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Corporate Financial Statement

What is a Financial Statement?

A financial statement is a quantitative way of showing how a company is doing. Three different ways of representing the financial state of a company: 1. Cash Management (can the company meet its obligations?) 2. Profitability (Is it making money?) - the income statement 3. Assets versus Liabilities (what is the value of the company? Who owns what?) - the balance sheet Each one of these questions is answered by our Financial Statements.

The Big Three

Cash Flow Statements These answer the important managerial question do I have enough cash to run my business Income Statements This is the financial sheet that tells you if your company is profitable or not. Balance Sheets How much debt do I have? How large are my assets? This sheet tells you the answer to these questions.
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Cash Flow Statements

A report of all a firms transactions that involve cash The key elements are revenues (money flowing in) and expenses (money flowing out). Cash flow statements compare the sum of the revenues to the sum of the expenses on a regular time basis usually monthly.
Manning Electronics (Engineering 9) Did Ms. Manning have enough cash to buy that piece of equipment for her boat business?

What are Revenues?

Sales Interest from firms investments (e.g., a company savings account) Royalty and Licensing payments for appropriate use of firms intellectual property
Another source of cash inflow, but not a revenue is the cash the firm receives from borrowing money.

What are Expenses?

There are two types of expenses:

FIXED COSTS
and VARIABLE COSTS

Fixed Costs
Rent payments Salaried employees Capital Investments and (some) maintenance Utilities (phone, water, electric, etc) Insurance Taxes (on property, plant, and equipment) Advertising (*) Others things that do not depend on number of units produced.
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Variable Costs
Materials Cost Supplies Production Wages Outside / Contracted labor Advertising (*) Sales Commissions / Distribution Costs Equipment Maintenance Other things that depend on the number of units produced (e.g. royalties paid)
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Putting it all together

So, placing the revenues at the top and the expenses below you get the following three month cash flow statement for a hypothetical startup:
Jan-00 REVENUES (inflow) SALES INTEREST RECEIPTS EXPENDITURES (outflow) MATERIALS COST AND MFG. LABOR SALES COMMISSIONS COST OF GOODS SOLD (COGS) GROSS MARGIN SALARY AND BENEFITS OF CEO SALARY AND BENEFITS OF ASSISTANT RENT TELEPHONE AND OTHER ADVERTISING EQUIPMENT TOTAL FIXED COSTS MONTHLY CASH FLOW $0.00 $0.00 Feb-00 $0.00 $239.27 $239.27 Mar-00 $1,000.00 $167.04 $1,167.04

$0.00 $0.00 $0.00 $0.00 $3,000.00 $2,000.00 $500.00 $75.00 $2,000.00 $20,000.00 $27,575.00 ($27,575.00)

$0.00 $0.00 $0.00 $239.27 $3,000.00 $2,000.00 $500.00 $75.00 $2,000.00 $10,000.00 $17,575.00 ($17,335.73)

$50.00 $100.00 $150.00 $1,017.04 $3,000.00 $2,000.00 $500.00 $75.00 $2,000.00 $10,000.00 $17,575.00 ($16,557.96)

Whats Missing?
Cumulative Cash Flow numbers Taxes ( and accumulated depreciation) Net Earnings

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Cumulative Cash Flow Cash Balance

Just like the average person keeps their checking account balance a firm also needs to know their cumulative cash flow or cash balance. It is an easy calculation simply take the cumulative cash flow from this month and add it to the previous months cash balance. Your very first months cumulative cash balance is your first months monthly cash flow added to your start-up capital (probably an initial loan or first round financing).
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EBI. what?
THE CHAIN OF EARNINGS
EBIDT (Earnings Before Interest, Depreciation and Tax)
( - accrued depreciation)

EBIT (Earnings Before Interest and Tax)

( - taxes paid once a year)

EBI
( - interest payments on your debt)

TOTAL EARNINGS
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EBIDT
Your EBIDT (Earnings Before Interest Depreciation and Tax) is Total Revenues All Costs that are not depreciable
Non-depreciable Costs
EXPENDITURES (outflow) MATERIALS COST AND MFG. LABOR SALES COMMISSIONS COST OF GOODS SOLD (COGS) GROSS MARGIN SALARY AND BENEFITS OF CEO SALARY AND BENEFITS OF ASSISTANT RENT TELEPHONE AND OTHER ADVERTISING EQUIPMENT TOTAL FIXED COSTS

