61. Classified Financial Statements and Ratios. Corporate Financial Statements. Классифицированные финансовые отчеты и показатели. Корпоративная финансовая отчетность.

The Balance Sheet, the Income Statement, the Statement of retained earnings and the Statement of cash flows – these four financial statements are the basic statements normally prepared by profit-making organizations for use by investors, creditors, and other external decision makers.

The purpose of the Balance Sheet is to report the financial position (amount of assets, liabilities, and stockholders' equity) of an accounting entity at a particular point in time. Assets are the economic resources owned by the entity. Every asset on the BS is initially measured at the total cost incurred to acquire it. BS does not generally show the amounts for which assets could currently be sold.

Liabilities and stockholders' equity are the sources of financing and claims against the company's economic resources. Financing provided by creditors creates a liability, financing provided by owners creates owners' equity.

Liabilities are the company's debts and obligations. Stockholders' equity indicates the amount of financing provided by owners of the business and earnings. These three elements of the BS are related in the basic accounting equation: Assets=Liabilities + Stockholders equity

The Income Statement reports the accountant's primary measure of performance of a business, revenues less expenses during the accounting period. Companies earn revenues from the sale of goods or services to customers. Revenues normally are reported for goods or services that have been sold to a customer whether or not they have yet been paid for. Expenses represent the amount of resources the entity used to earn revenues during the period. Expenses reported in one accounting period may actually be paid for in another accounting period. Net Income is the excess of total revenues over total expenses. If total expenses exceed total revenues, a net loss is reported. Revenues are not necessarily the same as payments. As a result, net income normally does not equal the net cash generated by operations. Irregular items. Discontinued operations is the most common type of irregular items. Shifting business location(s), stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations. They must be shown separately. Cumulative effect of changes in accounting policies (principles) is the difference between the book value of the affected assets (or liabilities) under the old policy (principle) and what the book value would have been if the new principle had been applied in the prior periods. The changes should be applied retrospectively and shown as adjustments to the beginning balance of affected components in Equity! No items may be presented in the income statement as extraordinary items under IFRS regulations, but are permissible under US GAAP. Extraordinary items are both unusual (abnormal) and infrequent, for example, unexpected natural disaster, expropriation, prohibitions under new regulations.

Statement of retained earnings reports the way that the net income and the distribution of dividends affected the financial position of the company during the accounting period. The main elements of this statement are: Beginning Retained Earnings+Net Income-Dividends=Ending Retained Earnings. Investors examine retained earnings to determine whether the company is reinvesting a sufficient portion of earnings to support future growth.

Statement of Cash Flows reports inflows and outflows of cash during the accounting period in the categories of operating, investing and financing. CFs from operating activities are CFs that are directly related to earning income. CFs from investing activities include CFs related to acquisition or sale of the company’s productive assets. CFs from financing activities are directly related to the financing of the enterprise itself. They involve the receipt or payment of money to investors and creditors (except for suppliers). Many analysts believe that the statement of CFs is particularly useful in predicting future CFs that may be available for payment of debt to creditors and dividends to investors. Bankers often consider the Operating Activities section to be most important because it indicates the company’s ability to generate cash from sales to meet its current cash needs. Any amount left over can be used to pay back the bank debt of expand the company. Stockholders will invest in a company only if they believe that it will eventually generate more cash from operations than it uses so that cash will become available to pay dividends and expand.

All financial analysts use ratio analysis or percentage analysis when they review companies. A ratio or percentage expresses the proportionate relationship between two different amounts, allowing for easy comparisons.

Tests of Profitability

Tests of Liquidity are ratios that measure a company’s ability to meet its currently maturing obligations.

Tests of Solvency are ratios that measure a company’s ability to meet its long-term obligations.

M arket Tests are ratios that tend to measure the market worth of a share of stock.

Corporate Financial Statements:

While the numbers reported on the various financial statements provide important information, users require additional details to facilitate their analysis. All financial reports include additional information in notes that follow the statements.

One of the first notes is typically a summary of significant accounting policies. The summary of significant accounting policies tells the user which accounting methods the company has adopted. Without an understanding of the various accounting methods used, it is impossible to analyze a company’s financial results effectively.

The second category of notes provides supplemental information concerning the data shown on the financial statements. Among other information, these notes may show revenues broken out by geographic region or business segment, describe unusual transactions, and/or offer expanded detail on a specific classification.

The final category includes information that impacts the company financially but is not shown on the statements. Examples include information on legal matters and any material event that occurred subsequent to year-end but before the financial statements were published.