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Financial Statement Analysis: Balance Sheet, Income Statement, And Cash Flow

The balance sheet, income statement, and cash flow statement are the three fundamental financial statements used in fundamental analysis? 📊

fundamental analysis

Balance Sheet

 Balance Sheet

The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It consists of assets, liabilities, and shareholders’ equity. The formula for the balance sheet is: [ \text{Assets} = \text{Liabilities} + \text{Shareholders’ Equity} ]

Example:

Assets:
  - Current Assets:
    - Cash and Cash Equivalents: $500,000
    - Accounts Receivable: $300,000
  - Non-current Assets:
    - Property, Plant, and Equipment: $1,200,000

Liabilities:
  - Current Liabilities:
    - Accounts Payable: $150,000
    - Short-term Debt: $100,000
  - Non-current Liabilities:
    - Long-term Debt: $700,000

Shareholders' Equity:
  - Common Stock: $300,000
  - Retained Earnings: $750,000
 
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    Income Statement

    Income Statement

    The income statement, also known as the profit and loss statement, shows a company’s revenues and expenses over a specific period. It provides insights into a company’s profitability. The formula for the income statement is: [ \text{Net Income} = \text{Revenue} – \text{Expenses} ]

    Example:

    Revenue:
      - Sales Revenue: $2,000,000
      - Interest Income: $50,000
    
    Expenses:
      - Cost of Goods Sold: $800,000
      - Operating Expenses: $300,000
      - Interest Expense: $20,000
      - Income Tax Expense: $150,000
    

    Cash Flow Statement

    Cash Flow Statement

    The cash flow statement tracks the inflow and outflow of cash in a company. It is divided into three sections: operating activities, investing activities, and financing activities. The formula for the cash flow statement is: [ \text{Net Cash Flow} = \text{Cash from Operating Activities} + \text{Cash from Investing Activities} + \text{Cash from Financing Activities} ]

    Example:

    Operating Activities:
      - Net Income: $500,000
      - Depreciation and Amortization: $100,000
      - Changes in Working Capital: $50,000
    
    Investing Activities:
      - Purchase of Property, Plant, and Equipment: ($300,000)
      - Sale of Investments: $200,000
    
    Financing Activities:
      - Issuance of Long-term Debt: $400,000
      - Repayment of Short-term Debt: ($100,000)
    

     

    To do: Prepare a comparative analysis of the financial statements (balance sheet, income statement, and cash flow statement) to identify the company’s financial health and performance.

    Financial Statement Analysis:

    Short step-by-step plan:

    1. Gather the financial statements: Obtain the balance sheet, income statement, and cash flow statement for the current and previous period from the company’s financial reports or accounting software. Example: Access the company’s financial reports from the accounting department or download them from the accounting software, ensuring that both the current and previous period’s financial statements are available.

    2. Identify key financial metrics: Select the relevant financial ratios and metrics that will be used to analyze the financial statements, such as liquidity ratios, profitability ratios, and solvency ratios. Example: Choose metrics such as current ratio, return on equity, operating cash flow ratio, and debt-to-equity ratio to gain a comprehensive understanding of the company’s financial performance.

    3. Perform horizontal and vertical analysis: Compare the financial data over time (horizontal analysis) and across different categories (vertical analysis) to identify trends and patterns. Example: Calculate the percentage change in each line item of the financial statements over the two periods (horizontal analysis) and express each item as a percentage of a base figure within the same period (vertical analysis).

    4. Interpret the findings: Analyze the trends and variations in the financial metrics to assess the company’s financial health, profitability, and efficiency. Example: Evaluate how changes in key metrics, such as a decrease in the current ratio or an increase in the operating cash flow ratio, impact the company’s financial stability and performance.

    5.  Summarize the findings and insights from the financial statement analysis in a clear and concise report that can be shared with stakeholders. Example: Create a report highlighting the key findings, trends, and recommendations based on the analysis of the balance sheet, income statement, and cash flow statement, providing a holistic view of the company’s financial performance.

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