Financial Statement Types

Quick reference

• 00:04 Let's begin then with financial statement types.
• 00:09 Going back to the final slide from last time we had some key points in
• 00:14 this course.
• 00:15 Three, financial statements theory, constructing a basic model,
• 00:18 that's one of the points you need to think about when modeling financial statements.
• 00:22 It's a theory I want to concentrate on this time, and
• 00:25 in particular financial statement types, of which there are three.
• 00:30 Let's have a high level summary,
• 00:33 the three financial statement types I'm talking about, everyone knows.
• 00:37 They may not be accountants, they may not be experts at finance, but
• 00:41 we all have a broad understanding of what they are.
• 00:44 The first and the one perhaps we all turn our attention to to begin with,
• 00:48 is the income statement, also known as a profit and loss account.
• 00:51 This provides a summary of revenues, costs of goods sold and expenses.
• 00:55 It calculates the net profit after tax, our NPAT.
• 00:59 Often known also as the net operating profit after tax, because it really
• 01:03 looks about the operating activities of a business for a period of time.
• 01:07 It might be a week, it might be a month, it might be a year,
• 01:10 it could be all sorts of things.
• 01:12 Now even if you're not an accountant,
• 01:14 you'll understand this because we all get paid when we do a job.
• 01:19 Now, I don't like people who get paid fortnightly, because I get paid monthly,
• 01:23 and that means they get paid twice as much as I do, and that's not fair.
• 01:27 I find in fact being paid monthly I find there's too much month at the end of
• 01:31 the money, but that's another story.
• 01:33 Anyway winge over let me carry on with what I'm talking about.
• 01:36 When we get paid, we don't get all the money we're entitled to.
• 01:41 Typically, the tax man has already taken their pound of flesh, so
• 01:45 we get our money after tax.
• 01:47 It's our operating profit for that period of time for the services rendered.
• 01:53 And that money will have to last us the entire period, be it a week,
• 01:56 a month, a year, whatever it might be.
• 01:58 For the majority of us we won't just go out and spend, spend,
• 02:01 spend like there's no tomorrow, we'll actually budget.
• 02:05 We'll put some in the bank thinking, right,
• 02:07 well that's got to tied me over to my next pay day.
• 02:09 So I've got to actually put some money aside for
• 02:12 the mortgage, or the rent, for the car, for
• 02:15 food, heating, utilities, clothes, drugs, bills, whatever it might be.
• 02:19 Sorry, I didn't mean to say bills there, that's a joke, let me move on then.
• 02:26 In terms of when we actually get this, we are thinking about,
• 02:29 we can't spend it all because we need it to actually last the whole period.
• 02:32 We're accruing, this is what's called accruing, we're making it last for
• 02:37 the period that it actually relates to.
• 02:39 And that's what an income statements about, it's about our profit for
• 02:43 a period of time.
• 02:44 The other main financial statement is the balance sheet,
• 02:48 often known back in the 80s as the net worth statement.
• 02:51 What a company or an individual was worth at a point in time, it was a snapshot.
• 02:57 It showed the status of three things, what's called assets, liabilities, and
• 03:02 equity.
• 03:02 Now assets mean the economic benefits afforded to you,
• 03:07 the things that are gonna give you some sort of benefit going forward.
• 03:12 Could be cash, could be a building that you live in, could be something like that.
• 03:17 A liability is an economic benefit you have to provide to someone else,
• 03:22 there's an obligation.
• 03:23 It may be pay a bill,
• 03:25 it may be that you got to pay the tax man, whatever it might be.
• 03:29 The difference between the two, hopefully a positive number will be the equity.
• 03:34 What it's all been worth to you at this point in time.
• 03:37 A good example of this might be, for many of us,
• 03:40 we are looking at buying apartments, houses, or something like that.
• 03:43 I know this is perhaps beyond the loss of people, but
• 03:46 let's just use this as a case study anyway.
• 03:49 Typically when you first buy a property,
• 03:52 you find that the principal stakeholder won't be you, it'll be the bank.
• 03:56 The bank will own actually maybe 80, 85, 90%,
• 04:00 maybe even more of the actual property's value.
• 04:03 In fact, what they'll do for safekeeping,
• 04:05 is they'll keep the deeds in a safe at their place.
• 04:08 So, does that mean they own it?
• 04:11 Well, strictly speaking, no, you're what's known as the residual legatee.
• 04:16 You control the asset even though you don't own it outright.
• 04:20 If the building falls down, you're expected to repair it, and if the profit
• 04:24 triples in price, you're not expecting to give the bank 90% of the profits, are you?
• 04:29 They'll just want their interests which, trust me, we'll do them fine anyway.
• 04:33 That's what we're talking about here, it's something you control,
• 04:36 not necessarily own.
• 04:37 Which is why things like leases go on the balance sheet,
• 04:40 because of the fact you may not own the asset but you control it.
• 04:46 With that house, there'll be a whopping big mortgage, the debt,
• 04:49 that will be the liability.
• 04:50 And you're hoping a difference between the two is a positive number and
• 04:54 that will be the equity.
• 04:55 And that's essentially what a balance sheet does, it summarizes for
• 04:58 point in time the difference between the assets, the liabilities, and the equity.
• 05:03 The third of the three financial statements never used to be known as
• 05:06 a primary statement, it was actually known as note one to the accounts.
• 05:10 In the beginning, there was the income statement and the balance sheet.
• 05:13 But more and more often, people would actually pull the wool over investors eyes
• 05:17 and take out money, which was difficult to see.
• 05:20 So they made the cash flow statement more prominent.
• 05:23 They actually split it out into three parts, operating, investing and financing.
• 05:27 And it's reporting for the same period of time as the income statement is.
• 05:32 And it shows the net change in cash held, be it inflows or outflows,
• 05:36 categorized accordingly.
• 05:38 What I'm gonna do then is in the next session I'm going to start looking at each
• 05:42 of these financial statement types in turn.
• 05:44 And I'll begin with the one that most of us think of first of all,
• 05:47 and that's the income statement.
• 05:49 So let's get going.

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