Chapter 2: The Basic Financial Statements 3 Basic Statements Income Statement (aka Profit & Loss Statement, or P&L)

Report of a firm's performance over time. Starts with Revenue and ends with some measure of Net Income (or Profit (Loss)) Typically prepared for different time periods, like Monthly, Quarterly or Annually Balance Sheet Describes the Assets, Liabilities, and Owner's Equity. Assents - Liabilities = Equity Equity is what a firm owns, less what it owes to others. Statement of Cash Flows Outlines cash inflows and outflows over a period of time. Tips Let Excel do as much work as possible. Use formulas, not "hardcoded" numbers Cuts down on errors Makes it "modular" change numbers in one place and watch everything recalculate Format the worksheet so it is easy to understand: shading, borders, and font choices. One financial statement per tab Change column widths by double-clicking cursor, or Format-Column Width or Auto Fit Selection Shade Inputs with special color to indicate entered text AutoSum Sum is by far the most common formula. Click Autosum and drag over cells you want to add together. Change =SUM to =AVERAGE or =COUNT or =MIN Net Income Does NOT accurately show the amount in a company's coffers Cash is KING. Use Cash Flow statement to show health and success of a firm Common Size Statements A Common Size Income Statement shows percentages (of Revenue) rather than numbers Allows for comparison of P&Ls of different scales or sizes. Change the first number and use Copy-Paste Special- Formulas for the rest Denominator (comparison to Revenue) should be absolute reference, numerator relative reference Balance Sheet Assets on top, Liabilities and Owner's Equity at bottom. Use indentations for improved readability Use custom number formats to get rid of zeroes Common Size Balance Sheets compare everything as a percent of a firm's Total Assets Assets Must equal, or BALANCE to, Liabilities + OE Current Assets usually defined as 1 year cycle (from purchase to collection) Fixed Assets (or Noncurrent) take longer-- buildings, property, vehicles, equipment Liabilities Also have short-term and long-term. Short term are wages, A/P, etc things that will be paid out before the end of the year. Long term liabilities take longer-- bank loans, bonds. Owner's Equity.

Assets minus Liabilities Contributed Capital, or Common Stock, is the investment made by the shareholders Retained Earnings is the accumulated undistributed profits. Custom Number Formats Format-Cells-Number Select Custom and select or type #,##0, Formats have changed, but numbers have not Be sure to note in sub-heading Cash Flows Notes Sources of cash, or cash inflows, increase the amount of cash Uses of cash, or cash outflows, decrease the amount of cash Generally organized in to 3 sections: Operations, Investing, and Financing Investing refers to changing fixed assets; Financing refers to changing debt, stock, etc. Statement of Cash Flows is almost entirely formulas referring to the other two statements. Basics Cash Flow Statement shows Beginning Cash + Inflows - Outflows = Ending Balance Basic formula: Start with Net Income, and show changes to the Balance Sheet along the way. Assets Assets increase when cash is spent; Assets decrease when cash is withheld Liabilities Liabilities increase when cash is withheld; Liabilities decrease when cash is spent Owner's Equity Dividends paid out is a DECREASE in cash Dividends Paid = Net Income - Increase in Retained Earnings Using the GROUP Feature Hides detail cells for easier viewing of totals Select rows or columns, and click Data-Group and Outline-Group Click on + to explode hidden cells or - to collapse them. Can also use Format-Column Width-Hide but this won't show presence of hidden cells

Elvis Products International Income Statement For the Year Ended Dec. 31, 2007 2007 2006 Sales 3,850,000 3,432,000 Cost of Goods Sold 3,250,000 2,864,000 Gross Profit 600,000 <<< Copy formula
Operating Expenses

Selling and G&A Expenses Fixed Expenses Depreciation Expense EBIT Interest Expense Earnings Before Taxes Taxes Net Income
Notes: Tax Rate Cash Dividend paid to owners

330,300 100,000 20,000 149,700 76,000 73,700 29,480 44,220

240,000 100,000 18,900

<<< Copy formula

62,500
<<< Copy formula

0
<<< Copy formula

40%

Common-size P&L

Elvis Products International Income Statement For the Year Ended Dec. 31, 2007 2007 2006 Sales 3,850,000 3,432,000 Cost of Goods Sold 3,250,000 2,864,000 Gross Profit 600,000 568,000 Selling and G&A Expenses 330,300 240,000 Fixed Expenses 100,000 100,000 Depreciation Expense 20,000 18,900 EBIT 149,700 209,100 Interest Expense 76,000 62,500 Earnings Before Taxes 73,700 146,600 Taxes 29,480 58,640 Net Income 44,220 87,960
Notes: Tax Rate

E Co For

40%

Page 4

Common-size P&L

Elvis Products International Common-size Income Statement For the Year Ended Dec. 31, 2007 2007 2006 Sales 100.00% 100.00% Cost of Goods Sold 84.42% 83.45% Gross Profit 15.58% 16.55% Selling and G&A Expenses 8.58% 6.99% Fixed Expenses 2.60% 2.91% Depreciation Expense 0.52% 0.55% EBIT 3.89% 6.09% Interest Expense 1.97% 1.82% Earnings Before Taxes 1.91% 4.27% Taxes 0.77% 1.71% Net Income 1.15% 2.56% Notes: Tax Rate

