Question

In your own words, describe each of the four financial statements. Go online and find the most recent set of financial statements for a publicly traded company that you are interested in, and explain what you learned about that company from exploring its financial statements.

Answer 1

Answer.

Balance Sheet

A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity.

Assets are things that a company owns that have value. This typically means they can either be sold or used by the company to make products or provide services that can be sold. Assets include physical property, such as plants, trucks, equipment and inventory. It also includes things that can’t be touched but nevertheless exist and have value, such as trademarks and patents. And cash itself is an asset. So are investments a company makes.

Liabilities are amounts of money that a company owes to others. This can include all kinds of obligations, like money borrowed from a bank to launch a new product, rent for use of a building, money owed to suppliers for materials, payroll a company owes to its employees, environmental cleanup costs, or taxes owed to the government. Liabilities also include obligations to provide goods or services to customers in the future.

Shareholders’ equity is sometimes called capital or net worth. It’s the money that would be left if a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the shareholders, or the owners, of the company.

Income Statements

An income statement is a report that shows how much revenue a company earned over a specific time period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue. The literal “bottom line” of the statement usually shows the company’s net earnings or losses. This tells you how much the company earned or lost over the period.

Income statements also report earnings per share (or “EPS”). This calculation tells you how much money shareholders would receive if the company decided to distribute all of the net earnings for the period. (Companies almost never distribute all of their earnings. Usually they reinvest them in the business.)

To understand how income statements are set up, think of them as a set of stairs. You start at the top with the total amount of sales made during the accounting period. Then you go down, one step at a time. At each step, you make a deduction for certain costs or other operating expenses associated with earning the revenue. At the bottom of the stairs, after deducting all of the expenses, you learn how much the company actually earned or lost during the accounting period. People often call this “the bottom line.”

At the top of the income statement is the total amount of money brought in from sales of products or services. This top line is often referred to as gross revenues or sales. It’s called “gross” because expenses have not been deducted from it yet. So the number is “gross” or unrefined.

The next line is money the company doesn’t expect to collect on certain sales. This could be due, for example, to sales discounts or merchandise returns.

When you subtract the returns and allowances from the gross revenues, you arrive at the company’s net revenues. It’s called “net” because, if you can imagine a net, these revenues are left in the net after the deductions for returns and allowances have come out.

Statements of shareholders' equity

The statement of shareholders' equity is a financial document a company issues as part of its balance sheet. It highlights the changes in value to stockholders' or shareholders' equity, or ownership interest in a company, from the beginning of a given accounting period to the end of that period.

Earnings Per Share or EPS

Most income statements include a calculation of earnings per share or EPS. This calculation tells you how much money shareholders would receive for each share of stock they own if the company distributed all of its net income for the period.

To calculate EPS, you take the total net income and divide it by the number of outstanding shares of the company.

Cash Flow Statements

Cash flow statements report a company’s inflows and outflows of cash. This is important because a company needs to have enough cash on hand to pay its expenses and purchase assets. While an income statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash.

A cash flow statement shows changes over time rather than absolute dollar amounts at a point in time. It uses and reorders the information from a company’s balance sheet and income statement.

The bottom line of the cash flow statement shows the net increase or decrease in cash for the period. Generally, cash flow statements are divided into three main parts. Each part reviews the cash flow from one of three types of activities: (1) operating activities; (2) investing activities; and (3) financing activities.

Operating Activities

The first part of a cash flow statement analyzes a company’s cash flow from net income or losses. For most companies, this section of the cash flow statement reconciles the net income (as shown on the income statement) to the actual cash the company received from or used in its operating activities. To do this, it adjusts net income for any non-cash items (such as adding back depreciation expenses) and adjusts for any cash that was used or provided by other operating assets and liabilities.

Investing Activities

The second part of a cash flow statement shows the cash flow from all investing activities, which generally include purchases or sales of long-term assets, such as property, plant and equipment, as well as investment securities. If a company buys a piece of machinery, the cash flow statement would reflect this activity as a cash outflow from investing activities because it used cash. If the company decided to sell off some investments from an investment portfolio, the proceeds from the sales would show up as a cash inflow from investing activities because it provided cash.

Financing Activities

The third part of a cash flow statement shows the cash flow from all financing activities. Typical sources of cash flow include cash raised by selling stocks and bonds or borrowing from banks. Likewise, paying back a bank loan would show up as a use of cash flow.

Lets take example of Amazon to study the financial Statements:

The first of our financial statements examples is the cash flow statement. The cash flow statement shows the changes in a company’s cash position during a fiscal period. The cash flow statement uses the net income figure from the income statement and adjusts it for non-cash expenses. This is done to find the change in cash from the beginning of the period to the end of the period.

Most companies begin their financial statements with the income statement. However, Amazon (NASDAQ: AMZN) begins their financial statements section in their annual 10-K report with their cash flow statement.

