Business Model - The Financial Statement
The Financial Statement
- Balance Sheet
- Income Statement
- Cash Flow Statement
The Financial Statement used to describe Economic Activities
Economic Activities
- operating activities
- manufacture products
- Sell the product
- collect receivables
- Investment activities
- open a new branch
- enter a new business
- development a new product line
- financing activities
- lack of money
- borrow from bank
- accept investment from others
Functions of each statement
Balance Sheet: What initial investment has become and how it worth.
| Assets | Liabilities |
|---|---|
| Current Assets | Current Liabilities |
| Cash | Short-term borrowing |
| Account Receivable | Account Payble |
| Other Receivable | Other Payable |
| Prepaid accounts | Deposit Received |
| Inventory | Other Liabilities |
| Deferred Expenses | Total Current Liabilities |
| Other | |
| Noncurrent Assets | Noncurrent Liabilities |
| Long-term investment | Long-term loans payable |
| Fixed asset | Bond Payable |
| Intangible Assets and Other Assets | Long term payable |
| Others | |
| Shareholder's equity | |
| Capital Stock | |
| Additional Paid-in captical | |
| Surplus reserve | |
| Retained earnings | |
| Total Assets | Total Liabilities and Shareholders' Equity |
If the expenditure brings Some thing for the future use, it is called the asset， Otherwise, if the expenditure is only related to curren period, it is called expense.
The assets of today are the expenses of the future.
Current assets
The current assets play an important role in funding day-to-day business operations.
Noncurrent asstes
Noncurrent assets are a company's long-term investments for which the full value will not be realized within the accounting year.
- High value
- For a long period
The ownership of individuals dose not belong to enterprises.
How to determine the value of the assets?
- Cost of acquisition(But many assets' value fluctuates over time)
- Ignore the appreciation
- Record the impairment
- Use historical cost to value the assets
- The value of assets after impairment on a historical cost basis.
- Market price(Not all assets have a market price available)
- Fair value
- Historical Cost : Under the principle of historical cost, if an asset is not sold, it will always be recorded as the purchase price.
IFRS:Internarional Financial Reporting Stantard
Assets
- The meaning of asset items
- Structure of assets
- How do we determine the value of an asset
Captical stock
When this company has more than one shareholder, the division of shares between the company's shareholders in not accordance with their capital contributions, it is according to the proportion of equity.
The surplus reserve is profit that cannot be distributed by the law. And retained earnings is profit we don't want to distribute.
Accounting Identities
residual claims
Shareholders are the ultimate risk bearer and benefit receiver of a company.
Income Statement
We can see if our initial investment's value is guaranteed, But this is not enough,we want to know if we are making profit as well.
| Operating Income |
|---|
| - Operating Cost |
| - Business Tax and Surcharges (turnover tax) |
| - Operating expenses |
| - Administration Expenses |
| - Financial Expenses |
| - Impairment loss of asset |
| + Gain on the Changes in the fair value |
| + Investment Income |
| = Operating profit |
| + Non-operating revenue |
| - Non-operating expenses |
| = Total Profit |
| Net Profit |
Turnover tax
- Business tax (Tax included in the price)
- Value-added tax (Tax excluded from the price)
Period expenses
- Operating expenses
- Advertisenment cost, transportation expense, warehouse fees.
- Administration expenses
- salaries of managers, administrative expenditures, depreciation on office building,
- Financial expenses
- interests
Excess inventory
Shortage of inventory
The characteristic of the non-operating income and expenditure they are both not related to the company's operating activities. They happen by chance and don't have continuity in the company's plans.
Taxable income: based on the tax law
Total profit: based on accounting standards
Notice:
\(Income \not ={Cash Inflow}\)
- Receivable \(\Leftrightarrow\) Unearned Revenue
\(Expenses \not ={Cash Outflow}\)
- Depreciation of fixed assets \(\Leftrightarrow\) Deffered Expense
\(Profit \not ={Cash Flow}\)
Depreciation is used to describe the decreasing in value of fixed assets. When calculating depreciation. We don't need to pay cash to anyone, We only write it down on the books. At this time, we have to record an expense, but we don't need to pay cash.
Question: How do we prepare the financial reports?
Cost of goods sold at manufacture process.
Operating expense at sales process.
Variable Cost
- Raw material
Fixed Cost
Within the scope of a certain capacity, the amount of the fixed cost remains the same no matter how many products are produced.
- Depreciation
R&D investments at research stage are counted as expenses, and at the development statge it is counted as an intangible asset.
The fees for applying patents are included in the value of intangible assets.
Purchased technology and patents are also intangible assets.
The intangible assets created by the enterprise itself will not ususally show on the financial report.
Cashflow Statement
| Operating activities | Investment activities | Financing activities | |||
|---|---|---|---|---|---|
| Core Business | Other Business | Fixed assets | Investment | Debt | |
| Inflow | Sale，Tax | Rent, Tax | Disposal | Disposal,Investment Income | Raise Money |
| Outflow | Procurement，Salar，Tax | Rent, Tax | Purchase or Construct | Invest | Interest, Pricipal |
Operating Lease(of short duration, small amount)
Financing Lease(of long duration, big amount)
Cash flow statement is catagorized description of cash inflows and outflows according to the three activities including operation investment and financing that a company engaged in.
The implications of cash changes caused by various reasons are different.
Cash are critical to the survival of an enterprise.
Cash flow statement describes where the cash comes from and goes to, more precisely, it displays the risk profile of an enterprise.
How do the changes in cash happen.
| The Balance Sheet | Income statement | Cashflow Statement | |
|---|---|---|---|
| Perspective | Investment and Financial activities | Operation activities | Risk |
Contingent Liability
Off balance sheet liability
