STEN 1000 Chapter Notes - Chapter 14: Cash Flow Statement, Gross Margin, Cash Flow
20 Jun 2018
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CHAPTER 14 – FINANCIAL STATEMENTS STRUCTURE AND
INTERPRETATION
Financial statements
Analysing and interpreting financial statements is what enables managers to stay up –to-date on
the successes and struggles of the company.
- Gross profit margin (operating margin) – the portion of an organization’s revenue that is
left over after the organization has paid the direct costs (wages, components, materials, etc.)
associated with its products or services
- Profitability margin – the portion of an organization’s revenue that is left after all operating
expenses associated with its products or services have been paid
- Three fundamental statements (fig. 14.1) – information about liquidity/solvency, financial
capacity
1) Income statement (statement of comprehensive income)
- Is company earning a profit as result of sales made vs. expenses incurred?
2) Balance sheet (statement of changes in financial position)
- What type of resources for the org. have at its disposal, at any point in time
(and financial obligations that come with purchasing them)
3) Cash flow statement (statement of cash flows)
- Full understanding of the total movement of cash (from all sources) into and
out of the business
- Business Transactions (fig. 14.2)
- Operational transactions – represent the flow of money within the organization that is
directly related to day-to-day business dealings
- Capital asset transactions – the decisions managers make with respect to investment
and divestment of capital assets (buildings, equipment, business subsidiaries) that may be
needed, or are no longer needed, as part of the organization’s business system.
- Not directly related to the current year’s profit but have an impact on firm’s
cash flow over the period being analysed
Liquidity, Solvency, Efficiency and Capacity (fig. 14.3)
- Liquidity – ability of the company (on the basis of the cash it has on hand and the cash is
it is generating with its operations) to meet its on-going financial obligation
- Ex. cash on hand to cover paycheques, payment of suppliers, repayment schedules
of credit facilities
- Solvency – the ability of an organization to meet its long-term expense obligations and to
profitably grow the company
- Also considers future revenues, products/services in development, market
position, ability to acquire additional resources
- Efficiency – the ability of an organization to effectively manage its operation and
allocate its resources
- Ex. how quickly firm is getting money from customers, how long it takes to
covert inventory into sales, productivity of employees, effectiveness of using asset
base and technology
- Capacity – the ability of an organization to meet long-term fixed expense requirements
and to fund future growth (its cash reserves and borrowing power)
- Ability weather downturn in the market, invest in R&D, launch new products etc.
3 Primary Financial Statements
1. Income Statement (Statement of Comprehensive Income)
= the financial statement that responds to the question of whether our business is earning a
profit as a result of the sales we have made versus the expenses we have incurred in
developing our goods/services and delivering them to the marketplace (fig. 14.4)
- Operational transactions of an organization
- Is a good barometer of an organization’s efficiency and effectiveness
- Shows the organization’s profit
after expenses and taxes
- Reflects specific period of time (year,
quarter, month)
- Revenue received – expenses incurred =
profit (or operating loss)
- Components of income statement (fig.
14.6):
- Sales revenue – the dollar
amount the organization receives as a result of selling its product or services
- Cost of goods sold (COGS) – the expenses directly incurred in the manufacturing of
a product / delivery of a service (ex. components, labour, packaging, delivery)
- Gross profit margin – the difference between total revenue that an organization
received and the direct expenses it incurs
- General operating expenses – the indirect expenses that an organization incurs and
that must be paid from the gross profit margin (ex. administrative expenses, lease,
marketing, utilities, insurance, maintenance, R&D, depreciation)
- Earnings before interest and taxes (EBIT) – determines by subtracting general
operating expenses from the gross profit margin
- Net profit / Net loss – the organization’s profit or loss from the sale of products /
services to customers
- Key takeaways
- Source of sales is as important as the sales amount
- Key to making more money ! spend less money to acquire each additional dollar of
sales
- No sales = no revenue = no business
- Total revenue – product costs = gross profit margin
- Without competitive advantage ! companies compete by lowering price of
product/service ! damages gross profit margin
- Gross profit margins alone don’t guarantee profit – killers: high R&D costs, high
selling/admin. costs, high interest on debt
- Earnings before tax (EBT) – most important = true level of earnings from company’s
operations
Document Summary
Analysing and interpreting financial statements is what enables managers to stay up to-date on the successes and struggles of the company. Gross profit margin (operating margin) the portion of an organization"s revenue that is left over after the organization has paid the direct costs (wages, components, materials, etc. ) associated with its products or services. Profitability margin the portion of an organization"s revenue that is left after all operating expenses associated with its products or services have been paid. 14. 1) information about liquidity/solvency, financial capacity: income statement (statement of comprehensive income) Is company earning a profit as result of sales made vs. expenses incurred: balance sheet (statement of changes in financial position) What type of resources for the org. have at its disposal, at any point in time (and financial obligations that come with purchasing them: cash flow statement (statement of cash flows) Full understanding of the total movement of cash (from all sources) into and out of the business.
