HOW TO READ FINANCIAL

STATEMENTS

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 HOW TO READ FINANCIAL STATEMENTS
A Portfolio for Life
INCOME STATEMENT

Jenny Smith established London Coffee Co. in 2011. At the end of

Actual Forecast Forecast 2013, London Coffee made 10,000 in sales from selling its coffees,
2013 2014 2015 teas and sandwiches.

On average, 20 customers visited the store each day and spent 2

Sales 10,000 15,000 20,000 each on average. The store is open 250 days each year.

Cost of Goods Sold (5,000) (6,000) (7,000) Jenny spent 5,000 in 2013 in cost of goods sold: raw materials such
as coffee beans, milk, raw food ingredients and cups, napkins etc.
Gross Profit 5,000 9,000 13,000 To keep the business running, Jenny paid selling, general & adminis-
tration costs of 2,500. These include rent, salaries, business insur-
Selling General & (2,500) (3,000) (3,500) ance, utilities and advertising.
Administration
From its 2,500 operating profit, London Coffee paid 270 in interest
on the bank loan it took out to finance the companys setup costs.
Operating Profit (EBIT) 2,500 6,000 9,500
Of its 2,230 in profit before tax, it paid 446 in corporation tax at
Interest Expense (270) (253) (157) 20%.

At the end of 2013, London Coffee generated 1,784 in Net Income.

Profit Before Tax 2,230 5,747 9,343 Jenny decided to pay herself a dividend of 20%. The rest was kept as
retained earnings and reinvested in the business.
Tax (446) (1,149) (1,870)
Using London Coffees previous financial performance, Jenny made
Net Income 1,784 4,598 7,475 forecasts for the next two years:

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 HOW TO READ FINANCIAL STATEMENTS
A Portfolio for Life
BALANCE SHEET

Actual Forecast Forecast Current Assets

USES OF FUNDS
2013 2014 2015 At the end of 2013, London Coffee had 500 in cash and cash equivalents in its
Current assets bank account. Jenny delivers coffees to employees in a nearby office block
Cash and cash equivalents 500 6,926 15,733 twice a month. The office pays the total cost at the end of the month. Jenny is
Accounts Receivable 400 600 800 expecting this 400 in accounts receivable.
Inventories 1,000 1,200 1,400
Other Current Assets 2,000 3,000 4,000 London Coffee has 1,000 of inventories including dairy products, coffee beans
and food ingredients in the shop. There is also 2,000 in other current assets in
Long-term assets the form of restricted cash, earmarked for payroll.
Deferred taxes 1,000 1,500 2,000
Goodwill 2,000 2,000 2,000
Long-term Assets
Property, plant and equipment 30,000 28,000 26,200
In the coffee shop, there was 30,000 worth in furniture and equipment
Total Assets 42,900 49,226 58,133 (fridges, espresso machine and till). The company has 2,000 in goodwill from
the value of its brand name and customer relations. London Coffee recorded a
SOURCES OF FUNDS loss in the previous year which it can use to offset its 2013 tax bill as a deferred
tax asset of 1,000.
Current liabilities
Short-term debt 0 0 0 Current Liabilities
Accounts payable 3,000 4,800 5,600 London Coffee has no short-term debt as it has a positive cash balance of
Income taxes payable 2,000 4,598 7,475 500. It purchases its coffee beans on credit and owes the suppliers 3,000 in
accounts payable. London Coffee owes the government 2,000 in income taxes
Long-term liabilities
for the period.
Long-term debt 15,000 14,000 13,000
Provisions 500 750 1,000
Long-term Liabilities
Total Liabilities 21,500 24,148 27,075 Jenny borrowed 15,000 from the bank to setup London Coffee as long-term
Equity debt. She has also set aside 500 as provisions to renew the lease on the
Common stock 100 100 100 property in four years time.
Share premium 11,000 11,000 11,000
Retained earnings 5,300 13,978 19,598 Equity
As the sole owner, Jenny paid in 100 as share capital when she started the
Total Equity 21,400 25,078 31,058 business in 2011. In 2013, another investor injected 11,000 in equity as a share
premium. The company has retained earnings of 5,300 since it opened.

Jenny made a series of assumptions to ABOUT FORECASTING

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2014 & 2015:
 HOW TO READ FINANCIAL STATEMENTS
A Portfolio for Life
CASH FLOW STATEMENT

Actual Forecast Forecast

2013 2014 2015
Operating Cash Flows
OPERATING CASH FLOWS From London Coffees cash flows from operations, the company generated
1,752 in net income. Due to aging of its property, plant and equipment, assets
Net Income 1,752 4,610 7,487 lost 3,200 in value from depreciation. There was an increase in cashflow from
Depreciation and amortisation 3,200 2,980 2,782 working capital due mainly to an increase in the amount the company owed to
Change in working capital 952 2,257 2,278 creditors.
Change in other assets (150) (500) (500)
Change in other liabilities 200 250 250 Investing Cash Flows
For general maintenance of the coffee shop, the company invested 1,000 in its
INVESTING CASH FLOWS property, plant & equipment through capital expenditure.

Capital expenditures (1,000) (1,000) (1,000)

Financing Cash Flows
FINANCING CASH FLOWS From debt and equity sources of funds, Jenny paid down 1,000 of the
long-term debt (bank loan). She paid out 350 in dividends from the net
income generated in 2013. There were no repurchases or sales of shares to
Change in short-term debt 0 0 0 investors during the year.
Change in long-term debt (1,000) (1,000) (1,000)
Dividends (350) (922) (1,497) London Coffee had a net cash flow of 3,604 to add to beginning cash of
Issue / Repurchase of shares 0 0 0 250. For 2013 London Coffee Co had ending cash in the bank of 3,854.

Net cash flow 3,604 6,675 8,800

Jenny made cash flow forecasts of the companys operating, investing and
Beginning cash 250 3,854 10,529 financing activities:
Ending cash 3,854 10,529 19,329
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