Topic 2: Fundamental financial concepts
- Accounting Vs Budgeting
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- Balance Sheets
The primary purpose of a balance sheet is to convey the “book value” of a company. It provides a straightforward overview of a company’s financial position by detailing its assets, liabilities, and shareholders’ equity, enabling analysts to swiftly assess its current and anticipated performance.Typically, balance sheets adhere to the following fundamental equation:Assets = Liabilities + Shareholders’ Equity
Assets encompass everything owned by the company with an ascertainable value, including both tangible assets like vehicles and real estate, as well as intangible assets like patents and trademarks.
Liabilities denote the financial obligations owed by the company to creditors, encompassing outstanding payroll expenses, debt repayments, rent and utility payments, amounts owed to suppliers, taxes, bonds payable, and other obligations.
Shareholders’ equity, a term commonly synonymous with a company’s net worth, signifies the residual interest in the company’s assets after deducting liabilities. This amount represents the money remaining if all assets were liquidated and all liabilities settled, and it is owned by the shareholders, whether they are private owners or public investors.
- Shareholders’ Equity Statement
The shareholders’ equity statement is a financial document that outlines alterations in the equity owned by shareholders, irrespective of whether they are public or private investors.This statement usually communicates variations in the quantity and value of common and preferred stock, along with information regarding the company’s acquisition of stock which was held in the past by shareholders, referred to as treasury stock, and other relevant data points.
- Income Statements
A company generates an income statement to convey its earnings over a specific timeframe, commonly presented in quarterly and annual reports.Aside from delineating top-line revenue, income statements provide a comprehensive breakdown of various metrics crucial for analysts and investors. These metrics encompass:- Operating expenses, outlining all the costs incurred by the company during the reporting period.
- Depreciation, quantifying the decline in value of the company’s assets, such as aging equipment or vehicles, over time.
- Net income, extracted by bleeding the company’s expenses from its gross revenue to verify the overall profit or loss.
- Earnings per share (EPS), calculated by dividing net income by the total number of outstanding shares.
- Cash Flow Statement
The Cash Flow Statement serves as a comprehensive document outlining a company’s cash receipts and expenditures. These transactions are categorized as cash inflows and outflows.A company’s operating income depends on its ability to cover its operating costs. Cash flow provides insight into the sustainability of a company’s operations over the short and long term. Investors, creditors, and regulators use this information to assess a company’s financial health.
Typically, Cash Flow Statements are divided into three segments:
- Operating activities, which delineates the cash flow generated through the company’s provision of goods or services, encompassing both revenue and expenses.
- Investing activities, which delineates the cash flow resulting from the acquisition or divestiture of assets, such as real estate, vehicles, and equipment (utilizing available cash rather than borrowed funds).
- Financing activities, which delineates the cash flow derived from both debt and equity financing.