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Financial Statements Keep a Watch on Performance

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Businesses exist to make money and financial statements report how well this objective has been met. Additionally, they report on the financial condition of the business and even give some broad insights into what happened on the performance front.

Considering the critical information that financial statements provide, it is no wonder that they attract so much attention from investors, lenders, creditors, tax authorities and even the general public. Top managers of the business look at published financial statements as a medium to demonstrate how well they have managed the business.

The Basic Financial Statements

The Income Statement, Balance Sheet, Cash Flow Statement and Retained Earnings Statement are the basic financial statements. Companies have to publish these statements and also have to get them audited for accuracy and fairness (of the picture they portray) by independent auditors.

Standards like GAAP (Generally Accepted Accounting Principles) also lay down rules for preparing these statements and the amount of information to be disclosed. Where statements are complex (as they generally are for large companies) much of the information is disclosed through "Notes" attached to the financial statements. The Notes also constitute an integral part of the statements.

A Look at the Financial Statements

The Income Statement

The Income Statement summarizes the performance of the business for a specific period of time, such as a year or a quarter. It reports the Sales, Cost of Sales, General Expenses, Non-operating Income/Expenses and Profit or Loss for the period. Comparative amounts for the corresponding previous period are also shown so that a reviewer can see whether things have improved or not.

The Income Statement of a reputed company is reproduced below:

Income Statement

 

2009

 

2008
  1. Revenue

 

23651

 

21796
  1. Cost of Revenue

 

8844

 

8622
  1. Gross Profit (1 – 2)

 

14807

 

13174
  1. Selling/General/Administrative Expenses

3651

 

3749

 
  1. Research & Development

2843

 

2793

 
  1. Depreciation

0

 

0

 
  1. Interest Expense

0

 

0

 
  1. Unusual Expense

0

 

1095

 
  1. Other Operating Expenses

0

6494

0

7637
  1. Operating Income (3 – 9)

 

8313

 

5537
  1. Non-operating Income

 

69

 

0
  1. Income before Tax (10 + 11)

 

8382

 

5853
  1. Income Tax

 

1861

 

1627
  1. Income after Tax (12 – 13)

 

6521

 

4226

Balance Sheet

The Balance Sheet shows the financial position of the company at a particular point in time, reporting on its assets, liabilities and owners' equity. Financial people can look at the Balance Sheet and assess how sound the company's financial position is.

The same company's Balance Sheet is reproduced below:

Balance Sheet

 

12/31/2009

 

12/31/2008
  1. Cash & Short Term Investments

24485

 

15846

 
  1. Total Receivables Net

3202

 

2642

 
  1. Total Inventory

0

 

0

 
  1. Prepaid Expenses

836

 

1404

 
  1. Other Current Assets

644

 

286

 
  1. Total Current Assets (1+2+3+4+5)

 

29167

 

20178
  1. Property, Plant, Equipment

4845

 

5234

 
  1. Goodwill Net

4903

 

4840

 
  1. Intangibles Net

775

 

997

 
  1. Long Term Investments

129

 

85

 
  1. Notes Receivable Long Term

0

 

0

 
  1. Other  Long Term Assets

678

 

433

 
  1. Total Long Term Assets (7+8+9+10+11+12)

 

11330

 

11589
  1. Total Assets (6+13)

40497

31767

 

 

 

 

 
  1. Accounts Payable

216

 

178

 
  1. Accrued Expenses

2246

 

1824

 
  1. Notes Payable/Short Term Debt

0

 

0

 
  1. Current Portion of Long Term Debt

0

 

0

 
  1. Other Current Liabilities

285

 

300

 
  1. Total Current Liabilities (15+16+17+18+19)

 

2747

 

2302
  1. Total Long Term Debt

0

 

0

 
  1. Deferred Income Tax

0

 

13

 
  1. Other Liabilities

1745

 

1214

 
  1. Total Non-Current Liabilities (21+22+23)

 

1745

 

1227
  1. Total Liabilities (20+24)

4492

3529

  1. Redeemable Preferred Stock

0

 

0

 
  1. Preferred Stock Non Redeemable

0

 

0

 
  1. Common Stock

1

 

1

 
  1. Additional Paid-In Capital

15817

 

14450

 
  1. Retained Earnings

20082

 

13561

 
  1. Other Equity

105

 

226

 
  1. Total Equity (26+27+28+29+30+31)

36005

28238

 

 

 

 

 
  1. Total Liabilities & Shareholders’ Equity (25+32)

40497

31767

You will notice that the total of assets (14 above) equals the total of liabilities and shareholders' equity (33 above). What this means is that the assets have been created with the funds obtained from shareholders and creditors (including lenders).

Cash Flow Statement
Cash can flow into and out of the business not only on account of income and expenses but also on account of purchase of long term assets, borrowings and their repayments, issues of share capital, dividend payments and other transactions. The cash flow statements look at all these inflows and outflows, in a summarized manner.

The cash flow statement of the above company is reproduced below:

Cash Flow Statement

12/31/2009

12/31/2008
  1. Net Income

6521

 

4227

 
  1. Add back: Non Cash Items

2330

 

3330

 
  1. Funds from Operations (1+2)

 

8851

 

7557
  1. Cash from Financing Operations

 

233

 

88
  1. Foreign Exchange Effects

 

10

 

-46
  1. Reduction in Working Capital

 

465

 

295
  1. Total Cash Inflows (3+4+5+6)

9559

7894
  1. Capital Expenditure

810

 

2358

 
  1. Investments

7209

 

2961

 
  1. Total Cash Outflows (8+9)

8019

5319
  1. Net Change in Cash (7 – 10)

+1540

+2575
  1. Beginning Cash Balance

 

8657

 

6082
  1. Closing Cash Balance (11+12)

 

10197

 

8657

Some idea of the complexity involved in financial statements will be available from the above statements provided as example. Actually, it does not reveal the full complexity. If you go through the Notes attached to financial statements, you will get an idea into this aspect.

 
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