Lecture 5: Financial Reports I In a two-lecture lesson on financial reports, you get a chance to examine a real report in detail as Professor Schwartz unveils the 1972 Annual Report of the United States Steel Company. As you go through the numbers, you gain an understanding of both the level of precision you can expect in such information and the degree of discretion management exercises in presenting information to its shareholders. badlani classes, ca dilip badlani, cma, cs, ca, small business finance, entrepreneurship, small business, financial tutorial,financial statements, income statement, balance sheet, statement of cash flows, cash flow statement, finance, accounting, equity, accounts payable, financial, ipcc, cpt, badlani classes, ca dilip badlani, cma, cs, ca, small business finance, entrepreneurship, small business, financial tutorial, profit and loss, statement, notes payable, analysis, assets, cfa, glassey, alex glassey, financial statement, credit, business, valuation, busi, credit (finance), credit (creative arts), stratpad, pickedup, 2encmstr, edit Financial statements present the results of operations and the financial position of the company. Four statements are commonly prepared by publicly-traded companies: balance sheet, income statement, cash flow statement and statement of changes in equity. Balance Sheet (Statement of Financial Position) The balance sheet tells you whether the company can pay its bills on time, its financial flexibility to acquire capital and its ability to distribute cash in the form of dividends to the company's owners. The top of the balance sheet has three items: (1) the legal name of the entity; (2) the title (i.e., balance sheet or statement of financial position); and (3) the date of the statement. Importantly, the financial position presented is always for the entity itself, not its owners. And the balance sheet is always for a specific point in time: instead of just a date of, say, December 31, 20XX, it would be more accurate to write December 31, 20XX, 11:59:59, or any particular moment on the 31st. Hence the key accounting equation: Assets = Liabilities + Owners Equity, or A=L+OE In the most common format, known as the account form, the assets in a balance sheet are listed on the left; they ordinarily have debit balances. Liabilities and owners equity are on the right, and typically have credit balances. These three main categories are separated and further divided to show important relationships and subtotals. Assets are broken down into current and noncurrent (or long-term). Assets are listed from top to bottom in order of decreasing liquidity, i.e., how fast they can be converted to cash. (For more on this see, Reading The Balance Sheet.) Current assets are cash and other assets that are expected to be used during the normal operating cycle of the business, usually one year. They typically include cash and cash equivalents, short-term investments, accounts receivables, inventory and prepaid expense. Noncurrent assets will not be realized in full within one year. They typically include long-term investments: property, plant and equipment; intangible assets and other assets. Liabilities are listed in order of expected payment. Obligations expected to be satisfied within one year are current liabilities. They include accounts payable, trade notes payable, advances and deposits, current portion of long-term debt and accrued expenses. Noncurrent liabilities include bonds payable and other forms of long-term capital. The structure of the owners' equity section depends on whether the entity is an individual, a partnership or a corporation. Assuming it's a corporation, the section will include capital stock, additional paid-in capital, retained earnings, accumulated other comprehensive income and treasury stock. Balance sheet data can be used to compute key indicators that reveal the company's financial structure and its ability to meet its obligations. These include working capital, current ratio, quick ratio, debt-equity ratio and debt-to-capital ratio. (To learn more read, Testing Balance Sheet Strength.) Income Statement
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