Financial statements are vital as they paint the financial picture of your company, and help you evaluate past performance and plans for the future.
If you are new to financial statements and accounting terms, here is your guide to the different financial statements such as the Statement of Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity and Statement of Cash Flows. Each of these financial statements tells you how your company has been operating, and how well you have been handling different financial aspects.
Statement of Comprehensive Income
The Statement of Comprehensive Income is otherwise known as the Income Statement, Statement of Profit and Loss, or simply P&L. The three types of accounts that will appear in your Statement of Comprehensive Income include revenues, costs and expenses. With just a glance, you can determine if you have made a profit or loss in a given period:
Revenues – Costs – Expenses = Profit / Loss
For example, the Statement of Comprehensive Income of local electronic chain store Challenger shows us that their profits have increased in 2017 by $4.199 million.
Statement of Financial Position
The Statement of Financial Position is what we refer to as the Balance Sheet. Think of the balance sheet as a snapshot of your business at any point in time – it tells you your assets, liabilities, and shareholders’ equity. A glance at the balance sheet shows you how much the company owes, as well as your equity share. Investors usually refer to a company’s balance sheet before deciding to invest.Assets include both liquid assets such as cash and accounts receivables, as well as property, plant and equipment which are non-liquid assets such as land and buildings. Like assets, liabilities are also split into current liabilities and long-term liabilities. Current liabilities are those due within the next year, while long-term liabilities are those due in over a year.For instance, if you have a mortgage, the portion of the mortgage that is due within the next 12 months would be counted under current liabilities, and the rest of the mortgage would be counted under long-term liabilities.
The “total assets” and “total liabilities plus shareholders’ equity” must balance each other, i.e.:
Total Assets = Total Liabilities + Shareholders’ Equity
This is balanced in Qantas’ Statement of Financial Position below, i.e. 18,647 = 14,688 + 3,959.
Statement of Changes in Equity
The Statement of Changes in Equity shows you how equity changes over a particular period. This statement shows the initial share capital, as well as events that increase or decrease it. Cumulative net income that are not distributed to shareholders are known as retained earnings. In the Statement of Changes in Equity, the final equity is calculated and carried over to the Statement of Financial Position (balance sheet). Sony’s Statement of Changes in Equity is extracted as follows.
Statement of Cash Flows
Many small businesses fail not because of profitability issues, but because of cash flow issues. The Statement of Cash Flows shows a company’s inflow and outflow of cash over a specified period of time.The Statement of Cash Flows has three main sections: operating, investing, and financing activities. Under the operating activities section, accountants usually include supplies that are expected to be used up in the short term, which is usually within a year. Investing activities usually include long-term asset investments, while financing activities include long-term borrowing and repaying of cash from lenders.As its name suggests, the Statement of Cash Flows focuses primarily on cash expenses. Non-cash expenses are found in the income statement. For instance, depreciation is a non-cash expense that we will not see in the Statement of Cash Flows. Instead, we can see where a company generates and spends its cash.
Value investors usually make investment decisions by judging how well a company handles its cash. Investors tend to look favourably to companies that finance their expenses using cash that they generate from their operations, instead of cash they get from selling their assets.
The Singapore Sports Hub’s Statement of Cash Flows is extracted below. As you can see, you can view the amount of cash it has on hand now, i.e. $196 million.
Cash flow from operating activities may include collection from clients (cash inflow), payment to suppliers (cash outflow), and payment to employees (cash outflow).One obvious sign of a company’s financial health is a positive cash flow from its operating activities after tabulating all cash inflows and outflows. This is because it refers to the cash that is generated from a company’s business activities. If a net cash outflow occurs, a business is said to not be earning revenue from its operations and is likely to fail.
Items under the investing activities section usually include cash spent or generated from property, plant and equipment, such as the purchase of investment securities (cash outflow).The buying or selling of assets will be reflected in this section. As you may deduce, if there is a negative cash flow from investing activities, it isn’t always a red flag. When a company expands, there is usually a net cash outflow in this section due to its investments in assets such as factories or machinery to help them generate profits in future.
This section usually contains cash that is paid or received from investors outside the company, such as interest paid (cash outflow), dividends paid (cash outflow), repayment of loans (cash outflow) and the issuance of shares (cash inflow).We consider a share of the company a financing activity and not an investing activity as the company itself is not investing in it. Instead, shares are a method of raising funds for its operations or expansion.
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