📊Financial Statements

This week, we are going to mix it up. Instead of reading a financial statement, we will look into what makes them up. There are three components of a financial statement.

Income Statement

Sometimes, this statement is also known as:

• Profit & Loss statement

• P&L statement

• Consolidated statement of income

This is the first thing that comes to mind when I think of financial statements. This statement aims to communicate the profit or loss for a period. It shows the revenue generated and expenses, such as operational expenses and taxes. In essence, the income statement is guided by the following formula:

Although the objective is the same, companies tend to present this information in different formats. Below are some samples of income statements. You will notice they all have similar line items, but they change the format and the groupings to suit their needs best.

Notably, the income statements are traditionally prepared using an accrual accounting method instead of a cash accounting method. Accruals can occur in separate periods than when the cash is actually transacted.

Visualising the income statement makes it considerably easier to understand the flow of revenue to profit and expenses.

Cashflow Statement

This is a well-named section. The cashflow statement communicates the flow of cash through the business. Cash can be broken up into three main categories:

• Cash from Operations,

• Cash from Investing and

• Cash from Financing

Don’t let the flash E (Σ) symbol scare you away; it is just a fancy shorthand way to write “sum of”. For instance, ΣOperations is the sum of operations, which means adding together all the gains and losses associated with business operations. Let us look more at each of these elements

Operations: This part shows the everyday activities of the business, like selling goods or services. It includes money coming in from customers and going out to suppliers, taxes, and employee salaries.
Investing: Here, you'll find details about buying or selling long-term assets like property, equipment, and investments. It covers things like spending money on new equipment or earning money from selling investments.
Financing: This section deals with company financial structure changes, like loans and equity. It includes cash movements such as paying dividends, taking out new loans, or issuing new shares.
This/Last period cash reserves: This is a simple section. The last period is how much cash you started the current period (ended the last period) with, and this period is how much you have now.

Companies communicate this information like income statements. slightly differently. Let us have a quick look at some sample cashflow statements.

Visualizing this information produces wildly different results. Sometimes, you get a nice operations feeds into investing and financing chart.

Other times, its can be a bit more complicated.

Balance Sheet

The last section is the balance sheet. This shows what the business owns, its debt and shareholder equity. It has the following formula.

Alternatively, it is sometimes written with equity as the subject. This is the exact same formula; it has just been rearranged.

An example might help better communicate the difference between the terms. Let us assume you own a $1M home and owe $250K to the bank. If you have an asset of $1M and a liability of $250K (solving for equity using formula b, you would have an equity of $750K.

Let us look at each of the components in more detail:
Assets: Assets are things a business owns or controls that are expected to bring future benefits. These assets come from past events, like buying equipment or securing contracts. Assets can be current (used or converted to cash within a year) or non-current (long-term investments).
Liabilities: Liabilities are obligations a business has because of past events, leading to future outflows of money. For example, a company has to pay employees for their annual leave based on their contracts. Like assets, liabilities can be current (due within a year) or non-current (long-term).
Shareholders’ Equity: This is the owner’s share of the company’s assets and is often called share capital. It includes money from selling shares, retained earnings (profits kept in the business), and reserves.

Balance sheets are the easiest section to read as they are highly structured. Let us look at a few:

Visualising the charts produces something like this:

There you go, you know now the primary three components of a financial statement. However, you will find many more tables that communicate different information in a financial statement. Each company and sector differ in their information to their shareholders. However, this should be enough to get you started.

Cheers,

Connor

All data can be found from the relevant source linked at the bottom of each figure.