CHAPTER 2

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The Basic Financial Statements

Understand the income statement, the balance sheet, and the statement of cash flows. Construct three financial statements. Link worksheets together so that formulas in one sheet can reference data in another. Use Excels outline tool to display/hide some parts of financial statements.

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Introduction to financial statements

Income Statement: summarizes the results of the firms operations over a period of time (annually, quarterly, monthly). Balance Sheet: describes the assets, liabilities, and equity of the firm at a specific point in time (i.e., 12/31/2008). Statement of Cash Flow: outlines the sources of the firms cash inflows and shows where the cash outflows went over a period of time (annually, quarterly, monthly).

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General Principles in Excel

Principle 1: Make Excel do as much of the work as possible. Whenever possible, a formula should be used rather than entering numbers.

Principle 2: Format worksheet so that it is easy to understand. Borders, shading, and font choices can make important numbers stand out and get the attention they deserve if they are properly chosen.

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I. Income Statement
Gross Profit: = Sales Cost of goods sold Earnings Before Interest and Taxes (EBIT): = Gross profit all other expenses (SG&A, depreciation, etc) other than interest and taxes. Earnings Before Tax (EBT): EBIT-interest Taxes: = EBT Tax Rate Net Income: EBTTaxes=EBT(1-Tax Rate)

Used for dividend payments and retained earnings.

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Common-Size Financial Statements

Display the data as percentage instead of dollar amount. Advantages: (1) Allow for easy comparisons betweens firms of different sizes. (2) Help to find important trends which cannot be obvious in dollar amounts. Income Statements: divided by Sales. Balance Sheet: divided by Total Assets.

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Custom Number Formatting

In most annual reports, numbers in financial statement are commonly displayed in thousands of dollars ($ 000s). Highlight numbers Format Cells Number choose Custom category choose type like #,##0.00,. Excel will display the numbers as if they has been divided by 1000. if displayed as divided by 1,000,000: choose type like #,##0.00,,.

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$ in formula calculation
The $ in the formula will freeze the reference to a specific address.

(1) $C$5: freeze both row 5 and column C

(2) C$5: Only freeze row 5, but the column reference will change if you copy the formula to the right or left (3) $C5: Only freeze column C, but the row reference will change if you copy the formula to the up or down. (4) C5: Both row and column can change.

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II. The Balance Sheet

Balance: Total Assets (TA) = Total Liabilities (TL)+ Total Owners Equity (TE)

Assets: tangible and intangible things a firm owns

Liabilities: a firms unpaid items (accounts payable) and debts. Equity: the difference between what the firm owns and what it owes to others. Including common stocks, preferred stocks, and cumulative retained earnings.

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Balance Sheet Items

Total Assets = Current Assets (Cash & equivalents, Accounts receivables, Inventory) + Net Fixed Assets (= fixed Assets Depreciation). Total Liabilities = Current Liabilities (Accounts payable, Short-term notes payable) + Long-term debt Total Equity = Common stocks + Preferred stocks + Cumulative retained earnings

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III. The Statement of Cash Flows

Outlines a firms cash inflows (sources of funds) and cash outflows (uses of funds).

Determining the cash balance change:

Beginning Cash Balance + Cash inflows (sources) - Cash outflows (uses) = Ending Cash Balance

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The Statement of cash flows Sections

There are three sections in the statement: (1) Cash Flows from Operations: Net Income; Depreciation expense; Changes in current assets; Changes in Accounts Payable and other current liabilities.

(2) Cash Flow from Investing: changes in Fixed Assets.

(3) Cash Flow from Financing: Change in Short-term Notes Payables; Change in Long-term Debt; Cash Dividends.

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How to determine cash inflow/outflows

The signs of numbers: Cash outflow (-); Cash inflows (+).

Asset account cash outflows:

cash inflows: Liability/Equity: cash inflows: cash outflows:

+ + -

Order: Older numbers Newer numbers

Order: Newer numbers Older numbers

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Dividend Payments
(1) Sign: Dividend payments have negative signs in the statement of cash flows (2) Dividends Paid = Net Income Retained Earnings (3) Retained Earnings = Newer Cumulative Retained Earnings Older Cumulative Retained Earnings

(in Balance Sheet)

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Example: How to link different sheets?

For example, we want to get the Changes in Inventory value in the Statement of Cash Flows (B8 in the Statement of Cash Flows) using the numbers in Balance Sheet (Inventory 2009 in B7; Inventory 2008 in C7 in the balance sheet). Type = in B8 of the Statement of Cash Flows then switch to Balance Sheet, select C7 using mouse then type - (subtraction) then select B7 using mouse finally press Enter. In B8 of the Statement of Cash flows directly shows the formula: Balance Sheet!C7 Balance Sheet!B7 then press enter.

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IV. Using Excels Outliner

Purpose: Help organize a worksheet by considering the major items first and progressively moving to details. (1) Excel SOMETIMES can apply an outline automatically: Data Group Auto Outline. (2) Manually Outline: Highlight the lines which you want to group. Shift + Alt + Right Arrow (or Data Group Group) (3) Clear outline: Data Ungroup Clear Outline.