Maryani Nenden

Higher School of Translation and Interpretation

Lomonosov Moscow State University
27 November 2016

Overview of The Main Financial Statements Used in

Public Reporting and Corporate Governance
There are generally three types of financial statements. There all based on the same
cash flows, but they have different purposes and ultimately have different points of view. The
first is the externel statements. These are the statements that are provided to investors and
others to give a general perspective of how the organization is doing. In the US, they are put
into a common format across the companies using what is known as generally accepted
accounting principles or GAAP and for an international companies are put into a format
using a set of standard rules called international financial reporting standard or IFRS.
Basically, what the accounting organization through the government regulatory bodies have
done is that they have created these standarized formats and companies must report on. So
no matter what industries you are looking at or what type of your company you are trying to
analyze. You can see the information in a commonly accepted format.
The reality is a little bit different because unfortunately even though it is in common
format, there are lots of exeptions and lots of nuances. That is one of the things that i want
to discuss here. But the key point and the key purposes of this statement is to provide
information to investors and creditors to help them understand how the companies is doing so
that companies can attract capital.
The second type of reporting is the internal/management reporting. This is how
company looks at itself and how it evaluates itself. Main challenge with that is there are really
no rules that companies have to follow. Companies can choose to evaluate themselves anyway
they want and they often to do. There are loosely based on external rules but they dont have
to follow the external rules. So it is very important to understand your international
statements by asking questions about how there are actually prepared, what are some of the
nuances for the categories, understand the ultimately about decision-making internally for the
company, and the management reporting structure is set up to do that.

FINANCIAL STATEMENT ANALYSIS !1

 The third type of reporting is tax reporting. The governments actually make you file a
different set of books under the different set of rules. They can decide how much to tax you
and so this actually is what leads to confusion. We are looking at the same cash flows and they
are all statements are reporting those cash flows. But the reporting them with trhee set of
rules, there is a set of rules for the external, there is a set rules for the internal, and there is a
set rules for the tax.
The Cashflow Cycle
All companies go through this cycle. In fact the first stage of the cash cycle is whats
known as raising capital. Before we do anything we have to get money from investors in the
form of debt of equity to finance our business. We then make an investment, we buy assets,
create inventory or products or services ready to sold to the customers. We then run our
operations where we are selling our poducts or services and we getting paid by our customers.
We have some additional operating expense and hopefully we generate a profit. We then take
this cash and we start returning the capital back to the investors. Interested bondholders and
banks dividends to the shareholders and we have to make an inportant decision to we return
all the cash back to the investors or we invest it for future cycle of the business. In order to
help us understand this cycle because it is happening constantly and continuously we have the
financial statement. They give us snapshots of the cycle of different points in time to give us a
sence of how we are doing.
The fisrt two stage the cash cycle raising capital and make an investments are measured
by a statement called the balance sheet. The operating side of the cash cycle to try and
figure out whether we are generating more cash than we spend is measured by a third state
second statement called the income statement also known as the profit and loss statement.
Those are the two statements i am going to discuss now.
I am going to use Toyota car company as example company to give us a sense of what
these statements tell us about the financial performance of a company. In this case, this is
2016 and these are the statements that toy release is 2016 for their financial performance.
Toyota being a japanese company released all their numbers. This is the format of the
statement that they are presented unfortunatelly it is called the consolidate statement of
income thats whats also known as the income statement. This statement is following the
generally accepted acounting principles. This is also known as P&L or profit and loss
statement.

