FINANCIAL STATEMENTS
Topic 2
ANNUAL REPORT
Annual report is a report issued annually by a corporation
to its shareholders. It contains basic financial statements
as well as management’s analysis of the firm’s past
operations and future prospects.
FOUR BASIC FINANCIAL STATEMENTS
1. Statement of Financial Position – shows information on
assets, liabilities and equity.
2. Statement of Profit or Loss – shows information on income
and expenses, and consequently, the profit or loss for the
period.
3. Statement of Cash Flows – shows information about the
entity’s cash movements.
4. Statement of Shareholders’ Equity – shows information
regarding the increase or decrease in equity.
STATEMENT OF FINANCIAL POSITION
20x2 20x1
Cash 7,282 57,600
Accounts receivable 632,160 351,200
Inventories 1,287,360 715,200
Total current assets 1,926,802 1,124,000
Gross noncurrent assets 1,202,950 491,000
Less: Depreciation 263,160 146,200
Net noncurrent assets 939,790 344,800
Total assets 2,866,592 1,468,800
STATEMENT OF FINANCIAL POSITION
20x2 20x1
Accounts payable 524,160 145,600
Notes payable 636,808 200,000
Accruals 489,600 136,000
Total current liabilities 1,650,568 481,600
Long-term debt 723,432 323,432
Common share 460,000 460,000
Retained earnings 32,592 203,768
Total equity 492,592 663,768
Total liabilities and equity 2,866,592 1,468,800
STATEMENT OF FINANCIAL POSITION
Working Capital
Current assets are often called working capital because these
assets “turn over”; that is, they are used and then replaced
throughout the year.
Net working capital is the difference between current assets
and current liabilities.
Net operating working capital is the difference between
current assets and non-interest-bearing current liabilities.
STATEMENT OF PROFIT OR LOSS
20x2 20x1
Sales 6,034,000 3,432,000
Cost of goods sold 5,528,000 2,864,000
Other expenses 519,988 358,672
Total operating costs (excluding depreciation
and amortization) 6,047,988 3,222,672
Depreciation and amortization 116,960 18,900
Earnings before interest and taxes (EBIT) (130,948) 190,428
Interest expense 136,012 43,828
Earnings before taxes (266,960) 146,600
Taxes (40%) (106,784) 58,640
Net income (160,176) 87,960
STATEMENT OF PROFIT OR LOSS
Other data
20x2 20x1
No. of shares 100,000 100,000
Earnings per share (EPS) (P1.602) P0.88
Dividends per share (DPS) P0.11 P0.22
Share price P2.25 P8.50
Lease payments P40,000 P40,000
STATEMENT OF CASH FLOWS
Operating activities
Net income (160,176)
Depreciation and amortization 116,960
Increase in accounts payable 378,560
Increase in accruals 353,600
Increase in accounts receivable (280,960)
Increase in inventories (572,160)
Net cash used by operating activities (164,176)
Investing activities
Additions to PPE (711,950)
Net cash used in investing activities (711,950)
Financing activities
Increase in notes payable 436,808
Increase in long-term debt 400,000
Payment of cash dividends (11,000)
Net cash provided by financing activities 825,808
Summary
Net decrease in cash (50,318)
Cash at beginning of year 57,600
Cash at end of year 7,282
STATEMENT OF SHAREHOLDERS’ EQUITY
Common Share Retained Total SHE
Earnings
Shares Amount
Bal. 12/31/x1 100,000 P460,000 P203,768 P663,768
20x2 Net income (160,176)
Cash dividends (11,000)
± to retained earnings (171,176)
Bal. 12/31/x2 100,000 460,000 32,592 492,592
FREE CASH FLOW (FCF)
The amount of cash that could be withdrawn from a
firm without harming its ability to operate and to
produce future cash flows.
Depr. and Capital
FCF EBIT(1 T) NOWC
amortization expenditures
MARKET VALUE ADDED (MVA) AND ECONOMIC
VALUE ADDED (EVA)
Market value added (MVA) is the difference between the market
value of the firm’s equity and the book value.
MVA = (P2.25 x 100,000) – P492,592
= (P267,592)
MVA = (P8.50 x 100,000) – P663,768
= P186,232
MARKET VALUE ADDED (MVA) AND ECONOMIC
VALUE ADDED (EVA)
Economic value added (EVA) is the excess of NOPAT over
capital cost. It is an estimate of a business’ true economic
profit for a given year.
EVA = EBIT(1 – T) – Investor-supplied x Cost of
capital capital
End of Topic 2