Understanding Balance Sheets, Income Statements, and Cash Flow
Understanding Financial Statements
1. Key Information in Financial Statements
What information is contained in the balance sheet, income statement, and statement of cash flows?
The Balance Sheet
The balance sheet is a financial statement that shows a firm’s assets and liabilities at a particular point in time.
Why is it useful? Shareholder’s Equity = Total Assets – Total Liabilities
Balance Sheet Structure
Current Assets:
- Cash and securities
- Receivables
- Inventories
Fixed Assets:
- Tangible assets
- Intangible assets
Current Liabilities:
- Payables
- Short-term debt
Long-Term Liabilities
Shareholder’s Equity
Total Assets = Total Liabilities + Shareholder’s Equity
The Income Statement
The income statement is a financial statement that shows the revenues, expenses, and net income of a firm over a period of time.
The Statement of Cash Flows
The statement of cash flows shows a firm’s cash receipts and cash payments over time.
Free Cash Flow: Cash available for distribution to investors after the firm pays for new investments or additions to working capital.
2. Market Value vs. Book Value
What is the difference between market and book value?
- Book Value:
- Value of assets or liabilities according to the balance sheet.
- Values recorded at their historical cost adjusted for depreciation.
- Market Value:
- The value of assets or liabilities were they to be resold in a market.
3. Fundamental Freedoms of the European Union
What are the fundamental freedoms of the European Union and what do they mean?
- Free movement of persons: All EU citizens can move freely, reside, and take up work within the EU area.
- Free movement of goods: Goods are not subject to border controls, tariffs, or quotas within the EU. This simplifies and promotes trade between member states.
- Free movement of services: Service providers from an EU state are free to offer their services in any state of the EU single market, even without settling there.
- Free movement of capital: Restrictions on capital and payment transactions between states of the EU single market are prohibited.
4. Sophie’s Balance Sheet Example
Shareholder’s Equity = Total Assets – Total Liabilities
Total Assets = Current Assets + Fixed Assets
- Current Assets: Inventory of sofas, accounts receivable, cash balance
- Fixed Assets: Store and property
Total Liabilities = Current Liabilities + Long-Term Liabilities
- Current Liabilities: Accounts payable
- Long-Term Liabilities: Long-term debt
Total Assets:
- Inventory of sofas
- Accounts receivable
- Store and property
- Cash balance
Total Liabilities:
- Accounts payable
- Long-term debt