Capital Equip. (Depreciable Costs)

EBITD = Revenues (COGS + Salary + Rent + Phone + 13 Advertising)

Calculating Depreciation
1. Continue depreciation on items purchased in earlier years, using previously established methods 2. Sum up all of that fiscal years capital expenses 3. Decide which method of Depreciation your firm wants to use (Straight Line or Accelerated) 4. Determine the useful lifetime for the assets 5. Determine the salvage value 6. Use the formulas to calculate depreciation on new equipment 7. Add up all depreciation contributions NOTE: while EBIDT may be a monthly figure since taxes and depreciation are only calculated once a year EBIT, EBI, and net earnings MUST be Year- 14 End numbers.

Calculating Taxes
Take the EBIDT and subtract the depreciation this yields Earnings Before Interest and Tax Then calculate profit (or earnings) before taxes by subtracting interest expenses. Then multiply the profit before taxes by your effective tax rate that will give the corporate income taxes the firm owes.

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Final Cash Flow Statement

Sep-00 REVENUES (inflow) SALES INTEREST RECEIPTS EXPENDITURES (outflow) MATERIALS COST AND MFG. LABOR SALES COMMISSIONS COST OF GOODS SOLD (COGS) GROSS MARGIN SALARY AND BENEFITS OF CEO SALARY AND BENEFITS OF ASSISTANT RENT TELEPHONE AND OTHER ADVERTISING EQUIPMENT TOTAL FIXED COSTS MONTHLY CASH FLOW ENDING CASH BALANCE EBIDT* PROFITS CUMULATIVE EBIDT* PROFITS Depreciation Expense for Tax Purposes EBIT Profits Taxes EBI Profits $22,000.00 $39.14 $22,039.14 Oct-00 $28,000.00 $85.66 $28,085.66 Nov-00 $35,000.00 $153.62 $35,153.62 Dec-00 $46,000.00 $246.65 $46,246.65 $1,100.00 $2,200.00 $3,300.00 $18,739.14 $3,000.00 $2,000.00 $500.00 $75.00 $2,000.00 $0.00 $7,575.00 $11,164.14 $20,557.84 $11,164.14 ($14,442.16) $1,400.00 $2,800.00 $4,200.00 $23,885.66 $3,000.00 $2,000.00 $500.00 $75.00 $2,000.00 $0.00 $7,575.00 $16,310.66 $36,868.50 $16,310.66 $1,868.50 $1,750.00 $3,500.00 $5,250.00 $29,903.62 $3,000.00 $2,000.00 $500.00 $75.00 $2,000.00 $0.00 $7,575.00 $22,328.62 $59,197.12 $22,328.62 $24,197.12 $2,300.00 $4,600.00 $6,900.00 $39,346.65 $3,000.00 $2,000.00 $500.00 $75.00 $2,000.00 $0.00 $7,575.00 $31,771.65 $90,968.77 $31,771.65 $55,968.77 $4,500.00 $51,468.77 $23,160.95 $28,307.82

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NET EARNINGS FOR YEAR (PROFIT AFTER TAX) $21,507.82

Income Statement
Income Statement compares the profitability of the firm to prior years Operating Information Total (yearly) revenues Net Earnings $ 172,593.77 minus total (yearly) Expenses Cost of Goods Sold $ 25,725.00 Total Salary/Benefits $ 60,000.00 expenditures Advertising $ 24,000.00
Rent Other EBIDT Profits Depreciation Taxes AFTER TAX PROFIT Accumulated Interest Expenses Earnings After Accumulated Interest $ $ $ $ $ $ $ $ 6,000.00 900.00 55,968.77 4,500.00 23,160.95 28,307.82 6,800.00 21,507.82

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Cash Flow versus Income Statements

