IBD - Financial Statement Basics
Terms in this set (11)
What are the 3 main financial statements?
An income statement represents a firm's operating results over a period of time (a fiscal year or quarter). It summarizes a business's profitability (revenue minus expenses) within a time period.
A balance sheet describes a firm's financial status at a specific time (end of fiscal year or quarter). From another angle, a balance sheet tells a business's economic resources that creditors and shareholders can claim
Statement of Cash Flows:
Shows the companies change in cash over a certain period of time. This statement starts with Net Income and adjusts for cash inflows and outflows through three separate areas, cash from operations, cash from investing, and cash from financing.
How are the 3 main financial statements connected?
Starting with the income statement, the last line item is net income. Net income is added to cash flow from operations on the statement of cash flows. You can think of the Income Statement as a cumulative record over a period of time.
Beginning cash balance on the statement of cash flows is taken from the prior period's balance sheet. After making adjustments to net income for non-cash items, the cash flow from operations, investing, and financing, the ending cash balance on the statement of cash flows becomes the cash on the current period's balance sheet, under assets.
Net income, minus any dividends paid, flows from the income statement onto the retained earnings column of the balance sheet, causing the balance sheet to balance.
How else are the 3 main financial statements connected? (additional answers)
Interest expense on the income statement is calculated from the long-term debt on the balance sheet.
Depreciation on both the income statement and the statement of cash flows is calculated based on PP&E from the balance sheet.
Change in working capital on the statement of cash flows is calculated from changes in current assets and current liabilities on the balance sheet.
Walk me through the major line items of an Income Statement.
The first line of the income statement would be revenues or sales.
From that you subtract the cost of goods sold, which leaves you with your gross margin.
Then, you subtract your operating expenses, leaving you with the operating income.
From operating income you subtract any other expenses - such as those from investments or interest payments - and your income taxes, which yields your net income.
What are the 3 components of the Statement of Cash Flows?
1) Cash from Operations
Amount of cash used/generated by a company from its normal operations - a company's primary source of cash. Takes into account any changes in operating assets and liabilities (e.g. A/R, inventories, A/P, deferred revenue
Shows a company's ability to generate cash from its core businesses.
2) Cash from Investing
Shows cash generated by the company through the purchase or sale of income-producing assets (e.g. investments in other companies or investments in CapEx)
3) Cash from Financing
Includes cash generated by the sale of equity or debt, or cash used to repurchase equity or debt. It will also include any dividends that are paid out to the firm's shareholders.
Walk me through the main line items of a a statement of cash flows.
Cash from Operations:
Direct method: Cash in - Cash out
Indirect method: Net income + Noncash loss - Noncash gain
Cash from Investing:
Cash in - Cash out on long term assets
Cash from Financing:
Cash in (borrowed) - Cash out (debt payoff/dividends)
What is the difference between the income statement and statement of cash flows?
A company's sales and expenses are recorded on their income statement. The statement of cash flows records what cash is actually being used and where it is being spent by the company during that time period. Some additional items included on the cash flow statement could be issuance or repurchase of debt or equity, capital expenditures or other investments.
Amortization and depreciation will be reflected on the balance sheet, but will be added back to net income on the cash flow statement since they are expenses, but not actually a use of cash
What is the link between the balance sheet and the income statement?
There are many links between the balance sheet and the income statement. The major link is that any net income from the income statement, after the payment of any dividends, is added to retained earnings.
In addition, debt on the balance sheet is used to calculate the interest expense on the income statement, and property, plant, and equipment will be used to calculate any depreciation expense.
What is the link between the balance sheet and the statement of cash flows?
The beginning cash on the statement of cash flows comes from the previous period's balance sheet. The cash from operations is impacted by the change in net working capital which is current assets minus current liabilities. Depreciation comes from property, plant, and equipment, which effects cash from operations. Any change in property, plant and equipment due to the purchase or sale of that equipment will affect cash from investing. Finally, ending cash balance from the cash flow statement is the cash balance on the new balance sheet.
What is the difference between a balance sheet and an income statement?
A balance sheet describes a firm's financial status at a specific time (end of fiscal year or quarter). An income statement represents a firm's operating results over a period of time (a fiscal year or quarter).
From another angle, a balance sheet tells a business's economic resources that creditors and shareholders can claim. An income statement summarizes a business's profitability (revenue minus expenses) within a time period.
From the three main financial statements, if you had to choose two, which would you choose and why?
If I had to choose two financial statements, I would choose the balance sheet and the income statement. As long as I had the balance sheets from the beginning and end of the period, as well as the end of period income statement, I would be able to generate a cash flow statement.
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