Chapter 1: Interpreting Financial Statements
● A company’s activities, method of operation and competitive strategy all fundamentally shape
the firm’s financial structure. The reverse is also true: Decisions that appear to be primarily
financial in nature can significantly affect company operations.
● The firm’s most important source of information for evaluation of a firm's financial health is a
set of financial statements consisting of a balance sheet, an income statement and a cash flow
statement.
● A balance sheet is a financial snapshot taken at a point in time, of all the assets a company
owns and all the claims against those assets.
Current Assets and Liabilities
● Accountants list assets and liabilities on the balance sheet in order of decreasing liquidity,
where liquidity refers to the speed with which an item can be converted to cash.
● Thus, cash, marketable securities, and accounts receivable are toward the bottom.
● Similarly on the liabilities side, short-term loans and accounts payable are at the top, while
shareholders’ equity is at the bottom.
The income statement
● Net income records the extent to which net sales generated during the accounting period
exceeded expenses incurred in producing the sales - commonly referred to as earnings or
profit. Net sales are often called revenues and cost of goods sold are sometimes labelled cost
of sales.
● Income statements are commonly divided into operating and non-operating costs.
Net sales
Cost of Goods Sold
Gross profit
Selling, general and administrative expenses
Research and development
Depreciation and amortisation
Total operating expenses
Operating Income
Interest expense
Other operating non-operating expense (income)
Total non-operating expenses
Income before income taxes
Provision for income taxes
Net income
The Balance Sheet
Assets
Cash and cash equivalents
Accounts receivable
Inventories
Other current assets
Total current assets
Gross property, plant and equipment
Less accumulated, depreciation and amortisation
Net property, plant and equipment
Goodwill and other intangible assets
Other assets
Total assets
Liabilities and Shareholders’ Equity
Debt due in one year
Accounts payable
Accrued Liabilities
Other current liabilities
Total current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
Common stock
Additional paid-in capital
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
● A company’s activities, method of operation and competitive strategy all fundamentally shape
the firm’s financial structure. The reverse is also true: Decisions that appear to be primarily
financial in nature can significantly affect company operations.
● The firm’s most important source of information for evaluation of a firm's financial health is a
set of financial statements consisting of a balance sheet, an income statement and a cash flow
statement.
● A balance sheet is a financial snapshot taken at a point in time, of all the assets a company
owns and all the claims against those assets.
Current Assets and Liabilities
● Accountants list assets and liabilities on the balance sheet in order of decreasing liquidity,
where liquidity refers to the speed with which an item can be converted to cash.
● Thus, cash, marketable securities, and accounts receivable are toward the bottom.
● Similarly on the liabilities side, short-term loans and accounts payable are at the top, while
shareholders’ equity is at the bottom.
The income statement
● Net income records the extent to which net sales generated during the accounting period
exceeded expenses incurred in producing the sales - commonly referred to as earnings or
profit. Net sales are often called revenues and cost of goods sold are sometimes labelled cost
of sales.
● Income statements are commonly divided into operating and non-operating costs.
Net sales
Cost of Goods Sold
Gross profit
Selling, general and administrative expenses
Research and development
Depreciation and amortisation
Total operating expenses
Operating Income
Interest expense
Other operating non-operating expense (income)
Total non-operating expenses
Income before income taxes
Provision for income taxes
Net income
The Balance Sheet
Assets
Cash and cash equivalents
Accounts receivable
Inventories
Other current assets
Total current assets
Gross property, plant and equipment
Less accumulated, depreciation and amortisation
Net property, plant and equipment
Goodwill and other intangible assets
Other assets
Total assets
Liabilities and Shareholders’ Equity
Debt due in one year
Accounts payable
Accrued Liabilities
Other current liabilities
Total current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
Common stock
Additional paid-in capital
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
