For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity.. The three major financial statement repo
FOREIGN TRADE UNIVERSITY HỒ CHÍ MINH CITY CAMPUS -*** - GROUP ASSIGNMENT Subject: English for Finance and Banking TOPIC: FINANCIAL STATEMENTS Ho Chi Minh City, September 2022 Financial Statements Group INDEX INDEX PART 1: INTRODUCTION TO FINANCIAL STATEMENTS PART 2: INCOME STATEMENT 2.1 Definition 2.2 Purpose 2.3 Components 2.4 Example (IFRS Standard) PART 3: BALANCE SHEET 3.1 Definition and related considerations 3.2 Components 3.2.1.Assets .7 3.2.2 Liabilities 3.2.3 Shareholder equity 3.3 Importance and limitation of balance sheet 10 3.3.1 Importance of balance sheet .10 3.3.2 Limitation of balance sheet 11 PART 4: STATEMENT OF CASH FLOW 14 4.1 Definition 14 4.2 Components 14 4.2.1 Cash from operating activities 14 4.2.2 Cash from investing activities 14 4.2.3 Cash from financing activities 15 4.3 Direct and Indirect Method 15 4.3.1 Differences 15 4.3.2 Advantages and disadvantages 16 4.4 Purpose .17 4.5 Example 17 PART 5: SOME IMPORTANT RATIOS 18 PART 6: SUMMARY 22 REFERENCES 244 Financial Statements Group Financial Statements Group PART 1: INTRODUCTION TO FINANCIAL STATEMENTS What are financial statement? Financial statements are written records that convey the business activities and the financial performance of a company Financial statements are often audited by government agencies, accountants, firms, etc to ensure accuracy and for tax, financing, or investing purposes For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity Nonprofit entities use a similar but different set of financial statements Investors and financial analysts rely on financial data to analyze the performance of a company and make predictions about the future direction of the company's stock price One of the most important resources of reliable and audited financial data is the annual report, which contains the firm's financial statements The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential The three major financial statement reports are the balance sheet, income statement, and statement of cash flows Not all financial statements are created equally The rules used by U.S companies is called Generally Accepted Accounting Principles, while the rules often used by international companies is International Financial Reporting Standards (IFRS) In addition, U.S government agencies use a different set of financial reporting rules PART 2: INCOME STATEMENT 2.1 Definition An income statement, also known as a profit and loss (P&L) statement, summarizes the cumulative impact of revenue, gain, expense, and loss transactions for a given period It's a summary of a business's revenues and expenses over a period of time When we take our total revenue and subtract our expenses from it then we work out our profit or our loss We make a profit when our revenues exceed our expenses and on the flip side we make a loss when our expenses are more than the income we've earned This is why the income statement is also known as the profit and loss statement or the P&L for short Financial Statements Group 2.2 Purpose An income statement tells the financial story of a business’s activities Within an income statement, you’ll find all revenue and expense accounts for a set period Accountants create income statements using trial balances from any two points in time From an income statement and other financial documents, you can determine: ● Whether the business is generating a profit ● If it’s spending more than it earns ● When costs are highest and lowest ● How much it’s paying to produce its product ● If it has the cash to invest back into the business Accountants, investors, and business owners regularly review income statements to understand how well a business is doing in relation to its expected performance and use that knowledge to adjust their actions A business owner whose company misses targets might, for example, pivot strategy to improve in the next quarter Similarly, an investor might decide to sell an investment to buy into a company that’s meeting or exceeding its goals 2.3 Components While all financial data helps paint a picture of a company’s financial health, an income statement is one of the most important documents a company’s management team and individual investors can review because it includes a detailed breakdown of income and expenses over the course of a reporting period This includes: ● Sales Revenue: company’s revenue from sales or services, displayed at the very top of the statement It then deducts contra revenue accounts4sales returns and allowances and sales discounts4from sales revenue to arrive at net sales ● Costs of goods sold (COGS): The cost of component parts of what it takes to make whatever it is a business sells For a business that provides services we might call this our cost of services and if we sell physical goods then we can call this our cost of sales or our cost of goods sold If you were running a retail or a wholesale business then these would include things like the original purchase Financial Statements Group price of the product that you're reselling or if you've run a manufacturing business then this would include the cost of your raw materials or the direct labor cost that went into producing your product ● Gross profit: Total revenue - COGS Companies deduct cost of goods sold from sales revenue in order to determine gross profit ● Expenses: The amount of money a business spends during a reporting period Operating expenses are the next component in the income statement of a merchandising company They are the expenses incurred in the process of earning sales revenue ● Operating income (Income from operation): Gross profit - operating expenses ● Income before taxes: Operating income - nonoperating expenses ● Net income: Income before taxes - taxes ● Earnings per share (EPS): Division of net income by the total number of outstanding shares Image 1: Income Statement of PW Audio Supply ● Depreciation: The extent to which assets (for example, aging equipment) have lost value