FINANCIAL

PERFORMANCE
Financial Analysis
Assessment of the firm’s past,
present and future financial
conditions
Done to find firm’s financial
strengths and weaknesses
Primary Tools:
– Financial Statements
– Comparison of financial ratios to past,
industry, sector and all firms
5 Main Accounts
Assets
Liabilities
Owner Equity
Revenues
Expenses
Assets
 Economic resource, owned by a business and
expected to benefit future operations.
– Benefit in form of future cash inflow
• cash or other assets that result in future
cash flows.
 Type of Assets
– Tangible – e.g. Land, building, machinery,
equipment etc.
– Intangible – e.g. patent rights, amounts due
from customers etc.
– Natural resources – e.g.forests, mines etc.
 Land is an exceptional case as its value does not
decrease due to any type of wear and tear.
Assets Contd...
Fixed Assets
– Are used for more than a year e.g. Land,
building etc
Current Assets
– Are used within a year e.g. cash, raw
material, stocks (inventory) etc
Liabilities
Liabilities are debt that represent negative
future cash flow (cash outflow)
Person or organization to whom the debt is
owned is called creditor.
– Account payable
– Notes payable
– Expense payable (accrued expenses)
Creditor’s claim have priority over those of
owners.
Owner’s Equity
Owner’s claim to the assets of the business
Owner’s equity is also called the residual
amount
Owner’s Equity = Total Assets – Total liabilities
Increase is Owner’s equity
– Investment of cash by the owner
– Profits to the business
Decrease in Owner’s equity
– Withdrawals by the owner
– Loss to the business
Revenues & Expenses
Revenue is the price of goods sold and
services rendered during a given period.
– Revenues cause an increase in the assets and
owner’s equity
Expenses are the costs of goods and
services used up in the process of earning
revenues.
– Expense cause a decrease in owner’s equity
and a decrease in assets or increase in liabilities
Current assets: Liabilities :
cash Notes Payable
Notes receivable accounts payable
accounts receivable Salaries Payable
inventories Interest payable
prepaid payments unearned revenue

Fixed Assets: Owner’s Equity:

Property (Land)
Plant (builiding)
Equipment
GAAP
Generally accepted accounting
principles
– business entity principle
– Cost principle
– Realization principle
– Matching principle
– Materiality principle
Financial Statements
Financial statements (or financial
reports) are formal records of a
business' financial activities.
Financial statements provide an
overview of a business' financial
condition in both short and long
term.
Financial statements should be
understandable, relevant, reliable
and comparable.
Financial Statements Contd...
There are 3 basic financial statements
– Balance sheet
– Income statement
– Statement of cash flows

– Notes to the Accounts

Balance sheet
Also referred to as statement of financial
position or condition, reports on a
company's assets, liabilities, and net
equity as of a given point in time, such
as the end of its financial year.
A balance sheet is often described as a
snapshot of a company's financial
condition.
It applies to a single point in time.
 Company’s Name
Balance Sheet
Dec 31, 2008
Assets Liabilities and Owners' Equity

Cash Rs6,600 Liabilities

Accounts Receivable Rs6,200 Notes Payable Rs30,000

Accounts Payable

Total liabilities Rs30,000

Tools and equipment Rs25,000 Owners' equity

Capital Stock Rs7,000

Retained Earnings Rs800

Total owners' equity Rs7,800

Total Rs37,800 Total Rs37,800

Income Statement
Income statement: also referred to as
Profit and Loss statement (or a "P&L"),
reports on a company's income,
expenses, and profits over a period of
time.
an income statement represents a period
of time.
 Company Name
INCOME STATEMENT
For the year ended DECEMBER 31 2007

$ $
Revenues
GROSS PROFIT (including rental income) 496,397
--------
Expenses:
ADVERTISING 6,300
INSURANCE 750
LEGAL & PROFESSIONAL SERVICES 1,575
RENT 13,000
UTILITIES 491
PRINTING, POSTAGE & STATIONERY 320
ENTERTAINMENT 5,550
LICENSES 632
BANK & CREDIT CARD FEES 144
BOOKKEEPING 3,350
EMPLOYEES 88,000
RENTAL MORTGAGES AND FEES 74,400
--------
TOTAL EXPENSES (194,512)
--------

NET INCOME
======== 301,885
Cash flow Statement
 Statement of cash flows: reports on a
company's cash flow activities, particularly its
operating, investing and financing activities.
 People and groups interested in cash flow
statements include
– Potential lenders or creditors
– Potential investors
– Potential employees or contractors
Cash flows from operating activities
Cash receipts from customers $27,500
Cash paid to suppliers and employees (20,000)
Cash generated from operations (sum) 7,500
Interest paid (2,000)
Income taxes paid (2,000)
Net cash flows from operating activities $3,500
Cash flows from investing activities
Proceeds from the sale of equipment 7,500
Dividends received 3,000
Net cash flows from investing activities 10,500
Cash flows from financing activities
Dividends paid (12,000)
Net cash flows used in financing activities (12,000)

Net Cash flow 2,000

Opening Balance 1,000
Ending Balance $ 3,000
Notes to the accounts
Disclose information useful in
interpreting the financial
statements
Discloses details related too
financial statements
Users of Financial Statements
Internal Users
– Owners and managers
– Employees
External Users
– Investors
– Financial institutions (banks and other
lending companies)
– Government entities (tax authorities)
– Media and the general public