CashFlow Statement (CFS)

Hello Everyone,

Today we are going to talk about another financial statement called cash flow statement (CFS).

Let’s first agree on the definition of cash flow statement.

A cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities. The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent.

We have mentioned operating, investing and financing activities; let’s figure out what these activities are.

Operating Activities are the revenue generating activities of a business e.g., cash received and disbursed for product sales, royalties, commissions, fines, lawsuits, supplier and lender invoices, and payroll fall under operating activities category.

Investing Activities constitute of payments made to acquire long-term assets, as well as cash received from their sale. Activities like purchase or sale of securities of other entities, purchase of fixed assets fall under investing activities.

Financing Activities are the ones that alter the equity or borrowing of a business. Some examples are sale of company shares, re purchase of shares, dividend payments.

Here is a format for CFS that can present the cashflows of a business for a year.

Uses of Cash Flow Statements

Here are a few ways the statement of cash flows is used.

1.     provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances

2.     provide additional information for evaluating changes in assets, liabilities and equity

3.     improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods

4.     indicate the amount, timing and probability of future cash flows

This is all about today's post. we will discuss CFSs in more detail in some other blog.

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Format Types of Income Statment

Hello Everyone,

We talked about income statement recently. Let me discuss here the two type of formats of income statements now. They include

• Single Step Income Statement
• Multi Step Income Statement

Single Step Income Statement

A single step income statement uses just one subtraction. This is done by subtotaling all the revenues and gains together at the top of income statement and subtotaling all the expenses and losses together below revenues. The sum of expenses and losses is then subtracted from the sum of revenues and gains to arrive at net income

Thus it basically is the illustration of equation

(Revenues + Gains) − (Expenses + Losses) = Net Income

Format

A sample format of Single Step Income Statement is here

Drawback

The major drawback of single-step income statement is that it does not calculate the gross profit of the business. To calculate gross profit, revenues and expenses must be classified.

Multi Step Income Statement

Multi-step income statement involves more than one subtraction to arrive at net income and it provides more information than a single-step income statement. The most important of which are the gross profit and the operating profit figures.

Multi-step income statement is divided into two main sections:

 The Operating Section 

The operating section contains information about revenues and expenses of the principle business activities. The gross profit and the operating profit figures are calculated in the operating section of a multi-step income statement. All operating revenues are grouped at the top of the income statement.

The Non-Operating Section

The non-operating section of a multi-step income statement, usually labeled as 'other incomes and expenses' contains those revenues and expenses which are not earned directly through principle business activities but are incidental to them. For example gains/losses on sales of INVESTMENTS or fixed assets, interest revenue/expense etc. It also includes extraordinary items of revenues and expenses which are infrequent and unusual such as loss due to natural calamity

A sample format of Multi Step Income statement has been shared in the previous post.

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Income Statement

Hi Everyone,

Today we are going to talk about income statement. Let’s first agree on the definition of income statement

“The income statement reports the revenues, gains, expenses, losses, net income and other totals for the period of time shown in the heading of the statement.”

Sample Format:

Alternate Terms

The alternate terms for income statements are 

• profit and loss account 
• profit and loss statement (P&L) 
• revenue statement 
• statement of financial performance 
• earnings statement 
• operating statement 
• statement of operations

Why an Income Statement is used?

Now that we are agreed on the definition, have seen the basic format of the income statement, we can now talk about why to use an income statement.

• It indicates how the revenues (money received from the sale of products and services before expenses are taken out, also known as the “top line”) are transformed into the net income (the result after all revenues and expenses have been accounted for, also known as “net profit” or the “bottom line”).

• It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes.

• Income Statement also provides the basis for measuring performance of an entity over the course of an accounting period.

• Performance can be assessed from the income statement in terms of the following:

•  Change in sales revenue over the period and in comparison to industry growth
• Change in gross profit margin, operating profit margin and net profit margin over the period
• Increase or decrease in net profit, operating profit and gross profit over the period
• Comparison of the entity's profitability with other organizations operating in similar industries or sectors

Components of Income Statement

Basically an income statement is based on 2 equations

Gross Profit = Sales – Cost of Goods Sold

Net Profit = Gross Profit – Expenses

As we had it in our balance sheet

Revenue

less        Cost of Goods Sold

                Gross Profit

less        Expenses

                Net Profit

So we can conclude that the basic components of a balance sheet are

• Revenue (Gross receipts earned by the company selling its goods or services)

• Cost of Goods Sold (Cost of goods sold is the direct cost of producing the goods being offered by the entity. This would include the materials, labor, and other resources required for production)

• Gross Profit (Gross profit is the difference between the revenue received for the product less the cost of goods sold)

• Expenses (The costs to the company to earn the gross receipts)

• Net Profit (Revenues minus all expenses equal net income (profits or losses). Profits are also referred to as net income or the “bottom line” because profits are reported at the bottom of the income statement. Some analysts call these “accounting profits” because they include non-cash accounting entries such as depreciation and amortization)

So, this was all for today, Stay good :)

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Financial Statements

Hello Everyone, 

Our Today’s topic should have been the first of the chain, but it’s never too late J

So, Today we are going to focus on what a financial statement is. Let me add here a statement I heard recently that financial statements are scorecards. Every single figure is telling you a story behind it. You just got to start reading this story. Well, a formal definition of financial statements is something like,

Financial statements are a collection of reports about an organization's financial results, condition, and cash flows. They are useful for the following reasons: 

• To determine the ability of a business to generate cash, and the sources and uses of that cash.
•  To determine whether a business has the capability to pay back its debts. 
• To track financial results on a trend line to spot any looming profitability issues. 
• To derive financial ratios from the statements that can indicate the condition of the business.
• To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements

      Now coming to the major types of financial statements; they include 

•  Balance Sheet
• Income Statement
• Cash Flow Statement
• Owner’s Equity Statement

And now, one liner on each type of statement,

Balance Sheet presents the financial position of an entity at a given date. It is comprised of the following three elements: asset, liability and equity.

Income Statement also known as the Profit and Loss Statement, reports the company's financial performance in terms of net profit or loss over a specified period. Income Statement is composed of the following two elements: income and expense.

Cash Flow Statement presents the movement in cash and bank balances over a period. The movement in cash flows is classified into the following segments: Operating Activities, Investing Activities, and Financing Activities.

Owner’s Equity Statement also known as the Statement of Retained Earnings, details the movement in owners' equity over a period. The movement in owners' equity is derived from the following components: Net Profit, Share Capital Issued or repaired during a period, Dividend payments, Gains or Losses, Effect of change in accounting policy or effect of correction in accounting error.

  

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And in the end there is a message to me that I am not accepting so far

I’m sorry for all misdeeds
This is wrong because it has affected rather ruined you badly
In the future, I will be careful not doing like thi
Will you forgive please me? :(