40%

Page 5

Balance Sheet

Elvis Products International Balance Sheet As of Dec. 31, 2007 Assets Cash and Equivalents Accounts Receivable Inventory Total Current Assets Plant & Equipment Accumulated Depreciation Net Fixed Assets Total Assets Liabilities and Owner's Equity Accounts Payable Short-term Notes Payable Other Current Liabilities Total Current Liabilities Long-term Debt Total Liabilities Common Stock Retained Earnings Total Shareholder's Equity Total Liabilities and Owner's Equity 2007 52,000 402,000 836,000 1,290,000 527,000 166,200 2006 57,600 351,200 715,200 1,124,000 491,000 146,200

360,800
1,650,800 175,200 225,000 140,000 540,200 424,612 964,812 460,000 225,988 685,988 1,650,800

344,800
1,468,800 145,600 200,000 136,000 481,600 323,432 805,032 460,000 203,768 663,768 1,468,800

Page 6

Common Size Balance Sheet

Elvis Products International Common-size Balance Sheet As of Dec. 31, 2007 Assets Cash and Equivalents Accounts Receivable Inventory Total Current Assets Plant & Equipment Accumulated Depreciation Net Fixed Assets Total Assets Liabilities and Owner's Equity Accounts Payable Short-term Notes Payable Other Current Liabilities Total Current Liabilities Long-term Debt Total Liabilities Common Stock Retained Earnings Total Shareholder's Equity Total Liabilities and Owner's Equity 2007 52,000 402,000 836,000 1,290,000 527,000 166,200 2006 57,600 351,200 715,200 >>> 1,124,000 491,000 146,200 344,800 >>> 1,468,800 145,600 200,000 >>> 136,000 481,600 323,432 805,032 460,000 203,768 663,768 1,468,800

360,800
1,650,800 175,200 225,000 140,000 540,200 424,612 964,812 460,000 225,988 685,988 1,650,800

Page 7

Common Size Balance Sheet

Elvis Products International Common-size Balance Sheet As of Dec. 31, 2007 Assets Cash and Equivalents Accounts Receivable Inventory Total Current Assets Plant & Equipment Accumulated Depreciation Net Fixed Assets Total Assets Liabilities and Owner's Equity Accounts Payable Short-term Notes Payable Other Current Liabilities Total Current Liabilities Long-term Debt Total Liabilities Common Stock Retained Earnings Total Shareholder's Equity Total Liabilities and Owner's Equity 2007 3.15% 24.35% 50.64% 78.14% 31.92% 10.07% 2006 3.92% 23.91% 48.69% 76.53% 33.43% 9.95%

21.86%

23.47%

100.00% 100.00% 10.61% 9.91% 13.63% 13.62% 8.48% 9.26% 32.72% 32.79% 25.72% 22.02% 58.45% 54.81% 27.87% 31.32% 13.69% 13.87% 41.55% 45.19% 100.00% 100.00%

Page 8

Statement of Cash Flows Cash Flows from Operations Net Income Depreciation Expense Change in Accounts Receivable Change in Inventories Change in Accounts Payable Change in Other Current Liabilities Total Cash Flows from Operations Cash Flows from Investing Change in Plant & Equipment Total Cash Flows from Investing Cash Flows from Financing Change in Short-term Notes Payable Change in Long-term Debt Change in Common Stock Cash Dividends Paid to Shareholders Total Cash Flows from Financing Net Change in Cash Balance 25 101 0 -22 104 -6 -36 -36 2007 44 20 -51 -121 30 4 -74

How Cash Flow Statement got its Values 2007 Net Income Accumulated Depreciation Accounts Receivable Inventory Accounts Payable Other Current Liabilities 44 166 402 836 175 140 2006 146 351 715 146 136

Plant & Equipment

527

491

Short-term Notes Payable Long-term Debt Common Stock Retained Earnings

225 425 460 226

200 323 460 204

-6

Cash and Equivalents

52

58

Notice how EVERY line-item on the Balance Sh

Balance Sheet Assets Taken from Income Statement Added back from Income Statement A/R went up, so cash was not collected Inventories went up, so cash was spent to buy them Payables went up, so cash was not paid to vendors Liabilities went up, so cash was not paid to creditors Cash and Equivalents Accounts Receivable Inventory Total Current Assets Plant & Equipment Accumulated Depreciation Net Fixed Assets Total Assets Equipment went up, so cash was spent on it Liabilities and Owner's Equity Accounts Payable Short-term Notes Payable Other Current Liabilities Notes payable went up, so cash was borrowed Debt went up, so money was not paid down on it No money was collected from stockholders Dividends were paid out to shareholders, using cash. Total Current Liabilities Long-term Debt Total Liabilities Common Stock Retained Earnings Total Shareholder's Equity Total Liabilities and Owner's Equity 2007 52 402 836 1,290 527 166 361 1,651 2007 175 225 140 540 425 965 460 226 686 1,651 2006 58 351 715 1,124 491 146 345 1,469 2006 146 200 136 482 323 805 460 204 664 1,469

Cash went down slightly from Period 1 to Period 2

Balance Sheet is accounted for SOMEWHERE on the Cash Flow statement