FINANCIAL STATEMENT ANALYSIS !2

 Income Statement

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 Ultimately what an income statement does it is help us measure the financial
performance. The income statement is the periode statement which means it looks all the
activity over a periode of time. The Toyota statement is an anual statement but it can also be
quarterly statement typically for external purposes. All the activities during the period of
time. The acountans try and match revenue with expenses. The income statements really
represents ability to generate the cash. So, income, net income or net profit represents the
cash the company will eventually generate, but it may not be the cash that company is
generating during the period of time. One of the challenges with income statements is
income statemnets show what your eventual cash flow is, but doesnt show your actual cash
flow today. Income statement has revenue which is a representation of all the cash that is
being invoiced and cash will be collected. So cash coming in minus expenses these are the
expenses. This is the cash going out of the business. Net income is difference between cash
coming in and cash going out.
I will break the expenses into a series of categories or key indicator to tell us about the
business performance. The first category of expense is cost of good solds (COGS). The
direct expenses assosiated with a product or services. So if the product of toyota is a car, it is
all the cost thats go into making the car. The direct labor people actually manufacturing the
car, departs the inventory associated with that car, manufacturing line, the facility. That is
making it all the cost directly associated with the manufacturing the product go into cost of
good solds. Also have another costs associated with running its business, that is called indirect
costs. It is not the cost to make the car but the cost to run the business day today, such as the
cost of leadership, the cost of shared services, selling general marketing expense, and the
research and development expense. Selling general and administrative (SG&A) costs
are undirect expenses. Some people call this overhead and that is an important distinction
because there some discretion by the firm and accounting as to which cost going to direct and
which cost going to indirect expenses. The company has a third types of the expenses which
ia known as a non-cash cost which is depreciation. Depretiation cash comes from really tax
rules. The government really wants you to pay more taxes, so when you buy a long-term asset
such as a building or even a computer, they will make you spread the expense over time.
Depretiation represents the cost of whats often called property plant and equipment long-
term invesments in facilities and major software IT projects that are spread out over a longer
period of time. Next category of expenses is financing costs. This would be the interest

FINANCIAL STATEMENT ANALYSIS !4

expense that were paying on our debt which is a cost of doing business. The final category of
expenses is taxes.
In the financial statement there is a series of indicators that we are going to check, to see
how we are doing againts those categories of expenses. The first indicator is gross profit or
gross margin. Basically the revenue minus the cost of goods sold so it is what left after we
pay the direct expense. The second is Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) which represents the cash profit from running the operations
of the business after the direct and indirect expenses have been accounted for. The trhird is
Earnings Before Interest and Taxes (EBIT) or also known as operating income which
represents how much money the business is making, running the business day today. We then
pay our interest and our tax and we are left with something called net income or profit. So
these become four key performance indicator.
Balance Sheet

FINANCIAL STATEMENT ANALYSIS !5

 The other statement that i want to explain is the balance sheet. The balance sheet
help us measure back to the cash cycle both the investment part of the cycle and the financing
part of the cycle. Financing is where the money come and investing is where the money go.
Assets represent what we spent the money on liabilities and equity. A balance sheet measures
investment it also tracks the financing. The different about balance sheet and income
statement is where an income statement looks at a periode of time, a snapshot of the balance
sheet is at point in time. How much cumulatively have we invested as of today and what do
we own as a today. Balance sheet tells you what you have historically spent today. The balance
sheet is not really give us a sense of a value but it does track our spending, thats why the
balance sheet a usefull statement. The other key of the balance sheet is the balance sheet list
what are known as tangible assets meaning things that you purchased. Balance sheet doesnt
list intangible assets, the value of a brand, the value of the patents and the value of the
employee.
One of the components of the balance sheet is assets. Assets are listed in order of
liquidity and a balance sheet which means the things that are close to cash are listed first the
things that will take longer to convert me cash are listed last. One of the categories of assets
called current assets or short term assets. Short term or Current assets is the items that
can be converted to cash within 1 year, and items that usually take more than year to be
converted to cash called long term or fixed assets. Other components are liabilities and
equity. Liabilities and equity are listed in order of when the liability must be paid. The
things with the highest priority are listed first and the things with the lowest priorities are
listed last. In this case anything that must be paid within a year is called a current liability or
short-term liability and anything that is do after year is called a longer term liability. And
finally, the equity. The nice thing about equity in a balance sheet is beyond the fact that it is
double entry accounting equity. It is what is left after everybody else has been paid. Equity is
what ultimately forces the balance sheet balance and what is belong to the owners assets.
Assests minus liabilities is another way of representing net worth. So, that is the structure of
the financial statements.

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