Computer and Financial Analysis
Financial Statements
Prepared By
Eng. Hani A. Abuamer
Objectives
After studying this chapter, you should be
able to:
1. Explain the purpose and understand the
format of the firm’s three basic financial
statements: the income statement, the balance
sheet, and the statement of cash
flows.
2. Construct each of these statements in Excel
with data for any company.

Objectives
3. Link worksheets together so that formulas in
one worksheet can reference data
in another and update automatically when
changes are made.
4. Use Excel’s Outline tool to selectively display or
hide parts of a financial statement.
Financial Statements
1. Balance Sheet
2. Income Statement
3. Cash Flows
Balanced Sheet
Balanced Sheet
The balance sheet describes the assets, liabilities, and equity of
the firm at a specific point in time. Assets are the (tangible or
intangible) things that firm owns. Liabilities are the firm’s
debts. Equity is the difference
between what the firm owns and what it owes to others.
Because the balance sheet is specific to a point in time, it is
much like a photograph.
What it shows was true when the snapshot was taken, but is
not necessarily true when it is viewed.
Excel Principles
Principle 1:
Make Excel do as much of the work as possible.
Whenever possible, a formula should be used rather
than entering numbers. In the long run
this will minimize errors
Principle 2:
Format the worksheet so that it is easy to understand.
Borders, shading, and font choices are more than just
decorations. Properly chosen, they can make
important numbers stand out and get the attention
they deserve
.
Elements of a Balance Sheet
A balance sheet, also called the statement of financial
position, lists:
$ IN
• Assets
$ OUT
• Liabilities
?
• Owners Equity
as of a specific date. It gives an idea of what the company is
worth.
Let us now look at these terms in more detail.
Elements of a Balance Sheet
Assets
$ IN
Assets are all those things a company owns which are of
value to the business.
Assets can be tangible like e.g. a manufacturing plant,
computers or cash in the bank.
Tangible assets like cash or goods for sale that can
easily (i.e. within an accounting year) be converted
into cash are called current assets while other assets
like properties and equipment are called fixed assets.
Assets can also be intangible like e.g. copyrights.
Elements of a Balance Sheet
Liabilities
$ OUT
Liabilities are all those things for which the company
eventually needs to pay. There are two types of liabilities:
Current Liabilities need to be paid within one
accounting year. Examples are: Outstanding rent,
goods bought on credit.
Long Term Liabilities are those liabilities which will
not be paid during the current accounting year.
Examples are: Long term debts, bank loans.
Elements of a Balance Sheet
Owner’s Equity
?
Owner’s Equity is by definition the difference between the
Assets of a company and its Liabilities. Owner’s Equity is
the sum of two parts:
Contributed Capital is the money that the owners
invested in the company.
Retained Earnings are those earnings which were not
distributed to the owners. These can accumulate to a
large sum over the years.
Elements of a Balance Sheet
Let me stress again: A Balance Sheet must balance the
assets, liabilities and owner’s equity.
Assets – Liabilities = Owner’s Equity
$ IN
$ OUT
Most commonly, the assets are on top and the liabilities
and owner’s equity on the bottom.
Let’s now have a look at a balance sheet.
Some Notes
Note how the top and bottom parts balance
Presentation indeed makes a big difference. In a sense
‘design’ is an important ingredient of financial modeling.
After all, what is the use of great information if no-one
understands it?
Now, let us look at the items in the balance sheet one by one.
Elements of a Balance Sheet
Assets – Current Assets
$ IN
Cash and Cash Equivalents
Cash is all the cash the company has, be it in bank accounts or in the
cash box. Cash Equivalents are short term investments that can be
converted to cash with no or very little delay. Examples of Cash
Equivalents are: Money Market Investments, Government Bonds.
Accounts Receivable
Most businesses do not immediately receive payment for (some or
all) of the goods or services they sell. Assuming that payment will
indeed be made in the near future, a receivable account is an asset.
Elements of a Balance Sheet
Assets:Total Current Assets
In this case, of course, its just the sum of ‘Cash and
Equivalents’ and ‘Accounts Receivable’, but there could
be many more ‘current’ items.
Total current assets is an important item since it indicates
how much money the company has to run its business.
Elements of a Balance Sheet
Assets: Fixed Assets
Plant and Equipment
In order to run a business one usually will need to buy some equipment (even when one is in the service business) like e.g. machines
and computers. The total cost price of the bought equipment is listed
in this item (note, the fact that equipment becomes worth less is
accounted for in the next item).
