Chapter 2
Understanding
Financial
Analysis
Learning Objectives
❑ Balance Sheet
❑ Income Statement
❑ Sources and Uses of Funds
What is Financial Analysis
“ Is the process of collecting and refining
financial data to provides necessary information
to aid decision making in an effort to determine
future course of actions”
Financial Statement
Consists of :
▪ Balance Sheet
▪ Income Statement
▪ Cash Flow Statement
▪ Statement of Retained Earnings
Balance Sheet
▪ Represent snapshot of firm’s financial
position at specific point in time
▪ Consist of :
■ Assets (i.e. current and fixed)
■ Liabilities (i.e. short and long term)
■ Owner’s equity (i.e. common equity)
COMPANY’S NAME
Balance Sheet as at xx Month 2xxx
CURRENT ASSETS CURRENT LIABILITIES
▪Can be converted into cash in a relatively short ▪Obligations due and payable within a period of
time 1 year or less
▪It represents working capital of the firm that ▪E.g; Account Payables, Notes Payables,
provides support for day-to-day operation Accrued Expenses, etc
▪E.g; Cash, Marketable Securities, Account
Receivables, Inventories, etc
NON-CURRENT LIABILITIES
FIXED ASSETS ▪Debt due or payable beyond 1-year period
▪E.g; Debentures, Bonds, Mortgages, etc
▪Acquires for long-term use and cannot easily
be converted into cash within a short period of
time EQUITY
▪E.g; Lands, Buildings, Machineries, etc
▪Represents ownership positions in the firm.
▪E.g; preferred shares, common shares, retained
earnings, paid in capital
TOTAL ASSETS TOTAL LIABILTIES AND EQUITIES
Income Statement
▪ The summary of the firm’s operating
result over a period of time
▪ Shows Revenues (i.e. sales & other
income), costs (i.e. COGS), expenses
incurred & Profit
INCOME STATEMENT
Income Statement
Sales
Less : COGS
Gross Profit
Less : Selling Expenses
Depreciation
Other Expenses
Earning Before Interest and Tax
Less : Interest Expenses
Earning before tax
Less : Taxes
Net Profit After Tax
Sources and Uses of Funds
▪ Is a Statement of changes in financial
position (i.e. Balance Sheet items)
▪ 3 steps in preparing funds flow statement :
❑ Analyze the balance sheet
❑ Analyze the income statement
❑ Combine the information to determine sources
and uses.
Sources and Uses of Funds
Sources of Funds Uses Of Funds
• Decrease in Asset • Increase in Asset
• Increase in Liability & • Decrease in Liability &
Equity Equity
• EAT/Net profit • Net loss from operations
• Depreciation • Dividend
Statement of Cash Flow
Cash flow from
Cash flow from investing
operations
(CFFI)
(CFFO)
3 main activities
under Statement of
Cash Flow
Cash flow from financing
(CFFF))
Statement of Cash Flow
Cash Flow from
operating Cash generated from day-to-day business operations
(CFFO)
Cash flow from Cash used for investing in assets, as well as the
investing proceeds from the sale of other businesses, equipment
(CFFI) or long-term assets
Cash flow from
Cash paid or received from the issuing and borrowing
financing
(CFFF) of funds
Statement of Cash Flow
Statement of cash flows is separated into 3 main
Categories:
□ Operating activities, which includes net
income, depreciation, changes in current
asset and current liabilities (except Cash,
short-term and Notes payable)
□ Investing activities, changes in fixed assets
□ Financing activities, changes in short-term
investment, notes payable, equity, long-term
debt, dividends payment,
To the uneducated, an A
is just three sticks