📊 Financial Statements Cheat Sheet (Income Statement, Balance Sheet, Statement of Cash Flows)
by Joe · 105 things on Twos
- Every company has 3 financial statements that answer 3 different questions...
- Income Statement - Are you profitable?
- Balance Sheet - Are you healthy?
- Statement of Cash Flows - Where is cash going?
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- Income Statement Notes
- This statement tells you whether or not you've made a profit over a given period of time
- The formula: Revenue - Expenses = Profit
- Expenses can be broken down into two buckets
- Costs of goods sold (cost related to revenue)
- Any expenses related directed to revenue:
- Cost of product, either purchased now or pulled from inventory
- For services, employee cost (hours directly booked to a project)
- Overhead expenses (cost required to run the business, not not directly related to revenue)
- The income statement helps you:
- Identify how much revenue you're bringing in
- Understand if you're making money on your product
- Identify if your fixed or overhead costs are too high
- Itemize your costs to make better decisions
- Balance Sheet Notes
- The balance sheet answers one question: Is your company healthy?
- The formula: Assets = Liabilities + Equity
- Assets are what you own
- Cash
- Accounts receivable (money owed to you)
- Inventory (product in your possession but not sold)
- Fixed assets (property, equipment, machinery, or vehicles)
- Intangible assets (software, licenses, trademarks, goodwill)
- Liabilities are what you owe
- Current Liabilities (owed in less than 1 year)
- Accounts payable (money owed to vendors)
- Credit Card Payables
- Short-term debt (obligations to pay)
- Long-term liabilities (owed in more than 1 year)
- Equity is how much the company is worth on paper
- Money put in the business
- Money taken out of the business
- Earnings retained in the company
- Net profit from the income statement goes into retained earnings
- The balance sheet helps you learn:
- How strong the business is financially
- Whether short-term obligations can be met
- The amount of debt a company has
- The book value of the company
- Now that we’ve set the foundation, we can analyze this statement with the following ratios:
- Accounts Payable Aging
- Accounts Receivable Aging
- Debt-to-equity Ratio
- Current Ratio
- Quick Ratio
- Balance Sheet Notes
- Statement of Cash Flows Notes
- This statement helps you understand how cash has been spent over a period of time.
- The Statement of Cash Flows answers:
- Was cash flow positive or negative?
- Why was it positive or negative?
- The formula: Net increase/decrease of cash during period + cash at beginning of period = cash at end of period
- The net increase/decrease is broken down into 3 categories:
- Operating activities
- Cash collected from sales versus cash paid related to sales
- Cash that changes hands related to the operations of the business goes in this section
- Net Income
- +/- non-cash adjustments from the Income Statement
- Depreciation & Amortization
- Any deferred expense
- +/- changes in operating assets and liabilities
- Accounts Receivable / Accounts Payable
- Inventory
- Deferred Revenue or Taxes
- When looking at the Operating Activities section, the goal is to determine if you're negative or positive cash flow and WHY.
- Profit is ONE line within this section
- There are a lot of factors that determine your cash flow from operations
- If cash flow is negative cash flow from operations, you have to make up the difference from:
- Investing activities
- Financing activities
- Previous cash balances
- Owner funding the business
- Investing activities
- New equipment (or companies) purchased or sold
- Negative cash flow from investing could mean you're:
- Buying assets
- Buying businesses
- Investing via research and development
- Positive cash flow from investing could mean:
- Selling assets
- Getting returns on marketable securities
- Negative cash from investing activities is GOOD is you're trading short-term for long-term
- Financing activities
- Change in debt or inflow of capital
- Stock sale or repurchases
- Issuance or repayment of debt
- Distribution or dividend to owner
- Positive cash flow in financing indicates that cash has come into the company (increasing assets)
- Negative cash flow in financing indicates the company has paid out capital
- Just like with investing, either can be a good or bad sign depending on context
- If a company is returning money to investors or owners, it is a sign they don't have a way to deploy it in investments
- If a company has positive cash flow from financing, it could indicate they're taking on more debt
- If it's because of growth, good.
- If it's because enough cash isn't being generated by operations it could be bad.
- The statement of cash flows is one of the more complex and confusing concepts.
- Cash flow is what matters, not profits.
- When analyzing this statement you are learning:
- Is your cash flow positive or negative
- Why your cash flow is positive or negative
- Whether operations is carrying it's weight