Accumulated Depreciation
Naturally, when one uses equipment it will get old and thus become
worth less. It is therefore necessary to subtract a certain amount
from the original equipment value every year. Since one would like
to keep the original value listed above, one needs to ‘accumulate’
i.e. sum up all the previous year’s depreciations.
Elements of a Balance Sheet
Assets: Net Fixed Assets
In this case the net fixed assets are ‘Plant and Equipment’
minus ‘Accumulated Depreciation’, but there could be
many more items.
Note that having a lot of fixed assets does not necessarily
mean that the company is ‘rich’. It is also important to
realize that fixed assets do not provide cash for running the
business (though they could be use as collateral for a
loan).
Elements of a Balance Sheet
Assets: Total Assets
Total Assets = Current Assets + Net Fixed Assets
Note: While total assets in a sense represent the current
value of the business, they do not necessarily represent the
resale value or the liquidation value of the business.
The total assets are the value of the business as seem from
the perspective of a continuation of the currently operating
business.
Elements of a Balance Sheet
Liabilities: Current Liabilities
$ OUT
• Accounts Payable
Just as there are accounts receivable, there are also accounts
payable. Businesses usually do not need to pay immediately upon
delivery but have e.g. 30 or 60 days ‘credit-terms’.
In other words, ‘accounts payable’ are unpaid bills due soon.
• Other Current Liabilities
All the liabilities which are due within one accounting year and
which are not separately listed (in this case only accounts payable)
are lumped together here. Examples are: unpaid salaries, interest,
short term loans.
Elements of a Balance Sheet
Liabilities: Total Current Liabilities
The total current liabilities are an important indicator of
how much money a company will need in the near future.
If the total current liabilities are much bigger than the total
current assets great caution is warranted.
Elements of a Balance Sheet
Liabilities: Long Term Liabilities
• Long Term Debt
While in daily life having debts (especially credit card debts!) is
usually not a good thing, the proper use of long term loans is an
essential part of many business activities. It is for example very
rare that a company has enough cash to build a new state of the art
manufacturing plant. The idea is of course that you earn more than
you pay in interest. (This is somewhat similar to buying a condo
with a mortgage).
• Other Long Term Liabilities
All other liabilities which do not need to be returned within one
accounting year and which are not separately listed. E.g. Royalties,
asbestos claims.
Elements of a Balance Sheet
Liabilities: Total Liabilities
Total Liabilities = Total Current + Long Term Liabilities
Note: If the Total Liabilities exceed the Total Assets, the
company is almost certainly in some sort of danger. But
there are exceptions to this! (Especially companies in new
hot industries like e.g. dot.coms or genetics).
Elements of a Balance Sheet
Liabilities: Shareholder’s Equity
• Common Stock
When a corporation is set up or when it needs money and desires to
do so, it can issue common stock. The amount received is entered
under this item. Note that the value printed on the stock certificate
may be quite different from what one actually pays.
• Retained Earnings
At the end of an accounting year, a company can have a profit or
a loss. The profit or loss (in case of loss, naturally with a minus
sign) is added to the retained earnings.
The retained earnings sum up all the profits and losses since the
inception of the company (minus paid out dividends).
Elements of a Balance Sheet
Liabilities: Total Shareholder’s Equity
This is the amount the company ‘owes’ its shareholders.
Note that from an operational point of view, these debts
have no impact on the daily running of the business since
they do not need to be repaid.
Elements of a Balance Sheet
Liabilities: Total Liabilities and Owner’s
Equity
As such this item is mainly a cross check for the accuracy
of the balance sheet. It must be exactly the same number
as the total assets or something is wrong!
Key Points of the Day
The Balance Sheet provides a snapshot of the assets and
liabilities of a company.
The Balance Sheet is one of the most important financial
statements.
Remember:
Assets – Liabilities = Owner’s Equity
$ IN
$ OUT
And again:
Assets – Liabilities = Owner’s Equity
INCOME STATEMENT
Income Statement
Revenues less Expenses = Net Income
Also called the Statement of Earnings
Comparative financial statements enable users to
analyze performance over multiple periods and identify
significant trends.
Consolidated financial statements combine
the financial results of a “parent
company” with its subsidiaries.
Income Statement
Income reported on income statement
is based on Accrual Accounting, all revenues
earned in the year & all expenses incurred in
that year (NOT on the cash generated or cash
paid during accounting period)
Income Statement may be presented in the
multi-step or single step form.
