Adding Financial Statements

Quick reference

• 00:04 So we learned of the income statements, but there are more.
• 00:08 You recall the conceptual order.
• 00:12 We have our three blocks.
• 00:13 We have the income statement in the smallest conceptually of the three,
• 00:17 just looking at net operating profit after tax.
• 00:20 We've got the cash flow statement,
• 00:21 which also looks at investing and financing activities as well as operating.
• 00:25 And we've got the balance sheet, where everything feeds in.
• 00:29 We build our checks around it.
• 00:31 And we have our three-way integrated financial statements.
• 00:34 So we need to get the chart of accounts sorted for
• 00:36 these three financial statements first of all.
• 00:39 Let's go take a look.
• 00:41 So we have our income statement in there, what next?
• 00:43 Well there's more to put in, and you can see, back on the cover sheet here,
• 00:47 I have actually added a tab here, Opening Balance Sheet.
• 00:51 Now, this needs to be given to us.
• 00:53 We can't actually model this.
• 00:55 There is a start and it may be that the model is brand new, and therefore,
• 01:00 the Opening Balance Sheet will all be 0s.
• 01:02 Or, it may be it's an existing model going forward.
• 01:05 So you take it from historical information, reports to accounts,
• 01:09 journal entries, financial statements derived in other ways from spreadsheets,
• 01:13 etcetera, etcetera.
• 01:15 But it's got to balance.
• 01:16 So you just put them into all of these, each our cells here,
• 01:20 Cell Styles, these are assumptions.
• 01:22 We've subtotaled them, we put them in, and so on.
• 01:27 And what I've actually done is, I made it not balance for the time being.
• 01:31 I've got net assets at 545 and total equity of 325.
• 01:36 Now, this chart of accounts is being done under the International Finance Reporting
• 01:39 Standards, in that we're comparing net assets to total equity.
• 01:43 If you're under US generally accepted accounting practices,
• 01:45 you'll put equity and liabilities on the same side.
• 01:48 But the concept is exactly the same.
• 01:50 So don't get hung up on that.
• 01:53 What I do need to do though, is get this to balance.
• 01:56 Now, what I've got to do here is I'm missing a calculation.
• 01:59 And this'll be the only place in the entire model I put a balancing figure.
• 02:03 Because this is on my historical, so that's going to be equals.
• 02:07 My actual Net assets less the sum of the numbers on the other side of
• 02:11 the balance sheet, which will be the ordinary equity,
• 02:15 net covered after tax, and the dividends declared.
• 02:19 So that is 220 no circular, and now net assets equals total equity.
• 02:25 Let me just hide the ribbon again, Ctrl+F1, just to take up so
• 02:28 we've got a bit more real estate on here.
• 02:31 Notice that at the top, the Start Date, End Date, Number of Days, Counter,
• 02:35 all blank.
• 02:35 I've taken the model Start Date less one for my actual period end, which is right.
• 02:41 And this can be used, these formulas here,
• 02:43 can be actually used to mirror the balance sheet that we create.
• 02:47 So here's one I prepared earlier, and notice every single one of these is
• 02:51 a formula that goes back to the Opening Balance Sheet.
• 02:54 I'm not actually typing them in a second time.
• 02:57 And I've got my subtotals all ready to go, so everything can flow into it.
• 03:02 If I put a number in here, it will actually flow through.
• 03:06 Now, remember, in most presentations of balance sheets, if you're following
• 03:11 the statutory accounting, liabilities are shown as positive numbers.
• 03:15 Which means therefore, Net assets, down here, if you're calculating net assets,
• 03:20 will be assets less liabilities, not summing them.
• 03:23 This is an inconsistency between the P and L and
• 03:25 the balance sheet, which accountants seem to accept.
• 03:29 There is no balancing item for retained profits in here.
• 03:33 It's only in the historical information, so just watch out for that.
• 03:38 We've done our Income Statement already.
• 03:40 The other thing we've got is the Cash Flow Statement.
• 03:43 And we have to model it, if we're going to follow my method.
• 03:46 And trust me, we're going to follow my method, the Direct Cash Flow.
• 03:50 If you remember when we talked about the concepts earlier, the Direct Cash Flow is
• 03:54 the one you can actually reconcile back to your bank account.
• 03:58 It only affects the presentation of the actual operating cash flows.
• 04:03 So it's going to be cash receipts, less cash payments,
• 04:07 less interest paid, less tax paid.
• 04:10 Now later on in this course, I'll look at the indirect cash flow statement, and
• 04:14 how to reconcile those two together.
• 04:16 But we're going to do that at the end.
• 04:18 We need to actually get this sorted out.
• 04:20 Now notice I've widened this, and the error check here looks horrible.
• 04:24 It's okay consistency to cut it and
• 04:26 paste it into another one to make it look neater.
• 04:30 Yes, consistency for time series, things like that.
• 04:33 But we also need to make sure we have the pretty factor as well.
• 04:35 So that's acceptable as far as I'm concerned.
• 04:38 If you don't like it, yeah, it's a judgment call.
• 04:42 Notice I've put a subtotal in here as well,
• 04:44 because I'm going to separate out my direct and indirect cash payments.
• 04:48 So it's not just about summing these up,
• 04:50 even though the negatives are negative in this.
• 04:52 I'm putting in a subtotal here, cuz that's the convention, and I put my subtitles in.
• 04:57 So if you're playing along at home, you'll want to have a go at doing this yourself.
• 05:00 And there is an associated exercise where you just put all these subtotals together,
• 05:04 so that you can put numbers in.
• 05:05 So, 7 and -5 for instance, I've already styled the numbers.
• 05:10 The 2 flows through all the way to the bottom.
• 05:14 Now notice when I put those numbers in, and also when I have
• 05:17 the Opening Balance Sheet not balancing, the error check was actually okay.
• 05:21 Everything was fine, and that's because there are no error checks corrected.
• 05:25 I've got a summary sheet here, but I've got no actual calculations going on.
• 05:30 And this is why we should do the checks at the beginning.
• 05:33 I made this clear in the preparation course, but now you start to see why.
• 05:37 Otherwise, you might miss something and realize you've made some errors all along.
• 05:41 You don't want to be trying to fix it at the 11th hour.
• 05:43 You want to fix things up so you only ever got one mistake to sort out,
• 05:47 because your error checks will point it out there and then.
• 05:50 So I think this is a good time to go and sort out error checks.

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