Income statements illustrate what revenues the firm collects, the expenses required to support revenues, and the firm's profitability over a specified period of time. While balance sheets are a "snapshot" of the firm's status on a specific date, income statements reflect performance over a period of time. Publicly held companies generate income statements every quarter (three months) and for their annual report. INCOME STATEMENT (Thousands of dollars) Net revenues - Cost of goods sold - Operating expenses - Research & development expense Operating costs excluding depreciation - Depreciation and amortization expense Operating income (EBIT) - Interest expense Taxable income - Taxes Net income - Preferred dividends Net income available to common shareholders Dividends Addition to retained earnings Check Your Understanding The gross margin for this fictional company is: O 14.7% 9.2% 18.2% O 60.3% 33.3% $ $ On the income statement, interest expense is $ Wages are considered a(n) $ In this example, the firm pays half of its earnings as dividends to its stockholders and retains the other half. This is done for simplicity here, but real firms weigh a multitude of factors in setting their dividends. This issue will be covered in your finance course. $ $ Yr 2 7,000 (2,781) (1,809) (912) (5,502) (223) (1,275) (190) 1,085 (434) 651 (9) 642 $ 321 $ 321 Revenues Money generated by selling a firm's products or services. U.S. accounting practices allow firms to recognize revenues when sales are made, rather than waiting until cash is actually received. However, in finance we are more concerned about the cash flow a firm generates, and this accrual accounting creates an obstacle that has to be adjusted for. Firms with several lines of business may report revenues individually by each source. If the firm has 200,000 common shares outstanding, its earnings per share (EPS) is With its earnings, a firm has a decision to make about whether to pay common dividends or preferred dividends are while its dividends per share (DPS) is and common dividends are
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
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