CHAPTER 2 The Basic Financial Statements Explain the purpose and understand the format of the firm’s three basic financial statements: the income statement, the balance sheet, and the statement of cash flows. Construct each of these statements in Excel with data for any company. | 2 The Basic Financial Statements After studying this chapter you should be able to 1. Explain the purpose and understand the format of the firm s three basic financial statements the income statement the balance sheet and the statement of cash flows. 2. Construct each of these statements in Excel with data for any company. 3. Link worksheets together so that formulas in one worksheet can reference data in another. 4. Use Excel s Outline tool to selectively display or hide parts of a financial statement. Much of financial analysis takes as its starting point the basic financial statements of the firm. It is therefore crucial that the analyst have a strong fundamental understanding of these statements. There are three basic financial statements 1. The income statement summarizes the results of the firm s operations over a period of time. The income statement tells us the total revenues and expenses for the time period and also contains several different measures of the accounting profits earned by the firm. Typically income statements are prepared for different time periods usually monthly quarterly and annually. 41 42 The Basic Financial Statements 2. The balance sheet describes the assets liabilities and equity of the firm at a specific point in time. Assets are the tangible or intangible things that a firm owns. Liabilities are the firm s debts. Equity is the difference between what the firm owns and what it owes to others. Because the balance sheet is specific to a point in time it is much like a photograph. What it shows was true when the snapshot was taken but is not necessarily true when it is viewed. 3. The statement of cash flows outlines the sources of the firm s cash inflows and shows where the cash outflows went. Activities that bring cash into the firm are referred to as sources of cash while those that take cash out of the firm are referred to as uses of cash. In this chapter we will build each of these three statements for Elvis Products International
