 MM USD in one of the following companies based on Balance Sheet, Income Statement and Cash Flow Analysis, which company would you invest in and why?
    • Walmart
    • Sears Holdings
    • Infosys
    • Apple
    • Google
    • Alibaba
    • American Airlines
    • Makemytrip
    • Macy’s
  • What has been the year over year trend in the key metrics of the recommended company?

Thank you!