HOW TO READ FINANCIAL

STATEMENTS
A Portfolio for Life
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HOW TO READ FINANCIAL STATEMENTS
A Portfolio for Life
INCOME STATEMENT
Sales 10,000 15,000 20,000
Cost of Goods Sold (5,000) (6,000) (7,000)
Gross Profit 5,000 9,000 13,000
Selling General & (2,500) (3,000) (3,500)
Administration
Operating Profit (EBIT) 2,500 6,000 9,500
Interest Expense (270) (253) (157)
Profit Before Tax 2,230 5,747 9,343
Tax (446) (1,149) (1,870)
Net Income 1,784 4,598 7,475
2013 2014 2015
Jenny Smith established London Coffee Co. in 2011. At the end of
2013, London Coffee made 10,000 in sales from selling its coffees,
teas and sandwiches.
On average, 20 customers visited the store each day and spent 2
each on average. The store is open 250 days each year.
Jenny spent 5,000 in 2013 in cost of goods sold: raw materials such
as coffee beans, milk, raw food ingredients and cups, napkins etc.
To keep the business running, Jenny paid selling, general & adminis-
tration costs of 2,500. These include rent, salaries, business insur-
ance, utilities and advertising.
From its 2,500 operating profit, London Coffee paid 270 in interest
on the bank loan it took out to finance the companys setup costs.
Of its 2,230 in profit before tax, it paid 446 in corporation tax at
20%.
At the end of 2013, London Coffee generated 1,784 in Net Income.
Jenny decided to pay herself a dividend of 20%. The rest was kept as
retained earnings and reinvested in the business.
Using London Coffees previous financial performance, Jenny made
forecasts for the next two years:
Actual Forecast Forecast
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HOW TO READ FINANCIAL STATEMENTS
A Portfolio for Life
BALANCE SHEET
USES OF FUNDS
Current assets
Cash and cash equivalents 500 6,926 15,733
Accounts Receivable 400 600 800
Inventories 1,000 1,200 1,400
Other Current Assets 2,000 3,000 4,000
Long-term assets
Deferred taxes 1,000 1,500 2,000
Goodwill 2,000 2,000 2,000
Property, plant and equipment 30,000 28,000 26,200

SOURCES OF FUNDS
Current liabilities
Short-term debt 0 0 0
Accounts payable 3,000 4,800 5,600
Income taxes payable 2,000 4,598 7,475
Long-term liabilities
Long-term debt 15,000 14,000 13,000
Provisions 500 750 1,000
Equity
Common stock 100 100 100
Share premium 11,000 11,000 11,000
Retained earnings 5,300 13,978 19,598
Total Equity 21,400 25,078 31,058
Total Assets 42,900 49,226 58,133
Current Assets
At the end of 2013, London Coffee had 500 in cash and cash equivalents in its
bank account. Jenny delivers coffees to employees in a nearby office block
twice a month. The office pays the total cost at the end of the month. Jenny is
expecting this 400 in accounts receivable.
London Coffee has 1,000 of inventories including dairy products, coffee beans
and food ingredients in the shop. There is also 2,000 in other current assets in
the form of restricted cash, earmarked for payroll.
Long-term Assets
In the coffee shop, there was 30,000 worth in furniture and equipment
(fridges, espresso machine and till). The company has 2,000 in goodwill from
the value of its brand name and customer relations. London Coffee recorded a
loss in the previous year which it can use to offset its 2013 tax bill as a deferred
tax asset of 1,000.
Current Liabilities
London Coffee has no short-term debt as it has a positive cash balance of
500. It purchases its coffee beans on credit and owes the suppliers 3,000 in
accounts payable. London Coffee owes the government 2,000 in income taxes
for the period.
Long-term Liabilities
Jenny borrowed 15,000 from the bank to setup London Coffee as long-term
debt. She has also set aside 500 as provisions to renew the lease on the
property in four years time.
Equity
As the sole owner, Jenny paid in 100 as share capital when she started the
business in 2011. In 2013, another investor injected 11,000 in equity as a share
premium. The company has retained earnings of 5,300 since it opened.
Jenny made a series of assumptions to
model out the balance sheet for
2014 & 2015:
2013 2014 2015
Actual Forecast Forecast
Total Liabilities 21,500 24,148 27,075
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HOW TO READ FINANCIAL STATEMENTS
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CASH FLOW STATEMENT
OPERATING CASH FLOWS
Net Income 1,752 4,610 7,487
Depreciation and amortisation 3,200 2,980 2,782
Change in working capital 952 2,257 2,278
Change in other assets (150) (500) (500)
Change in other liabilities 200 250 250
INVESTING CASH FLOWS
Capital expenditures (1,000) (1,000) (1,000)
FINANCING CASH FLOWS
Change in short-term debt 0 0 0
Change in long-term debt (1,000) (1,000) (1,000)
Dividends (350) (922) (1,497)
Issue / Repurchase of shares 0 0 0
Net cash flow 3,604 6,675 8,800
Beginning cash 250 3,854 10,529
Ending cash 3,854 10,529 19,329
Operating Cash Flows
From London Coffees cash flows from operations, the company generated
1,752 in net income. Due to aging of its property, plant and equipment, assets
lost 3,200 in value from depreciation. There was an increase in cashflow from
working capital due mainly to an increase in the amount the company owed to
creditors.
Investing Cash Flows
For general maintenance of the coffee shop, the company invested 1,000 in its
property, plant & equipment through capital expenditure.
Financing Cash Flows
From debt and equity sources of funds, Jenny paid down 1,000 of the
long-term debt (bank loan). She paid out 350 in dividends from the net
income generated in 2013. There were no repurchases or sales of shares to
investors during the year.
London Coffee had a net cash flow of 3,604 to add to beginning cash of
250. For 2013 London Coffee Co had ending cash in the bank of 3,854.
Jenny made cash flow forecasts of the companys operating, investing and
financing activities:

2014 2015
Forecast Forecast
2013
Actual
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