Income Statement And Balance Sheet
- You will be able to plan your retirement; how much money you need
- If you want to take out a loan, buy investment plan, you can calculate if it makes sense to do it.
Balance Sheet
In simple terms, it is a full report card of a firm's financials.
The balance sheet is potentially useful to many different parties. A supplier might look at the size of accounts payable to see how promptly the firm pays its bills. A potential creditor would examine the liquidity and degree of financial leverage. For financial managers, they are interested in value of firm, and this is likely going to be market value.
There is one key formula you need to know:
Have a look through the summary mindmap below for its various components! You don't have to memorise everything, it should get clearer as you progress through and you can always refer back here if needed.
Formulas for this lecture
- Net Working Capital - The difference between current assets and current liabilities. It is an indicator of liquidity.
You can be set to earn 300million dollars in 30years, but you might owe ah long 1million dollars and you need to pay within a week. Liquidity is how much money you can source in a short period of time (you can sell all your assets like stocks, etc).
Just bear with me - this is an introductory lecture and there will be a example walkthrough at the bottom.
Income Statement
Like your personal income statement, it is mainly used to track where the firm spent their money on and how much money they have at the end (retained earnings - retained means you keep, earnings means profit). Let's have a walkthrough of the typical components of a basic income statement. Don't memorise, understand the logic:
- Revenue
- Minus Cost Of Goods Sold (eg. Coffeeshop sell kopi, cost of goods sold or COGS can be coffee beans)
- Gross profit - Like gross salary it means there's more things to deduct from your profit to come
- Minus Depreciation - Decline in value for fixed assets (eg. equipment or even your IPhone. For example, IPhone 6 was worth $600 at 2017. Now its probably worthless.)
Depreciation is not money you have to pay
You don't actually cough up money every year, but it is a real cost. Keep this in mind when we walkthrough operating cash flow next time. An income statement may also deduct other stuff, called operating expenses.
- EBIT - Earnings before interest (I) and taxes (T). With such a name it should be obvious to you what's the next two components:
- Minus Interest
- Minus Tax
- Net Profit/ Income
- Minus Dividend - As a company you typically can't keep all the profits!
- Retained Earnings - Profit the company can actually keep; to use to invest next time, whatever.
Alright, time to go through an example! You can just read through, then ideally try doing it on pen paper yourself: