A great place to start your investment banking and finance education is with the financial statements.
Financial statements provide insights into a company's financial health, growth prospects, and their profitability.
The three statements include the income statement, balance sheet, and statement of cash flows. Read and watch the linked Youtube videos below to get a basic understanding.
Income Statement:
Purpose:
The Income Statement, also known as the Profit and Loss Statement, shows a company’s revenues and expenses over a specific period of time (typically a quarter or a year). It shows how revenue (the total amount of money generated from the sale of goods or services by a company) is transformed into net income (the profit remaining after all expenses have been deducted from revenue).
Key Components:
Revenue: Total earnings from the sale of goods or services.
Cost of Goods Sold (COGS): Direct costs attributable to the production of the goods sold by a company.
Gross Profit: Revenue minus COGS.
Operating Expenses: Costs required to run the company’s core operations, such as salaries, rent, and utilities.
Operating Income: Gross profit minus operating expenses.
Other Income/Expenses: Non-operational financial activities, like interest income or expenses.
Net Income: The final profit after all expenses have been deducted from revenue. It's often referred to as the bottom line.
Importance: The Income Statement helps stakeholders understand the profitability and operational efficiency of a business. It’s vital for making informed decisions about investments, management strategies, and potential areas for cost reduction.
Video files attributable to @rareliquid (https://www.youtube.com/@rareliquid).
Balance Sheet:
Purpose:
The Balance Sheet provides a snapshot of a company's financial position at a specific point in time. It lists the company’s assets, liabilities, and shareholders’ equity, showing what the company owns and owes.
Key Components:
Assets: Resources owned by the company, divided into current assets (cash, receivables, inventory) and non-current assets (property, equipment, patents).
Liabilities: Obligations the company owes to others, split into current liabilities (accounts payable, short-term debt) and long-term liabilities (bonds payable, long-term loans).
Shareholders’ Equity: The residual interest in the assets of the entity after deducting liabilities. It includes common stock, retained earnings, and additional paid-in capital.
Formula: Assets= Liabilities + Shareholders’ Equity
Importance:
The Balance Sheet is crucial for assessing the liquidity, solvency, and capital structure of a company. It helps investors and creditors evaluate the company’s ability to meet its short-term obligations and fund its long-term growth.
Video files attributable to @rareliquid (https://www.youtube.com/@rareliquid).
3. Cash Flow Statement
Purpose:
The Cash Flow Statement tracks the flow of cash in and out of the business over a period. It categorizes cash flows into operating, investing, and financing activities, showing how the company generates and uses cash.
Key Components:
Operating Activities: Shows the cash that a company generates and spends on its daily operations to produce and sell products or services.
Investing Activities: Cash flows related to the acquisition and disposal of long-term assets and investments, like purchasing equipment or selling a subsidiary.
Financing Activities: Cash flows from transactions with the company’s owners and creditors, such as issuing shares, borrowing, and repaying debt.
Importance:
The Cash Flow Statement is essential for understanding the liquidity and financial flexibility of a company. It reveals whether a company generates enough cash from operations to sustain its business, fund new investments, and return capital to shareholders.
Video files attributable to @rareliquid (https://www.youtube.com/@rareliquid).
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