The cash flow statement begins with the net income and adjusts it for non-cash expenses, changes to balance sheet accounts, and other usages and receipts of cash. Put another way, it adjusts it for cash from operating activities, investing activities, and financing activities.

The following are explanations for the line items listed in Amazon’s cash flow statement. Please note that certain items such as “Other operating expenses, net” are often defined differently by different companies:

Operating Activities:

Depreciation of property and equipment (…): a non-cash expense representing the deterioration of an asset (e.g. factory equipment). An addition to net cash.

Stock-based compensation: a non-cash expense as a company awards stock options or other stock-based forms of compensation to employees as part of their compensation and wage agreements. An addition to net cash.

Other operating expense, net: a non-cash expense primarily relating to the amortization of Amazon’s intangible assets. An addition to net cash.

Other expense (income), net: a non-cash expense relating to foreign currency and equity warrant valuations.

Deferred income taxes: temporary differences between book tax and actual income tax. The amount of tax the company pays may be different from what it owes.

Changes in operating assets and liabilities: non-cash changes in operating assets or liabilities. For example, an increase in accounts receivable is a sale or a source of income where no actual cash was received, thus resulting in a deduction. Conversely, an increase in accounts payable is a purchase or use of income where no actual cash was used, resulting in an addition to net cash.

Investing Activities:

Purchases of property and equipment (…): purchases of plants, property, and equipment are usages of cash. A deduction from net cash.

Proceeds from property and equipment incentives: this line is added for additional detail on Amazon’s property and equipment purchases. Incentives received from property and equipment vendors are recorded as a reduction in Amazon’s costs and thus a reduction in cash usage.

Acquisitions, net of cash acquired, and other: cash used toward acquisitions of other companies, net of cash acquired as a result of the acquisition. A deduction from net cash.

Sales and maturities of marketable securities: the sale or proceeds obtained from holding marketable securities (short-term financial instruments that mature within a year) to maturity. An addition to net cash.

Purchases of marketable securities: the purchase of marketable securities. A deduction from net cash.

Financing Activities:

Proceeds from long-term debt and other: cash obtained from raising capital by issuing long-term debt. An addition to net cash.

Repayments of long-term debt and other: cash used to repay long-term debt obligations. A deduction from net cash.

Principal repayments of capital lease obligations: cash used to repay the principal amount of capital lease obligations. A deduction from net cash.

Principal repayments of finance lease obligations: cash used to repay the principal amount of finance lease obligations. A deduction from net cash.

Foreign currency effect on cash and cash equivalents: the effect of foreign exchange rates on cash held in foreign currencies.

Supplemental Cash Flow Information:

Cash paid for interest on long-term debt: cash usages to pay accumulated interest from long-term debt.

Cash paid for interest on capital and finance lease obligations: cash usages to pay accumulated interest from capital and finance lease obligations.

Cash paid for income taxes, net of refunds: cash usages to pay income taxes.

Property and equipment acquired under capital leases: the value of property and equipment acquired under new capital leases in the fiscal period.

Property and equipment acquired under build-to-suit leases: the value of property and equipment acquired under new build-to-suit leases in the fiscal period.

#2 Financial Statements Examples – Income Statement

The next statement in our financial statements examples is the income statement. The income statement is the first place for an analyst to look at if they want to assess a company’s profitability.

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The income statement provides a look at a company’s financial performance throughout a certain period, usually a fiscal quarter or year. This period is usually denoted at the top of the statement, as can be seen above. The income statement contains information regarding sales, costs of sales, operating expenses, and other expenses.

The following are explanations for the line items listed in Amazon’s income statement:

Operating Income (EBIT):

Net product sales: revenue derived from Amazon’s product sales such as Amazon’s first-party retail sales and proprietary products (e.g., Amazon Echo)

Net services sales: revenue generated from the sale of Amazon’s services. This includes proceeds from Amazon Web Services (AWS), subscription services, etc.

Cost of sales: costs directly associated with the sale of Amazon products and services. For example, the cost of raw materials used to manufacture Amazon products is a cost of sales.

Fulfillment: expenses relating to Amazon’s fulfillment process. Amazon’s fulfillment process includes storing, picking, packing, shipping, and handling customer service for products.

Marketing: expenses pertaining to advertising and marketing for Amazon and its products and services. Marketing expense is often grouped with selling, general, and administrative expenses (SG&A) but Amazon has chosen to break it out as its own line item.

Technology and content: costs relating to operating Amazon’s AWS segment.

General and administrative: operating expenses that are not directly related to producing Amazon’s products or services. These expenses are sometimes referred to as non-manufacturing costs or overhead costs. These include rent, insurance, managerial salaries, utilities, and other similar expenses.

Other operating expense, net: expenses primarily relating to the amortization of Amazon’s intangible assets.

Operating income: the income left over after all operating expenses (expenses directly related to the operation of the business) are deducted. Also known as EBIT.

