Basic Financial Statements

(Accounting 101)
There are 3 basic types of financial statements that
each corporation produces:
1. Balance Sheet
2. Income Statement
3. Cash Flow Statements
The balance sheet is comprised of three
Assets – things of value that a company holds
in its possession.
Liabilities-what the company owes to others
(banks, suppliers, tax authorities, employees)
Equity-retained earnings and money
contributed by shareholders.
Assets = Liabilities + Equity
The Balance Sheet name comes from the fact that
this equation must remain in balance.
Real corporate balance sheets can look more
intimidating because corporations tend to include
more titles.
Examine the Loblaw Balance Sheet from their 2014
Annual Report. You will notice more specific
categories (current assets, current liabilities), but
the basic equation is the same.
Tells us how a company has generated revenue
(and hence income) as well as what it’s
expenses were for a particular period of time
(usually one year).
The Income Statement usually has two
sections: Operating Items and Non-Operating
Look at Dollarama’s Statement “Consolidated
Statement of Comprehensive Income”
The Cash Flow Statement allows us to see
whether a company is running into difficulty
with access to cash.
Companies may land a giant new contract
(new revenue), but they may not have received
cash for this yet.
Much like how you have a job, but may have
no money because you have not been paid yet.
Liquidity: How easily assets can be converted into
Example: A house is less liquid than the cash in
your bank account.
Current Ratio: This ratio tells us how easily a
company can pay for short-terms debts.
Formula: 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Leverage: The amount that a company depends
on borrowed money is called “leverage”
2. Debt Ratio: Tells us whether a company is
highly leveraged or not.
Formula: 𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Inventory is a fancy word to describe the goods
that a company can sell.
3. Inventory Turnover: Tells us how quickly a
company replaces (turns-over) their inventory.
Companies that sell perishable goods (grocery
stores) have high inventory turnover.
Formula: 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
4. Net Margin: Tells us the percentage of each
dollar that a company earns (revenue) that is
turned into actual profit.
Formula: 𝑁𝑒𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 =
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
5. Return on Investment (ROI) : Allows us to
compare the efficiency of our investment
compared to other investments.
 Return on Investment Explained
Formula: 𝑅𝑂𝐼 =
𝐺𝑎𝑖𝑛 𝑓𝑟𝑜𝑚 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 −𝐶𝑜𝑠𝑡 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
Fill out your “cheat sheet” on Financial Ratios
In the Preferred Direction Column – tell me
whether it is better for each ratio to be “high”
or “Low” and why.
Go through and calculate all the ratios using
the Dollarama Statements Provided. For ROI,
assume you bought 1000 shares of Dollarama
on Feb. 3, 2014 and Sold all 1000 on January 31,