Introduction to business

financial statements and reports
The balance sheet
The income statement
Statement of cash

flow
Statement of retained earnings
Modifications of statements

what is behind?
Historically, development of specialization leaded to creation of

loan (merchant lending and then banking) as a aid in business expansion.
Eventually production more and more complex so that lenders could not physically inspect all borrowers assets and judge on default risk. Also some investment on the basis of profit sharing.
So profits had to be determined accurately. Moreover: owners needed to see how effective is their business.

to make decisions,
managers to operate efficiently,
government to learn

on economic performance
and to tax 
Various difficulties in translation of physical assets into numbers …..

transaction
Annual accounts can be produced
Security measures can be taken
Business performance

can be monitored
Taxes can be calculated
Purchasing documents: the order form, goods received note, purchase invoice.
Sales documents: orders received, delivery note, sales invoice, statements of accounts (summary).
Other documents: as required for the reasons outlined above

aspects: authorization of orders, reconciling invoices against orders and goods

received notes, authorized signatories.
Two main criteria for deciding who authorizes an order: the amount of money to be spent or a type of goods being purchased.
An audit of financial statements, is the examination by an independent third party of the financial statements of a company, resulting in the publication of an independent opinion on whether or not those financial statements are relevant, accurate, complete, and fairly presented

types of information – numbers and verbal section providing explanation/description.
Where

to find current data?
Obviously in company itself
Published collection of data (Dun&Bradstret, Coface, Registry Court(!))
Investment sites on the web
Examples
http://moneycentral.msn.com/investor
http://www.marketguide.com

in time.
Current Assets
Cash and equivalents
Accounts receivable
Inventory
Long-term (fixed) Assets
Net plant

and equipment
Other long-term assets

TOTAL ASSETS

TOTAL LIABILITIES AND EQUITY

Current Liabilities
Accrued wages and taxes
Accounts payable
Notes payable

Long –Term Debt

Stockholders’ Equity
Common stock
Retained earnings

be converted into cash within one year
Long-term assets – use

exceed one year (physical assets, intellectuall property) net of depreciation
The retained earnings – when firm „saves” part of its earnings instead of paying out as dividends.
Net worth – common stock + retained earning
Net working capital = Current Assets- Current liabilities (often used as a measure of liquidity)

is the REAL value of non-cash assets?
Inventory accounting: FIFO (first-in,

first-out) or other methods to determine inventory value?
Possible other sources of funds: preferred stock, convertible bonds, long-term leases.
Depreciation methods – two sets of statements – one for owners, second for taxation.
Market values vs book values.

costs) during an accounting period
EBIT- earning before interest and taxes=

sales revenue minus operating costs. Often called OPERATING INCOME.
EBITDA = EBIT+DEPRECIATION or earnings before interest, taxes, depreciation and amortization. Shows amount of cash in the company.
Net cash flow: Net income + depreciation and amortization. Thus business net cash flow differs from accounting profits!

business. But high cash flow not necessarily mean high cash

value in BS.
It may also cause changes in working capital, fixed assets or security transactions (ie. dividend payments)
Statement of cash flow include:
- operating activities
-investing activities
-financing activities

retained in the business rather than paid as dividends.
In fact

it represents claim against assets – it does not represent cash, neither is „available” for dividends or anything else!
But accounting methods used differ, so:
Q: can we rely on financial statements ?

any company. Describe briefly this company. Present most important figures

and explain how these relate to selected company’s activities, sector in which it operates and its performance.

capital less accounts payable and accruals. It is the working

capital financed out of own funds.
Total operating capital = NOWC + net fixed assets
Net Operating Profit After Taxes (NOPAT)- profit a company would generate if it had no debt and held only operating assets
NOPAT = EBIT x (1- tax rate)
Operating cash flow = NOPAT+ depreciation

investors (incl. debtowners) after the company has made all required

investment and increased adequately its working capital. Otherwise amount to be potentially taken out of company without any harm.
FCF = Operating cash flow – investment in operating capital = (EBIT x (1-T) + depreciation) - (capital expenditures + ∆ net operating working capital).