Financial Statement Analysis part 2

 

Liabilities (Debt) and Equity

Current liabilities
This includes all current liabilities which thecompany is obligated to pay within the next 90 days
· ACCOUNTS PAYABLE – amount owed by the company for materials they have purchased on credit
· NOTES PAYABLE – amount the company has borrowed from banks in the form of short-term loans
· ACCRUED WAGES AND TAXES – for wages, the amount of wages earned by the employees, but not yet paid by the company; for taxes, the amount of taxes incurred by the business, but not yet paid to the respective governments by the company.

Long-term liabilities
These accounts include:
· LONG-TERM DEBT – amount the company has borrowed in the form of bonds sold to investors or banks
· PREFERRED STOCK – amount paid by investors to the company wanting a priority claim on the assets of the company
· COMMON STOCK – amount paid to the company by investors in exchange for a claim on the ownership of the company. Often, the number of outstanding shares is included on this line.
· RETAINED EARNINGS – value of the assets of the company in excess of the claims upon those assets (liabilities and stockholders' ownership). This does not represent cash held in the company.

The stockholders' (common) equity, also known as net worth, is the residual between the value of the assets and the value of the liabilities.
Assets - Liabilities = Common Equity (Net Worth)

Financial Statement Analysis part 1

Public companies are often widely held with investors ranging from individuals who hold one share to large financial institutions that own millions of shares.It  means that stock ownership is most investors’ sole tie to the company. How, then, do investors learn enough about a company to know whether or not they should invest in it? One way firms evaluate their performance and communicate this information to investors is through their financial statements

Companies use financial statements to record their asset investments, report their profitability, and describe their cash flow. There are three types of financial statements:
· Balance Sheet
· Income Statement
· Cash Flow Statement

A typical Balance Sheet looks like the example.

Assets

Assets are used to produce the products or generate the services that are sold by the company. Although all assets are stated in monetary terms, only cash represents actual money.

Some asset accounts represent the current (short-term) assets of Corporation. They include

· CASH – amount of cash held by the company in liquid bank accounts

· MARKETABLE SECURITIES – value of short-term investments held by the company
· ACCOUNTS RECEIVABLE – amount owed to the company by its customers who have purchased their products or services on credit terms
· INVENTORIES – amount of money the company has invested in raw materials, work-in-progress, and finished goods available for sale
· PREPAID EXPENSES – amount of expenses paid by the company before the expense is incurred. One example is rent on an office building paid at the beginning of the year for the entire year.
· OTHER CURRENT ASSETS – any other item related to production that does not fit into the above classifications.

Corporation also has long-term investments for the operation of its business. These asset accounts include:

· GROSS FIXED ASSETS – amount that the company paid for its property, manufacturing plants, and equipment when it acquired those assets at some time in the past
· DEPRECIATION – total amount of money that the company has charged as an expense for using the plants and equipment. Since this account is a deduction from an asset account, it is referred to
as a contra-asset account

· NET FIXED ASSETS – difference between GROSS FIXED ASSETS and DEPRECIATION. This is often called the book value of the fixed assets.

PROGRESS CHECK

1. Suppose that $1.2 million worth of equipment damaged before the company was able to package them. What asset account would be affected?
a) Cash
b) Accounts Receivable
c) Raw Goods Inventory
d) Prepaid Expenses
e) Gross Fixed Assets

2. What should the correct amount be for the Balance Sheet to be correct?
a) 319.4 million
b) 11.12 million
c) 55.93 million
d) 11.55 million
e) 3.545 million

3.  A customer  is no longer able to pay its bills. The amount to be written off as a loss is $1.9 million. What will the new ACCOUNTS RECEIVABLE amount be?

4.  This event will also affect an account on the other side of the Balance Sheet. What is this account?
a) Accounts Payable
b) Notes Payable
c) Long-term Debt
d) Preferred Stock
e) Retained Earnings