over time ● Earnings before interest, taxes, depreciation, and amortization (EBITDA): A measure of a company’s ability to generate cash flow that’s calculated by adding net profit, interest, taxes, depreciation, and amortization together These categories may be further divided into individual line items, depending on a company’s policy and the granularity of its income statement For example, revenue is often split out by product line or company division, while expenses may be broken down into procurement costs, wages, rent, and interest paid on debt Document continues below Discover more from: International Finance TCHE414 Trường Đại học… 253 documents Go to course Financial Statements 12 2.4 Example (IFRS Standard) 1.Vì Cách mạng tư sản Pháp triệt Groupđể International Finance 100% (5) Tiểu-luận-TCQT - Tiểu 56 luận mơn Tài chính… International Finance 100% (3) Q&A - Tài tiền tệ International Finance 100% (2) PHÂN TÍCH HỢP ĐỒNG Image 2: Income Statement of the Volkswagen Group 2021 12 International Explain: On the top, we can see that most of Volkswagen Group’s sale revenue 100% (2) Finance of 250 billion Euro comes from manufacturing and selling cars in 2021 When we subtract the Cost of Sales in 2021 of nearly 203 billion Euro, the result will be the Gross Profit (Gross Result in this case) Next, we continue to deduct the Operating Expense Chuỗi cung ứng Eleven - quản trị… and add the Operating Income of the VW group to get the result of year of operating of around 19 Billion Euro Then we add or minus the result8 of Financing Activities (in this case it is a positive number of 851 million Euro) to get theInternational Earning before Tax of 100% (2) Finance approximately 20 Billion Euro Finally, after subtracting the tax and the related tax expense, we will get the final Net Profit of around 15.4 Billion Euro To get the Earning per Share, we will take the Net profit of 15.4 Billion Euro and divide by theanh outstanding 123doc huong cua share to get the EPS of 29.56 Euro for ordinary share and 29.65 Euro for preferred share 23 moi truong marketi International Finance 100% (2) Financial Statements Group PART 3: BALANCE SHEET 3.1 Definition and related considerations The term balance sheet refers to a financial statement that reports a company's assets, liabilities, and shareholder equity at a specific point in time Balance sheets provide the basis for computing rates of return for investors and evaluating a company's capital structure In short, the balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders Balance sheets can be used with other important financial statements to conduct fundamental analysis or calculate financial ratios The balance sheet provides an overview of the state of a company's finances at a moment in time It cannot give a sense of the trends playing out over a longer period on its own For this reason, the balance sheet should be compared with those of previous periods Investors can get a sense of a company's financial well-being by using a number of ratios that can be derived from a balance sheet, including the debt-to-equity ratio and the acid-test ratio, along with many others If a company takes out a five-year, $4,000 loan from a bank, its assets (specifically, the cash account) will increase by $4,000 Its liabilities (specifically, the long-term debt account) will also increase by $4,000, balancing the two sides of the equation If the company takes $8,000 from investors, its assets will increase by that amount, as will its shareholder equity All revenues the company generates in excess of its expenses will go into the shareholder equity account These revenues will be balanced on the assets side, appearing as cash, investments, inventory, or other assets The assets should always equal the liabilities and shareholder equity This means that the balance sheet should always balance, hence the name If they don't balance, there may be some problems, including incorrect or misplaced data, inventory or exchange rate errors, or miscalculations 3.2 Components 3.2.1 Assets Assets are anything a company owns with quantifiable value Financial Statements Group Accounts within this segment are listed from top to bottom in order of their liquidity This is the ease with which they can be converted into cash They are divided into current assets, which can be converted to cash in one year or less; and in contrast non-current or long-term assets, which cannot Here is the general order of accounts within current assets: ● Cash and cash equivalents are the most liquid assets and can include Treasury bills and short-term certificates of deposit, as well as hard currency ● Marketable securities are equity and debt securities for which there is a liquid market ● Accounts receivable (AR) refer to money that customers owe the company This may include an allowance for doubtful accounts as some customers may not pay what they owe ● Inventory refers to any goods available for sale, valued at the lower of the cost or market price ● Prepaid expenses represent the value that has already been paid for, such as insurance, advertising contracts, or rent Long-term assets include the following: ● Long-term investments are securities that will not or cannot be liquidated in the next year ● Fixed assets include land, machinery, equipment, buildings, and other durable, generally capital-intensive assets ● Intangible assets include non-physical (but still valuable) assets such as intellectual property and goodwill These assets are generally only listed on the balance sheet if they are acquired, rather than developed in-house Their value may thus be wildly understated (by not including a globally recognized logo, for example) or just as wildly overstated 3.2.2 Liabilities A liability is any money that a company owes to outside parties, from bills it has to pay to suppliers to interest on bonds issued to creditors to rent, utilities and salaries Current liabilities are due within one year and are listed in order of their due date Long-term liabilities, on the other hand, are due at any point after one