Financial Statement
Statem
ent of
Chang
es in E Pitfalls
The Bala quity
nce Shee in Fina
t ncial S
Related S tateme
Income tatements nt Anal Financi
State ysis al Stat
ment ement
and Sche Fraud
dules Role of
Cash Fl Audito
ow Sta rs
tement
A B C D
Revenue/Sales Gross Profit Operating Expenses Operating Income
(EBIT):
Revenue/Sales: The Calculated as Expenses related Earnings Before
total income earned Revenue minus to the day-to-day Interest and
from the company’s COGS. It reflects running of the Taxes. It
primary business how efficiently a business, such represents the
activities, such as company produces as salaries, rent, company's
sales of products or and sells its utilities, and profitability from
services. goods. marketing. core operations
The Balance sheet
01 02 03
Assets Liabilitie Equity
Everything the company s company’s
The Also known as
owns, which is expected obligations that must be shareholders' equity, it
to generate future settled in the future represents the owners’
economic benefits. stake in the company
after liabilities are
deducted from assets.
Cash • Operating Activities
Cash generated or used by the company’s
Flow 0 core business activities, such as cash
received from customers, cash paid to
suppliers and employees, and taxes paid.
1
Stateme • Investing Activities
nt
Cash flows related to the acquisition
0 and disposal of long-term assets, such
as buying or selling property,
equipment, or investments.
2
• Financing Activities
Cash flows from transactions with
0 the company’s owners and creditors,
such as issuing or repurchasing
stock, borrowing, or repaying loans.
3
atement of Changes in Equity Opening
B equity
The a l abalance
n c eat the
beginning of the period.
The Statement of Changes in Equity shows how the
company’s equity has changed during a given period. It
tracks changes in retained earnings, stockholder Net Income or
equity, and other equity-related accounts. L oprofit
The s sor loss generated during the
period, which affects retained earnings.
These are different types of statement of changes in
equity:
Dividen
d s paid out to shareholders as
The amount
dividends, which reduces retained
earnings.
Other
C hadjustments,
Any other a n g e ssuch as issuing
new stock, repurchasing stock, or
changes due to foreign currency
translation.
Other Related Statements and Schedules
Comprehensive Income Statement
It includes both net income and other
comprehensive income (OCI), which may consist
of gains and losses that are not included in the
income statement
Apart from the four main
financial statements,
companies may also prepare
additional reports or
schedules, such as:
Segment Reporting Notes to Financial Statements
For large companies with multiple business These notes provide additional details and explanations
units, segment reporting provides details about the financial statements. They often include
about each business segment’s financial information on accounting policies, contingent liabilities,
performance and position. and related party transactions.
E !
F RE
ommon Pitfalls in Financial Statement Analys
0 0
Overlooking Non- Ignoring Industry Impact of Off-
Recurring Items Comparisons
0 Balance-Sheet
1
Financial statements might include non-
recurring items like asset sales or one-
time gains. These can distort profitability
2
: Financial ratios are more meaningful when
compared to industry benchmarks. A company’s
ratios may look healthy in isolation but could lag 3Some companies may hide liabilities or risks
off their balance sheet which can mislead
investors and creditors. It's important to look
and make a company appear more behind its competitors in the same industry.
for these items and assess the company’s
profitable than it really is. total risk exposure.
Focusing Only on
0 Short-Term Results
0 Cash Flow
Misinterpretation
4 5
Analyzing financial statements from a short-
term perspective might overlook long-term While profitability is important, a company’s true
trends. For example, a company might show financial health is also determined by its cash flow.
low profitability in the short term due to heavy Even a highly profitable company might run into
investment in research and development trouble if its cash flow is negative, indicating it
(R&D) that promises long-term benefits. cannot cover its operational and financial needs.
he Role of Auditors in Financial Statements
1. Financial statements must be audited to ensure
their accuracy, completeness, and compliance
with accounting standards.
2. Independent auditors examine the financial
records and statements of a company to provide
an opinion on whether they present a true and
fair view of the company's financial position.
3. The audit process adds credibility to the financial
statements. Auditors assess the adequacy of
internal controls, check for errors or fraud, and
verify that the company adheres to accounting
principles.
Financial
Statement Fraud
In some cases, companies might manipulate
their financial statements to present a more
favorable financial position than what is true.
Financial statement fraud can include
overstating revenue, underreporting liabilities,
or inflating profits through accounting tricks.
Some famous examples of financial statement
fraud include companies like Enron and
WorldCom, which engaged in extensive
accounting frauds, leading to significant
financial scandals.
