Financial Statement

yong Yang Written by yong Yang · 4 min read >

I major in the engineering industry, a green man in the finance industry without any knowledge. But I am eager to have some more knowledge of financing so that I can solve the problem of enterprise growing up, and explore more space in my career. we always use the annual financial report. But I have no clue what it indicates, and what can be useful information. after the CFA session in LBS, I am much clear. Below is a summary of a basic financial statement.

Companies use four financial statements to periodically report on business activities. These statements are the: balance sheet, income statement, statement of stockholders’ equity, and statement of cash flows. A balance sheet reports a company’s financial position at a point in time. The income statement, statement of stockholders’ equity, and the statement of cash flows report on performance over a period of time. The three statements (income statement, statement of stockholders’ equity, and statement of cash flows) link the balance sheet from the beginning to the end of a period.

Balance Sheet
A balance sheet reports a company’s financial position at a point in time. The balance sheet reports the company’s resources (assets), namely, what the company owns. The balance sheet also reports the sources of asset financing. There are two ways a company can finance its assets. It can raise money from stockholders; this is owner financing. It can also raise money from banks or other creditors and suppliers; this is nonowner financing. This means that both owners and nonowners hold claims on company assets. Owner claims on assets are referred to as equity and nonowner claims are referred to as liabilities (or debt). Since all financing must be invested in something, we obtain the following basic relation: investing equals financing. This equality is called the accounting equation (Asset= liability+ owner’s equity).

Income Statement
An income statement reports on a company’s performance over a period of time and lists amounts for revenues (also called sales) and expenses. Revenues minus expenses yield the bottom-line net income
amount. Net income reflects the profit (also called earnings) to owners for that specific period.

Statement of Stockholders’ Equity
The statement of stockholders’ equity reports on changes in key types of equity over a period of time. For each type of equity, the statement reports the beginning balance, a summary of the activity in the
the account during the year, and the ending balance.

■ Contributed capital, the stockholders’ net contributions to the company
■ Retained earnings, net income over the life of the company minus all dividends ever paid
■ Other
■ The noncontrolling interest, the equity of outside stockholders

Statement of Cash Flows
The statement of cash flows reports the change (either an increase or a decrease) in a company’s cash balance over a period of time. The statement reports cash inflows and outflows from operating, investing, and financing activities over a period of time.

explanatory footnotes

explanatory footnotes provide additional support and explanation to the above 4 parts.

after know about the consist of financial statement. How is it can be used for different users, what is the main consideration or care point?

Managers and Employees
For their own well-being and future earnings potential, managers and employees demand accounting
information on the financial condition, profitability, and prospects of their companies as well as
comparative financial information on competing companies and business opportunities. This permits
them to benchmark their company’s performance and condition. Managers and employees also demand
financial accounting information for use in compensation and bonus contracts that are tied to such
numbers. The popularity of employee profit sharing and stock ownership plans has further increased
the demand for financial information. Other sources of demand include union contracts that link wage negotiations to accounting numbers and pension and benefit plans whose solvency depends on company
Investment Analysts and Information Intermediaries
Investment analysts and other information intermediaries, such as financial press writers and business
commentators, are interested in predicting companies’ future performance. Expectations about future
profitability and the ability to generate cash impact the price of securities and a company’s ability to
borrow money at favorable terms. Financial reports reflect information about past performance and
current resources available to companies. These reports also provide information about claims on those
resources, including claims by suppliers, creditors, lenders, and stockholders. This information allows
analysts to make informed assessments about future financial performance and conditions so they can
provide stock recommendations or write commentaries.
Creditors and Suppliers
Banks and other lenders demand financial accounting information to help determine loan terms, loan
amounts, interest rates, and required collateral. Loan agreements often include contractual requirements,
called covenants, that restrict the borrower’s behavior in some fashion. For example, loan
covenants might require the loan recipient to maintain minimum levels of working capital, retained
earnings, interest coverage, and so forth to safeguard lenders. Covenant violations can yield technical
default, enabling the creditor to demand early payment or other compensation. Suppliers demand
financial information to establish credit terms and to determine their long-term commitment to supply chain relations. Both creditors and suppliers use financial information to monitor and adjust their contracts and commitments with a company.
Stockholders and Directors
Stockholders and directors demand financial accounting information to assess the profitability and
risks of companies. Stockholders and others (such as investment analysts, brokers, and potential investors)
Search for information useful in their investment decisions. Fundamental analysis uses financial
information to estimate company value and to form buy-sell stock strategies. Both directors and
stockholders use accounting information to evaluate managerial performance. Managers similarly use
such information to request an increase in compensation and managerial power from directors. Outside
directors are crucial to determining who runs the company, and these directors use accounting information to help make leadership decisions.
Customers and Strategic Partners
Customers (both current and potential) demand accounting information to assess a company’s ability to
provide products or services as agreed and to assess the company’s staying power and reliability. Strategic partners wish to estimate the company’s profitability to assess the fairness of returns on mutual
transactions and strategic alliances.
Regulators and Tax Agencies
Regulators (such as the SEC, the Federal Trade Commission, and the Federal Reserve Bank) and tax
agencies demand accounting information for antitrust assessments, public protection, price setting,
import-export analyses, and setting tax policies. Timely and reliable information is crucial for effective regulatory policy, and accounting information is often central to social and economic policy. For example,
governments often grant monopoly rights to electric and gas companies serving specific areas
in exchange for regulation over prices charged to consumers. These prices are mainly determined by
accounting measures.

Voters and Their Representatives
Voters and their representatives to national, state, and local governments demand accounting information
for policy decisions. The decisions can involve economic, social, taxation, and other initiatives.
Voters and their representatives also use accounting information to monitor government spending. We
have all heard of the $1,000 hammer-type stories that government watchdog groups uncover while sifting through accounting data. Contributors to nonprofit organizations also demand accounting information to assess the impact of their donations.

I really enjoy this CFA class and the professional knowledge.


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