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Financial Statement Explained!

This page provides you with an explanation of the components of the financial statements a firm receives each quarter based on their inputs. A sample financial statement is available below.

The Financial Statements:
Financial Statements	The report of most financial transactions and events over a specific period of time issued by a business.
Income Statement	The financial statement that provides a measure of the performance (net income or net loss) of an entity for a stated period of time. It summarizes a business’s revenues and expenses for a period.
Statement of Retained Earnings	The financial statement that lists the beginning balance in retained earnings, followed by a description of any changes that occurred during the period (net income or net loss, dividends paid), and the ending balance.
Balance Sheet	The financial statement that shows the financial position of a business at a specific point in time (Assets, Liabilities and Equity).
Statement of Cash Flows	The financial statement that explains the changes (uses and sources) in cash balances during a stated period of time. The statement discloses the impact on cash as a result of all three activities: operating, investing and financing.
Notes to Financial Statements	Notes appended to the statements, providing explanations and supporting schedules to which the financial statements are cross-referenced. The notes are an integral part of such statements.

Income Statement:
Revenue	Amount of benefit received or promised from the sale of goods or services, before any deductions for the cost of providing the goods and services. (Price per unit x units sold.)
Cost of Goods Sold (COGS)	Expense account that reflects the cost of goods that generated the revenue.
Gross Profit	Revenue minus cost of goods sold expense.
Operating Expenses	Decreases in economic resource resulting from ordinary revenue generating or service delivery.
Income Before Interest and Taxes	Gross profit minus selling and administrative expenses.
Interest Expense (Rate%)	Cost of borrowed money (loan).
Income Before Taxes	Income before interest and taxes minus interest expense.
Income Tax Expense (Rate%)	Estimate of the income tax arising from the net income.
Net Income (Loss)	Income before taxes minus income tax expense. Loss appears (in parentheses).

Statement of Retained Earnings:
Retained Earnings (Loss) at Start of Period	Retained earnings (see above) at beginning of current period (or at end of previous period).
+ Net Income (loss)	Net income after expenses during current period (loss is shown in parentheses).
Retained Earnings (Loss) at End of Period	Retained earnings (see above) at end of current period.

Balance Sheet:
Assets	Economic resource that provides future benefits to a business for carrying out its business activity.
Cash	Currency and coin on hand, balances in bank accounts, and their highly-liquid assets.
Inventory	Goods purchased and manufactured by a business for the purpose of production and sale to customers.
Plant and Equipment (5)	Long-lived assets necessary to conduct an organization’s basic operations.
Total Assets	The current sum of Cash, Inventory and Plant & Equipment.
Liabilities	Economic obligations of a business to another party (creditor) arising from a past transaction.
Loans (6)	Money borrowed that must be repaid.
Shareholder Equity	Sum of shareholders’ direct investment (capital stock) and indirect investment (retained earnings).
Common Shares	Total capital investment in a corporation by its owners at the inception of business and subsequently.
Retained Earnings	Earnings not yet distributed to owners; Sums of amount earned by income-producing activities (net income or net loss), less distributions (dividend declared).
Total Shareholder Equity	The current sum of Common Shares and Retained Earnings.
Total Liabilities and Equity	The current sum of Liabilities and Equity.

Statement of Cash Flows:
Operating Activities	Category that describes the cash used to operate the firm.
Net Income (Loss)	Revenue minus all expenses (amount coming from the Income Statement).
+ Amortisation	Allocation of the cost of long-lived assets (Plant and Equipment) to the periods that benefit from these assets.
+ Cost of Goods Sold (COGS)	Expense account that reflects the cost of goods that generated the revenue (but not the use of cash).
- Production Cost	Cash used for production during the period.
Total Operating Activities	The current sum of Net Income (Loss), Amortisation, COGS, and Production Costs.
Investing Activities	Category that describes the cash used to acquire, or obtained by disposing of, non-current assets.
Purchases of Plant and Equipment	Acquisition of Plant and Equipment.
Financing Activities	Category that describes the cash obtained or used in connection with non-current debt and equity.
New Loan Value	Cash obtained from a loan during the period.
Loan Payment	Cash used as payment of a loan during the period.
Net Increase (Decrease) in Cash	Sum of Operating activities, Investing activities and Financing activities.
Cash at Start of Period	Cash at the beginning of the period (or at the end of last period).
Cash at End of Period	Cash at the end of the period.

Notes to Financial Statements:

1. Inventory
Inventory at Start of Period	The number of units available for sale at the beginning of the period (units and $).
+ Production Cost ($/unit)	The number of units manufactured during the period (units and $).
Available for Sale	The number of units available for sale during the period (units and $).
Units Sold	The total number units sold during the period (units and $).
Inventory at End of Period	The number of units available for sale at the end of the period (units and $).

2. Cost of Goods Sold (COGS)
+ Material	Includes the cost of all materials (e.g. plastics, etc.) that are used in manufacturing the products.
+ Labour	Includes regular salary and overtime salaries paid to manufacturing employees.
+ Amortisation	Allocation of the cost of inventory to the periods that benefit from these units.
+ Warehouse Expense	The costs associated with storing inventory.
+ Utilities	The costs associated with operating the machinery, lights, etc. used in the production of products.
Total Cost of Goods Sold	The sum of Material, Labour, Amortisation, Warehouse Expense, and Utilities.

3. Severance
Cost per Employee	The costs associated with letting go employees.
# of Laid Off Employees	The number of people laid off during the period.
Total Severance	The severance Cost per Employee times the number of employees laid off.

4. Training & Development
Cost per Employee	The costs associated with hiring and training all newly hired employees.
# of Laid Off Employees	The number of people hired during the period.
Total Training & Development	The training Cost per Employee times the number of people hired during the period.

5. Plant & Equipment
Existing Purchases	Balance of all Purchases of Plant and Equipment in the previous period.
New Purchases	New Purchases of Plant and Equipment in the period.
Total Purchases	Total of all Purchases of Plant and Equipment at the end of the current period.
Previous Amortisation	Balance of the sum of all Amortization expense in previous period.
Amortisation Expense	Allocation of the cost of long-lived assets (Plant & Equipment) for the current period.
Accumulated Amortisation	Balance of all Amortisation expense at the end of the current period.
New Book Value	Total Purchases minus Accumulated Amortisation.

6. Loans
Existing Loan Value	The loan balance at the end of the previous period.
New Loan Value	New loan acquired during the period.
Loan Balance at Start of Period	Loan at the beginning of period (Sum of Exhisting Loan Value and New Loan Value).
Interest Expense (0.00%)	The interest portion of the loan payment for the period.
Loan Payment	Payment of loan made to the creditor during the period.
Loan Balance at End of Period	The remaining loan balance at the end of the period.

Sample Financial Statements:

Sprott Business Competition