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The Four Financial Statements

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Hi, I am David Harper off a series devoted to the Chartered Financial Analyst for CFA exam, starting with an overview of the four basic financial statements. Here on the left the most popular probably is the income statement also called the profit and loss statement and this example is for the year the fiscal year 2011, so this is a flow statement meaning it characterizes a period of time typically a quarter or in this case a one year period and the important thing is that it recognizes transactions under an accrual not a cash basis.

So it is a period of time one year the top line here as revenue also called sales and these are going to get an per revenue recognition not necessarily cash. Subtract the cost of goods sold in this case sixty, gives us the gross income also called gross profit of forty and then other income expense in this case I have got twenty dollars in expenses. Deducted gives us the pre-tax income we can also call that earnings before taxes, I have assumed forty percent tax on those. And so, we deduct the taxes from protection can we get the net income which is also called the bottom line on the face of the income statement there also be a couple of flavors up earnings per share.

Here I have got basic earnings per share, so that is going to be net income divided by weighted average common shares outstanding. So the income statement again is a cruel or recognition not cash basis and the very stylized form here is the intuitive revenue ,recognize revenue, minus recognize expenses, equals booked net income. So noticed the net income under the cruel here is twelve dollars and I have carried out over to indicate that it with increaser plus up the retained earnings which is an equity account, so the balance sheet here unlike the flow income statement is a stock statement meaning point in time so there is a balance sheet at the beginning of 2011.

And there is a balance sheet, that characterizes the exact point in time at the end of the year, and the basic a quality in a left-hand side assets need to equal the summer liabilities and equity. Assets here we could have cash or in this case I have assume that we sold a hundred dollars with the product, issued the invoice two were customer but they have not paid us by the end of the year, so it is an account receivable asset that has not converted into cash.

So this is the cruel concept in action were crediting the asset because we expect to convert into cash shortly, so that one hundred dollars in this case, might equal 88 liabilities these could be payables to our vendors. Plus the twelve dollars in net income that increases retained earnings, so this very stylized wanna hear assets E-coli dollars plus equity. Set up because the final too quickly the third in least popular probably is the statement of owner’s equity, statement of changes in owner’s equity.

This also is a flow measure so this would be characterizing, how the retained earnings, change from the beginning the year to the end of the year. So I just made this up at the start of the year sim it was two hundred dollars, and so this is the shareholders book equity or we can also call it net asset because its assets minus liabilities as the equity lots leftover.

At the beginning of the year the matter in two hundred then we are gonna plus or add, any net income that was a crude into the income statement, after all that is going to flow to the owners, so in this case it is a plus to. If dividends were paid out those would get subtracted and then also notice without unrealized gains or losses remember I said the key feature the income statement as it is recognized transactions, now there may be unrecognized or unrealized, gains or losses but do not appear on the income statement.

For example a gain or loss on securities that are held available for sale or derivatives they do not show up in the income statement they do not show up and they will convert necessarily into the net income. So those were those unrealized gains or losses would be captured here after they have after all they have meant realized as transactions and they would influenced the change and the return retained earnings account, so that we can pew to see why the retained earnings is what it is at the end of the year. But again it is gonna be we could say is a book equity or net assets.

Finally the statement a cash-flow because all of the other three are under the a cruel principal, the statement a cash was important to us because it describes the actual flow during the year of cash. So here again like the income statement it will be over appeared year in this case fiscal year 2011, it shows us the starting cash and cash equivalents the beginning the year and then parses that into three basic components cash from operations, cash from investing and cash, from financing or cash flow from financing.

Those three together capture net cash flow during the year, which is gonna served to be the change or Delta from beginnings at the beginning plus or minus the net cash flow. Gives us the firm’s cash an equivalent at the end of the year, so increasingly this statement is important in conjunction with the income statement which is a cruel based. This is David Harper the factor, thanks for your time.

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