INTRODUCTORY NOTE ON FINANCIAL STATEMENTS
INCOME STATEMENTS
• How profitable business was over entire operating cycle (usually a year)
• Revenue (selling goods+services) LESS related expenses in the same period
• Result = net loss or net gain
• Any revenues/expenses generated in period are included regardless of when cash
transactions/payments are made
Net Sales
• Revenue (gross sales) LESS returns, discounts, allowances
Cost of Goods Sold
• Total costs associated with merchandise sold during period
• Left over inventory PLUS net purchases for this year = cost of goods available for sale
• LESS cost of inventory not sold during the period = COGS
• Cost of goods sold includes purchase and “freight-in” costs for non-manufacturers
• No COGS if selling services —> admin/wage expenses etc deducted from sales in
operating expenses section
Gross Income
• Net sales - COGS
• Only accounts for margin made on the good itself
Operating Expenses
• Selling expenses (salespeople’s salaries/commissions, ads, promo, travel)
• General and Administrative expenses (rent, electricity, payroll etc)
Depreciation Expense
• This bad boy shows up on the operating expenses
• Depreciation: basically the idea that an asset loses value over the course of its useful life
• Capital expenditures (expensive investments like equipment) not charged against
revenues of the period it was bought in all at once (it is used over several years)
• This would understate earnings in that period and overstate earnings in the next period
(so we spread out the purchase costs over several periods)
• Also gives us a more accurate depiction of what our assets are actually worth, as we
are reducing its value over its useful life
Income From Operations
• Net gain from company’s normal operating activities
• Gross income - operating expenses
Other Income and Other Expenses
• Revenues not directly related to primary business (investments etc)
• Not included in net sales (distorts performance of primary business)
• Other expenses: unusual / infrequent activities not part of regular operations (interest on
loans not considered related to operational activity of business)
• Other income/expenses reported after earnings from operations calculated
Net Income Before Tax
• Income from operations - other expenses + other income
, Net Income After Tax
• all revenues - all expenses after tax
• Either a net income or a net loss
THE BALANCE SHEET
• Financial position of an enterprise on a particular day
• Reflects what a company owns, owes, owner’s investment
• Net worth/shareholders’ equity: difference between own and owe
• Represents interest/stake/claim owners have in company
• Owners’ original investments plus/minus income/loss over company’s life
• Assets always = liabilities + shareholders’ equity
Assets
• What a company owns, resource available for future use
• Physical goods and items of value that provide future benefits
Current Assets
• cash/items that would usually be converted to cash within a year ish
• Organized in order of liquidity (ease of conversion to cash)
Marketable Securities
• Investment of temporary cash surpluses in a short-term, interest-earning instrument
• Might be needed on safe notice—> low risk
• Basically treated like cash
Accounts Receivable
• Amounts owed to company by customers who payed with credit
• Allowance for doubtful accounts (assuming not everyone will pay the credit card bill)
estimated
• Net accounts receivable represents actual cash from credit sales collected
Prepayments
• Payment made at one time —> anticipated reward expected to last over a span of time
• The unused portion of value/benefit is still considered an asset
Investment in Subsidiaries
• Not short term (unlike marketable securities), not tangible (unlike property/plant/eqpmt)
• Controlling interest: more than 50% of the common stock (influence in management)
Other Investments
• Not controlling interest —> listed separately
• Not short term
• Listed at cost (unless loss in value is more than temporary decline)
Property, Plant and Equipment (fixed assets)
• Physical, expected to last more than one operating period
• Intended for use in operation, not for resale
• Shown at original cost LESS accumulated depreciation (except land bc it doesn’t
depreciate) in order of permanence
Accumulated Depreciation
• The portion of the original cost which has been expensed through the years
• Net asset balance = original cost LESS accumulated depreciation to date
INCOME STATEMENTS
• How profitable business was over entire operating cycle (usually a year)
• Revenue (selling goods+services) LESS related expenses in the same period
• Result = net loss or net gain
• Any revenues/expenses generated in period are included regardless of when cash
transactions/payments are made
Net Sales
• Revenue (gross sales) LESS returns, discounts, allowances
Cost of Goods Sold
• Total costs associated with merchandise sold during period
• Left over inventory PLUS net purchases for this year = cost of goods available for sale
• LESS cost of inventory not sold during the period = COGS
• Cost of goods sold includes purchase and “freight-in” costs for non-manufacturers
• No COGS if selling services —> admin/wage expenses etc deducted from sales in
operating expenses section
Gross Income
• Net sales - COGS
• Only accounts for margin made on the good itself
Operating Expenses
• Selling expenses (salespeople’s salaries/commissions, ads, promo, travel)
• General and Administrative expenses (rent, electricity, payroll etc)
Depreciation Expense
• This bad boy shows up on the operating expenses
• Depreciation: basically the idea that an asset loses value over the course of its useful life
• Capital expenditures (expensive investments like equipment) not charged against
revenues of the period it was bought in all at once (it is used over several years)
• This would understate earnings in that period and overstate earnings in the next period
(so we spread out the purchase costs over several periods)
• Also gives us a more accurate depiction of what our assets are actually worth, as we
are reducing its value over its useful life
Income From Operations
• Net gain from company’s normal operating activities
• Gross income - operating expenses
Other Income and Other Expenses
• Revenues not directly related to primary business (investments etc)
• Not included in net sales (distorts performance of primary business)
• Other expenses: unusual / infrequent activities not part of regular operations (interest on
loans not considered related to operational activity of business)
• Other income/expenses reported after earnings from operations calculated
Net Income Before Tax
• Income from operations - other expenses + other income
, Net Income After Tax
• all revenues - all expenses after tax
• Either a net income or a net loss
THE BALANCE SHEET
• Financial position of an enterprise on a particular day
• Reflects what a company owns, owes, owner’s investment
• Net worth/shareholders’ equity: difference between own and owe
• Represents interest/stake/claim owners have in company
• Owners’ original investments plus/minus income/loss over company’s life
• Assets always = liabilities + shareholders’ equity
Assets
• What a company owns, resource available for future use
• Physical goods and items of value that provide future benefits
Current Assets
• cash/items that would usually be converted to cash within a year ish
• Organized in order of liquidity (ease of conversion to cash)
Marketable Securities
• Investment of temporary cash surpluses in a short-term, interest-earning instrument
• Might be needed on safe notice—> low risk
• Basically treated like cash
Accounts Receivable
• Amounts owed to company by customers who payed with credit
• Allowance for doubtful accounts (assuming not everyone will pay the credit card bill)
estimated
• Net accounts receivable represents actual cash from credit sales collected
Prepayments
• Payment made at one time —> anticipated reward expected to last over a span of time
• The unused portion of value/benefit is still considered an asset
Investment in Subsidiaries
• Not short term (unlike marketable securities), not tangible (unlike property/plant/eqpmt)
• Controlling interest: more than 50% of the common stock (influence in management)
Other Investments
• Not controlling interest —> listed separately
• Not short term
• Listed at cost (unless loss in value is more than temporary decline)
Property, Plant and Equipment (fixed assets)
• Physical, expected to last more than one operating period
• Intended for use in operation, not for resale
• Shown at original cost LESS accumulated depreciation (except land bc it doesn’t
depreciate) in order of permanence
Accumulated Depreciation
• The portion of the original cost which has been expensed through the years
• Net asset balance = original cost LESS accumulated depreciation to date