Note that the final Net Earnings number for both the final month of the cash flow statement is exactly the same as the year-end Net Earnings total for the Income Statement, reflecting the same time period
Sep-00 REVENUES (inflow) SALES INTEREST RECEIPTS EXPENDITURES (outflow) MATERIALS COST AND MFG. LABOR SALES COMMISSIONS COST OF GOODS SOLD (COGS) GROSS MARGIN SALARY AND BENEFITS OF CEO SALARY AND BENEFITS OF ASSISTANT RENT TELEPHONE AND OTHER ADVERTISING EQUIPMENT TOTAL FIXED COSTS MONTHLY CASH FLOW ENDING CASH BALANCE EBIDT* PROFITS CUMULATIVE EBIDT* PROFITS Depreciation Expense for Tax Purposes EBIT Profits Taxes EBI Profits $22,000.00 $39.14 $22,039.14 Oct-00 $28,000.00 $85.66 $28,085.66 Nov-00 $35,000.00 $153.62 $35,153.62 Dec-00 $46,000.00 $246.65 $46,246.65

Operating Information Net Earnings Expenses $ 172,593.77

$1,100.00 $2,200.00 $3,300.00 $18,739.14 $3,000.00 $2,000.00 $500.00 $75.00 $2,000.00 $0.00 $7,575.00 $11,164.14 $20,557.84 $11,164.14 ($14,442.16)

$1,400.00 $2,800.00 $4,200.00 $23,885.66 $3,000.00 $2,000.00 $500.00 $75.00 $2,000.00 $0.00 $7,575.00 $16,310.66 $36,868.50 $16,310.66 $1,868.50

$1,750.00 $3,500.00 $5,250.00 $29,903.62 $3,000.00 $2,000.00 $500.00 $75.00 $2,000.00 $0.00 $7,575.00 $22,328.62 $59,197.12 $22,328.62 $24,197.12

$2,300.00 $4,600.00 $6,900.00 $39,346.65 $3,000.00 $2,000.00 $500.00 $75.00 $2,000.00 $0.00 $7,575.00 $31,771.65 $90,968.77 $31,771.65 $55,968.77 $4,500.00 $51,468.77 $23,160.95 $28,307.82 $21,507.82

Cost of Goods Sold Total Salary/Benefits Advertising Rent Other EBIDT Profits Depreciation Taxes AFTER TAX PROFIT Accumulated Interest Expenses Earnings After Accumulated Interest

$ $ $ $ $ $ $ $ $ $ $

25,725.00 60,000.00 24,000.00 6,000.00 900.00 55,968.77 4,500.00 23,160.95 28,307.82 6,800.00 21,507.82

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NET EARNINGS FOR YEAR (PROFIT AFTER TAX)

Comparison (cont.)
Further the Income Statements year-end figures for COGS, Salary, Rent, Advertising, and sales should be the 12 month totals of the cash-flows corresponding to the respective line item Likewise, depreciation and taxes should be equal for that fiscal year

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Balance Sheets
Unlike Cash-Flow and Income Statements, Balance Sheets lists ASSETS and LIABILITIES
Examples of Assets include:
Land and Capital Equipment less accrued depreciation Intellectual Property (if purchased) Cash on Hand (which is equal to the year end Cumulative Cash Balance) Accounts Receivable Inventory Retained Earnings from Previous Years
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Balance Sheets (cont.)

Examples of Liabilities include:
Short Term Debt (loans) Long Term Debt (bond issues, etc) Accounts Payable Interest Payable Taxes Payable

The difference between Assets and Liabilities is your EQUITY

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Example of a Balance Sheet

ASSETS Current Assets Cash on Hand Accounts Receivable Inventory Prepaid Expenses Total Current Assets Property / Plant / Equipment less depreciation Other Assets TOTAL ASSETS $ $ FYE 2001 FYE 2000 $ $ $ $ $ 90,968.77 90,968.77 $50,000.00 $4,500.00 $ $ $ $ $ $ 85,000.00 85,000.00 $0.00

85,000.00

136,468.77 $

LIABILITIES Current Liabilities Interest Payable Short-term loans Accounts Payable Income Taxes Payable Total Current Liabilities Long Term Debt TOTAL LIABILITIES

FYE 2001

FYE 2000

$ $ $ $ $ $

6,800.00 $23,160.95 29,960.95

$ $ $ $

85,000.00 85,000.00

85,000.00 $ 114,960.95 $

TOTAL EQUITY LIABILITES PLUS EQUITY

$ $

21,507.82 $ 136,468.77

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Thank you

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