Net Income:

Interest income: income generated by Amazon from investing excess cash. Amazon typically invests excess cash in investment-grade, short to intermediate-term fixed income securities, and AAA-rated money market funds.

Interest expense: expenses relating to accumulated interest from capital and finance lease obligations and long-term debt.

Other income (expense), net: income or expenses relating to foreign currency and equity warrant valuations.

Income before income taxes: Amazon’s income after operating and interest expenses have been deducted.

Provision for income taxes: the expense relating to the amount of income tax Amazon must pay within the fiscal year.

Equity-method investment activity, net of tax: proportionate losses or earnings from companies where Amazon owns a minority stake.

Net income: the amount of income left over after Amazon has paid off all its expenses.

Earnings per Share (EPS):

Basic earnings per share: earnings per share calculated using the basic number of shares outstanding.

Diluted earnings per share: earnings per share calculated using the diluted number of shares outstanding.

Weighted-average shares used in the computation of earnings per share: a weighted average number of shares to account for new stock issuances throughout the year. The way this calculation works is by taking the weighted average number of shares outstanding throughout the year based on the amount of the fiscal period covered.

For example, a company has 100 shares outstanding at the beginning of the year. At the end of the first quarter, the company issues another 50 shares, bringing the total number of shares outstanding to 150. The calculation for the weighted average number of shares would look like below:

100*0.25 + 150*0.75 = 131.25

Basic: the number of shares outstanding in the market at the date of the financial statement.

Diluted: the number of shares outstanding if all convertible securities (e.g. convertible preferred stock, convertible bonds) are exercised.

#3 Financial Statements Examples – Balance Sheet

The last statement we will look at with our financial statements examples is the balance sheet. The balance sheet shows the company’s assets, liabilities, and stockholders’ equity at a specific point in time.

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Unlike the income statement and the cash flow statement, which display financial information for the company during a fiscal period, the balance sheet is a snapshot of the company’s finances at a specific point in time. This can be seen above in the line regarding the date. Compared to other financial statements examples, it states ‘December 31, 2017’ as opposed to ‘Year Ended December 31, 2017’. By displaying snapshots from different periods, the balance sheet shows changes in the accounts of a company.

The following are explanations for the line items listed in Amazon’s balance sheet:

Assets:

Cash and cash equivalents: cash or highly liquid assets and short-term commitments that can be quickly converted into cash.

Marketable securities: short-term financial instruments that mature within a year.

Inventories: goods currently held in stock for sale, in-process goods, and materials to be used in the production of goods or services.

Accounts receivable, net and other: credit sales of a business that have not yet been fully paid by customers.

Goodwill: the difference between the price paid in an acquisition of a company and the fair market value of the target company’s net assets.

Other assets: Amazon’s acquired intangible assets, net of amortization. This includes items such as video, music content, and long-term deferred tax assets.

Liabilities:

Accounts payable: short-term liabilities incurred when Amazon purchases goods from suppliers on credit.

Accrued expenses and other: liabilities primarily related to Amazon’s unredeemed gift cards, leases and asset retirement obligations, current debt, acquired digital media content, etc.

Unearned revenue: revenue generated when payment is received for goods or services that have not yet been delivered or fulfilled. Unearned revenue is a result of revenue recognition principles outlined by the U.S. GAAP and IFRS.

Long-term debt: the amount of outstanding debt a company holds that has a maturity of 12 months or longer.

Other long-term liabilities: Amazon’s other long-term liabilities, which include long-term capital and finance lease obligations, construction liabilities, tax contingencies, long-term deferred tax liabilities, etc. (Note 6 of Amazon’s 2017 annual report).

Stockholders’ Equity:

Preferred stock: stock issued by a corporation that represents ownership in the corporation. Preferred stockholders have a priority claim on the company’s assets and earnings over common stockholders. Preferred stockholders are prioritized with regards to dividends but do not have any voting rights in the corporation.

Common stock: stock issued by a corporation that represents ownership in the corporation. Common stockholders can participate in corporate decisions through voting.

Treasury stock, at cost: also known as reacquired stock, treasury stock represents outstanding shares that have been repurchased from the stockholder by the company.

Additional paid-in capital: the value of share capital above its stated par value in the above line item for common stock ($0.01 in the case of Amazon). In Amazon’s case, the value of its issued share capital is $17,186 million more than the par value of its common stock, which is worth $5 million.

Accumulated other comprehensive loss: accounts for foreign currency translation adjustments and unrealized gains and losses on available-for-sale/marketable securities.

Retained earnings: the portion of a company’s profits that is held for reinvestment back into the business, as opposed to being distributed as dividends to stockholders.

Conclusion

As you can see with these financial statements examples, financial statements are complex and closely linked. There are many accounts in financial statements that can be used to represent amounts regarding different business activities. Many of these accounts are typically labeled “other” type accounts, such as “Other operating expenses,etc.