Review of Accounting

Income statements, Balance Sheets and Cash Flow Statements

Financial Statements

    Income statement measures profit

    Price Earnings ratio

    Balance sheet assets and financing of those assets

    Cash Flow statement

    Depreciation and tax

Income statement

    Revenue Expenses = Profit

    COGS = Open + purchases Closing

    Revenue COGS = Gross Profit

    Gross Profit Expenses = Net Profit

    Gross Profit Operating Expenses = Operating Profit (EBIT)

    EBIT Interest Expenses = EBT

    EBT taxes = EAT

    EAT Stock dividends = Earnings available to common stockholders.

Earnings per share

     How much is left after paying expenses bond holders, and preferred stock.

     Divide this by the number of shares to get the earnings per share figure.

     Dividends are / can be paid out of retained earnings.

     Price-earnings ratio (p/e), indicates future expectations for the firm.

     Income statement has limitations because of external economic effects and because Accounting is only based on recording historical transactions.

Balance Sheet

    Assets liabilities = Capital

    Gives a measure of the firms worth.

    Assets are presented on order of liquidity.

    Shows financing and ownership effects.

    Can calculate net worth (book value).

    Companies have great differences in book values per share due to variations in industry, quality of management, and risk return..

Statement of Cash Flows

    Cash flows from Operating Activities

    Cash Flows from Investing Activities

    Cash Flows from Financing Activities


Cash Flows from Operating Activities

    Start with Net Profit (Income)

    Add back depreciation

    Subtract any increase in Current assets

    Add any increase in current liabilities

Cash flow from Investments

    Subtract any increase in investments

    Subtract any increase in plant and equipment

Cash Flows due to Financing

    Add increase in bonds payable

    Subtract any dividends paid.

    Add all three sources and uses of funds together to give the net increase or decrease in cash flows.

    An alternative is the Free Cash flow

   Take out capital expenditures and dividends

   This give free cash flow available for special financing like buy outs.


    Many expenses are tax deductible

    Giving a tax sheild.