year Current liabilities accounts might include: Financial Statements Group Image 3: Balance sheet of Apple Inc 13 Financial Statements Group PART 4: STATEMENT OF CASH FLOW 4.1 Definition The cash flow statement (CFS), is a financial statement that summarizes the movement of cash and cash equivalents (CCE) that come in and go out of a company 4.2 Components 4.2.1 Cash flow from operating activities The operating activities on the CFS include any sources and uses of cash from business activities In other words, it reflects how much cash is generated from a company’s products or services These operating activities might include: Receipts from sales of goods and services Interest payments Income tax payments Payments made to suppliers of goods and services used in production Salary and wage payments to employees Rent payments Any other type of operating expenses In the case of a trading portfolio or an investment company, receipts from the sale of loans, debt, or equity instruments are also included because it is a business activity 4.2.2 Cash flow from investing activities Investing activities include any sources and uses of cash from a company’s investments Purchases or sales of assets, loans made to vendors or received from customers, or any payments related to mergers and acquisitions (M&A) are included in this category In short, changes in equipment, assets, or investments relate to cash from investing Changes in cash from investing are usually considered cash-out items because cash is used to buy new equipment, buildings, or short-term assets such as marketable securities But when a company divests an asset, the transaction is considered cash-in for calculating cash from investing 4.2.3 Cash flow from financing activities 14 Financial Statements Group Cash from financing activities includes the sources of cash from investors and banks, as well as the way cash is paid to shareholders This includes any dividends, payments for stock repurchases, and repayment of debt principal (loans) that are made by the company Changes in cash from financing are cash-in when capital is raised and cash-out when dividends are paid Thus, if a company issues a bond to the public, the company receives cash financing However, when interest is paid to bondholders, the company is reducing its cash And remember, although interest is a cash-out expense, it is reported as an operating activity4not a financing activity 4.2.4 Disclosure of non-cash activities The disclosure of non-cash activities is sometimes included when prepared under generally accepted accounting principles (GAAP) The disclosure of non-cash activities is done on a company's cash flow statement However, these activities are not included in the body of the statement because no cash was involved Example: Purchase of assets by issuing stock or debt; Converting bonds in the common stock; Exchange of long-lived assets 4.3 Direct and indirect method While it has fixed and specific purposes, you can apply several methods when you are preparing this report, including direct and indirect methods In this article, we explore direct and indirect cash flow, provide examples for each, review the differences between the two and list the advantages and disadvantages for both 4.3.1 Differences Direct Method Indirect Method The direct method utilizes only the The indirect method generally utilizes transactions of cash that is the cash spent the value of net income as base and either and cash receipt to arrive at the cash flow adds or subtracts changes in assets as well statement as liabilities followed by the addition of the non-cash expense 15 Financial Statements Group To be more specific, when the direct method of presenting a corporation's cash flows from operating activities is used, the amount of net income is not the starting point Instead, the direct method lists the cash amounts received and paid by the corporation, for example: Cash from customers, cash paid to employees, cash paid to suppliers, cash paid for interest Otherwise, when the indirect method of presenting a corporation's cash flows from operating activities is used, this section of SCF will begin with a corporation's net income The net income is then followed by the adjustments needed to convert the accrual accounting net income to the cash flows from operating activities A few of the typical adjustments are: Adding back depreciation expense, adding the decrease in accounts receivable, deducting the increase in inventory, deducting the decrease in accounts payable, adding the increase in accrued expenses payable 4.3.2 Advantages and disadvantages Advantages Direct Disadvantages Transparency -> reports the - Method - Effort and time: The direct direct sources of cash payments cash flow method requires you and receipts to list all cash receipts and - Ease of comprehension -> the disbursements, which can take a - Accuracy -> Using real-time easiest to understand and read lot of effort and time - FASB requirements: Under figures when preparing financial the reports is a more reliable method accounting principles (GAAP), generally accepted of monitoring cash flows a company using the direct cash flow method needs to disclose to the FASB its reconciliation of net income to cash flow from operating activities Indirect Method - Easier to prepare -> because This method lacks most organizations keep their transparency This cash flow method 16 Financial Statements Group records on an accrual basis - rarely complies with some rules or Reconciles cash income -> accepted procedures of international showing the difference between accounting the company's cash holding position and its stated profitability - Links financial statements -> help you to have a more systematic view of a company's financial statement - Discloses non-cash transactions -> help you better understand how non-cash transactions are factors of the company's net income, but not sources of cash flows 4.4 Purpose To determine the quality of earnings If cash from operating activities is higher than net income, earnings are said to be of