Income Statement
Single-step
• All operating revenues and gains are reported first,
followed by all operating expenses and other losses.
• No separate section is prepared for COGS and gross
profit.
Multiple-step
• Divided into separate sections, various subtotals are
reported.
Gross Profit
• Involves separate sections for gross profit, operating
Operating Income
income, other income/losses, income before income
taxes, and net income.
Other Income/losses
Income Statement
Focus on Multi-step format
(it has more detail and is more useful)
NET SALES: A firm’s sales are usually reported as
Sales less Sales Returns less Sales Allowances
– the major source of revenue for most
Companies trends are important
Income Statement (continued)
Net Sales
Less: Cost of Goods Sold (COGS)
Cost to seller of products sold to customers.
• If purchased, then price plus freight-in.
• If manufactured, then DM, DL, Manf. Ovhd.
• The relationship between COGS and sales is an important
one.
= Gross Profit
• Key analytical tool in analyzing
performance.
• Gross profit percentage equals
Gross profit/Sales
firm’s operating
Income Statement (continued)
Gross Profit
Less: Operating Expenses
Selling Expenses:
Advertising expenses
Salesmen’ salaries
General and Administrative Expenses:
Office and officer salaries
Payroll taxes
Depreciation expense
Repairs & maint.
Insurance expense
Rent expense
Lease expense
Bad debt expense
Research and Development
Supplies
= Operating Income (or Operating Profit or Income from Operations)
Measures overall performance of company’s operations
Operating Income Percentage=Operating Income/Sales
Income Statement (continued)
Operating Income
+/- Other Income/Expense
Interest income
Gain from sale of equipment
Gain from sale of investments
Interest expense
Loss from sale of equipment
Loss from sale of investments
Loss from write-down of inventory
Earnings before income taxes
Less: Income taxes
Net Earnings or Net Income
(or Income from Continuing Operations)
FOR SALE
Income Statement (continued)
Income from Continuing Operations
+/- Income from Discontinued Operations (net of tax)
+/- Extraordinary Gains and Losses (net of tax)
+/- Cumulative Effect of a Change in Accounting
Principle (net of tax)
Net Earnings or Net Income
Net Earnings Percentage
Earnings/Sales
=Net
Income from Discontinued Operations
Income (loss) from operations of discontinued operations (from
1/1 to measurement date)
Less: Income tax
Gain (loss) from sale of discontinued operations
(a)Income (loss) from operations (after measurement date)
(b)Gain (loss) on disposition of segment of assets
Less: Income tax
Net Income from Discontinued
Operations
Changes in estimates
Estimates are made using the BEST available
information at the statement date.
Changes in estimates should be reflected in the
current period (date of the revision) and in future
periods, if any, that are affected.
No “cumulative effect”
of the
change
Comprehensive Income
Beginning in 1998, companies required to report
COMPREHENSIVE INCOME
Comprehensive income includes ALL changes in
stockholders’equity during a period except those
resulting from investments by owners and
distributions to owners
Does not include:
Dividends to stockholders
Issuance of stock
Treasury stock transactions
Comprehensive Income
Net Income (from Income Statement)
+/- Foreign currency translation adjustments
+/- Unrealized gains/losses on available-forsale securities
+/- Additional pension liabilities
+/- Changes in fair market value of cash flow
hedges
= Comprehensive Income/Loss
Comprehensive Income
Comprehensive Income may be reported in
one of three ways:
– on the face of the income statement
– in a separate statement of comprehensive
income
– in a statement of stockholders’ equity
Common size Balanced Sheet
and Income Statement
Analytical tool to compare firms with different
level of sales.
Used to facilitate structural analysis of a firm, to
evaluate trends and make industrial
comparisons.
Expresses each income statement
category as a percentage of net
sales.
Financial Cash Flow
Businesses are like Fruit Trees
Fruit = Operating Activities
Trunk & Branches = Investing Activities
Roots = Financing Activities
Managing Risks With Financial
Analysis
What's
Your
Plan?
Are You a Risk Taker?????
Production
Financial
Marketing
Human Resource
Montana State University
45
Do You Take Unnecessary Risks????
46
Montana State University
Just Like Balancing a Check Book
+
=
Beginning Cash Balance
Inflows
Outflows
Ending Cash Balance
These
are
Linked
47
Signs of Cash Flows for the Statements of Cash Flow
Direction of Changed
Type of item
Order of
Subtraction
increased
decreased
Assets
-
+
Older- Newer
Liability or Equity
+
-
Newer - Older
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