financial reporting &

analysis

Professor:
Abla Talbi El Alami
fin 3307
03
statement of
financial position
balance sheet.

Balance sheet introduction

Assets

Liabilities

Shareholder Equity

3
balance sheet.

Balance sheet introduction

Assets

Liabilities

Shareholder Equity

4
balance sheet.

● statement of financial position or statement of financial condition

● Balance Sheet reports the firm’s financial position at a point in time -> i.e. snapshot of a
company's finances (what it owns and owes) as of the date of publication.
assets liabilities shareholder equity

the resources controlled by amounts owed to lenders the residual interest in the
the firm. and other creditors. net assets of an entity that
remains after deducting its
liabilities from its assets.

● The proportions of liabilities and equity used to finance a company are known as the company’s
capital structure.

5
balance sheet.

● Assets = Liabilities + Equity

➔a company has to pay for all the things it owns (assets) by either borrowing money (taking on
liabilities) or taking it from investors (issuing shareholder equity).

Example:
If a company takes out a five-year, $4,000 loan from a bank, its assets (specifically, the cash
account) will increase by $4,000. Its liabilities (specifically, the long-term debt account) will
also increase by $4,000, balancing the two sides of the equation. If the company takes $8,000
from investors, its assets will increase by that amount, as will its shareholder equity.

$12,000 = $4,000 + $8,000

6
balance sheet.

Balance sheet introduction

Assets

Liabilities

Shareholder Equity

7
balance sheet.
assets.
● listed from top to bottom in order of liquidity: ease of conversion into cash:
○ current assets: can be converted to cash in one year or less
○ non-current or long-term assets

Cash and cash equivalents hard currency, treasury bills, short-term certificates of
deposit

marketable securities equity and debt securities for which there is a liquid
market

current accounts receivable (AR) money owed by customers

assets
inventory goods available for sale, valued at the lower of the cost
or market price

prepaid expenses value that has already been paid for, such as insurance,
advertising contracts, or rent
8
balance sheet.
assets.
● listed from top to bottom in order of liquidity: ease of conversion into cash:
○ current assets: can be converted to cash in one year or less
○ non-current or long-term assets

long-term investments securities that will not or cannot be liquidated in the

next year.

fixed assets land, machinery, equipment, buildings, and other

long-term durable, generally capital-intensive assets
assets
intangible assets non-physical assets such as intellectual property and
goodwill -> generally only listed if acquired vs.
developed in-house.

9
balance sheet.

Balance sheet introduction

Assets

Liabilities

Shareholder Equity

10
balance sheet.
liabilities.
● money owed to outside parties listed in order of their due date:
○ current liabilities: due within one year
○ long-term liabilities: due at any point after one year

accounts payable (AP) debt obligations on invoices processed as part of the

operation of a business that are often due within 30
days of receipt

current deferred revenue money received by a customer before the service has
liabilities been provided or product delivered

Wages payable salaries, wages, and benefits to employees, often for

the most recent pay period.

11
balance sheet.
liabilities.
● money owed to outside parties listed in order of their due date:
○ current liabilities: due within one year
○ long-term liabilities: due at any point after one year

long-term debt interest and principal on bonds issued

current
liabilities deferred tax liability amount of taxes accrued but will not be paid for
another year

12
balance sheet.

Balance sheet introduction

Assets

Liabilities

Shareholder Equity

13
balance sheet.
shareholder equity.
● net assets → total assets of a company minus its liabilities or the debt it owes to non-shareholders.
● Equity includes:
○ retained earnings: net earnings a company either reinvests in the business or uses to pay off
debt. The remaining amount is distributed to shareholders in the form of dividends.
○ stocks = shares = ticket to ownership into the company.
■ The term “authorized, issued and outstanding” refers to shares in a company that have
been sold publicly.
● authorized: fall within the maximum number of shares a company can sell
according to its corporate charter.
● issued: sold externally or internally.
● outstanding: sold to the public (not to the owners or managers of the company).

14
balance sheet.
shareholder equity.
● companies issue common stocks or preferred stocks.

common stock preferred stock

price ● market value of shares ● arbitrary par value

● usually fixed & paid before any dividends are

dividends ● paid out at the BoDs' discretion.
given to common stockholders.

● voting rights and can participate in decisions

voting rights about corporate policies and election of BoD.
● no voting rights (depending on terms).

● last in line to claim remaining assets, after

liquidation bondholders and preferred stockholders.
● higher claim on assets

market ● benefit directly from increases in the ● do not participate in the company's growth
participation company's value -> more price volatile beyond the fixed dividends
15
 balance sheet.
benefits and limitations.
helps to determine risk: managers or analysts use
assess whether: financial ratios to
● it has borrowed too used to secure capital:
measure the liquidity,
given to lender to secure
much money profitability, solvency, internal purposes for
● the assets it owns are loan or to PE for funding
and cadence (turnover) talent attraction and
-> external party to
not liquid enough of a company using retention
● it has enough cash on assess financial health of
financial ratios ->
company.
hand to meet current analysis over time or
demands against competitors

different formats, static and limited context → alone may not paint the full picture of a company's financial health

16
balance sheet.
balance sheet of Apple, Inc

17
balance sheet.
Randstad.

18
summary.
➔ Income statement shows how much revenue the company generated during a period
and what costs it incurred in connection with generating that revenue.

➔ Accounting issues relate primarily to timing (revenue recognition, expense recognition,

nonrecurring items).

➔ The income statement also presents EPS (earnings per share), an important metric.

➔ Tools for income statement analysis include common-size analysis and profitability
ratios.

➔ Comprehensive income includes net income and other comprehensive income.

19