FIN 305 Lecture Notes - Lecture 4: Cash Flow Statement, Income Statement, Financial Statement
14 Jan 2017
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Audiofiles Week #4 - September 27, 2016
Pulling Modules 5-9 Together [putting it all together]
5 Primary Business Performance Criteria (financially focused) (that influence Key Stakeholders’
Decision)
● Growth → income statement
● Profitability → income statement
● Cash Flow (of operating investing financing inflows or outflows) → cash flow statement
● Liquidity → balance sheet
● Solvency → solvency
Info. for Financial Decisions (i)
Information for Financial Decisions
● 2 Time Perspectives
○ Key stakeholders determine if they wanna have a relationship with the business
entity and to what extent. If they get involved, they're always reevaluating their
position to see if they should stay involved or exit. Decisions are made in real-
time, present with expectations of realizing benefits in the future. So, these key
stakeholders make informed decisions.
○ When decisions are made ^, they usually have a cost attached to them (ie.
Investors have the cost amount for their investment, lenders have the principle
amount of their loan, founders have an opportunity cost by committing
themselves to this venture full-time, managers also have an opportunity cost with
respect to alternatives. When people make a cost, they expect some benefit in
return.
○ The thing with expected benefits is ^, they will only be realized in the future. And
because this is unknown, the future of the business entity and the expected
benefits is also unknown. Therefore, this is risky. To reduce this, key
stakeholders like to create expectations for the business performance.
○ To do this ^, they need to obtain relevant information about the business entity.
They also wanna understand the track record of the business performance (how
did it perform in the past with regards to sales and profitability?). They use the
past information together with forward looking information (plans, forecasts,
projections, budgets) as information on which to base their decisions.
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○
● 3 Primary Financial Statements
○ This includes the Income Statement, Balance Sheet, and a Cash Flow
Statement. These are prepared in a standard format using common rules for
preparation and presentation called generally accepted accounting principles
(GAAP)
○ These ^ are reports on the financial condition in a business entity that have been
made to help key stakeholders to make their fundamental decisions. This is the
sole purpose for them.
○ Income Statement shows Profit! It presents summaries, not excruciating in detail,
of sales and the major expenses that the business entity incurred in the course of
earning its net income from operating the business in the particular period that
the performance is being reported
○ Balance Sheet (aka. The Statement of Financial Decisions) reports on the
entities financial position (kinda like a picture of the financing of the entity at a
specfic point in time). It shows what a business owns to what it owes. It shows
the resources against its financing.
○ Cash Flow Statement shows a summary of the businesses cash flow at a specific
timeframe and it breaks it down in the types of activities the business does. Its
important because it shows how the entity takes cash and how it spends cash.
And you could take this in relation to the other financial statements to predict
future cash flow. The bottom of this statement shows the balance of cash on
hand at the end of the reporting period.
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find more resources at oneclass.com
○
● Financial Statement ‘Blocks’
○ Income Statement
■ It allows to assess both growth and profitability in the entity allowing
stakeholders to see if the business has value and if they will have a return
on investment.
■
● 3 Blocks of the Income Statements
○ First part is the Revenue Block: The entity reports its sales from all sources. Here
you can determine the growth in year-over-year sales.
○ Operating Expenses Block: This includes all the costs that the business must
incur when operating the actual business (ie. the COGS) It is suggested to
separate Operating Expenses from all Other Expenses. The reason for this is so
that we can calculate the total Operating Income (EBITDA). It determines the
inherent profitability of their particular way of doing business.
■ When expenses grow faster than revenues, it is a recipe for declining
profits. Management has to be aware of this so that profits can be
sustained.
○ The Miscellaneous Expenses Block: Contains one-time expenses or smaller
expenses not related to recurring operating expenses (except for income taxes)
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Pulling modules 5-9 together [putting it all together] 5 primary business performance criteria (financially focused) (that influence key stakeholders". Cash flow (of operating investing financing inflows or outflows) cash flow statement. Key stakeholders determine if they wanna have a relationship with the business entity and to what extent. If they get involved, they"re always reevaluating their position to see if they should stay involved or exit. Decisions are made in real- time, present with expectations of realizing benefits in the future. When people make a cost, they expect some benefit in return. The thing with expected benefits is ^, they will only be realized in the future. And because this is unknown, the future of the business entity and the expected benefits is also unknown. To reduce this, key stakeholders like to create expectations for the business performance. To do this ^, they need to obtain relevant information about the business entity.
