CHAPTER 3: FINANCIAL

STATEMENTS

Prepared by:
Peña, Ella Greanne G. – BSBA-MKT2A
Sawyer, Lindsay A. – BSBA-FM2B
INSTRUCTOR: MS. KRYSTA LY RIVERA, CPA
3.1 ACCOUNTING AND FINANCIAL STATEMENT

ACCRUAL ACCOUNTING CASH ACCOUNTING

it is the method of accounting it is the opposite of accrual

universally used in today’s business, in accounting, in which transactions are
which events are accounted for even recognized only when the cash is
if cash does not change hands. exchanged.
THE ACCOUNTING PROCESS

The process of accounting records these transactions and

records what has been gotten and what has been given
up to get it, what flows in and what flow out.

In personal finance, a checkbook records most

transaction, with statements from banks or investment
accounts providing records of the rest.
INCOME STATEMENT

 In personal Finance, income is what earned as wages or salary

and as interest or dividends, and expenses are the costs of
things consumed in the course of daily living: the costs of
sustaining you while you earn income.

 The income statement clearly shows the relative size of your

income and expenses.
For example, consider Alice’s situation per year
FIGURE 3.3 ALICE’S SITUATION (in Dollars)

Gross Wages 44, 650

Income Tax and Deductions 8,930
Rent Expense 10,800
Living Expenses 14,400

FIGURE 3.4 ALICE’S LOAN PAYMENTS (ANNUALLY)

Interest Debt Payment

Car Loan 240 2,160

Student Loan 4,240 3,480

FIGURE 3.5 ALICE’S INCOME STATEMENT FOT THE YEAR 2009
44,650
Income taxes and 8,930
deduction
Disposable Income 35,720
Rent Expense 10,800
Food 3,900
Car expenses 3,600
Clothing 1,800
Cell phone 1,200
Internet and cable 1,200
TV
Entertainment, travel, 2,700
etc.
Total living expenses 25,200
Car loan interest 240
Student loan interest 4.240
Total interest 4,480
expenses
Net income 6,040
CASH FLOW STATEMENT

It shows how much cash came in and where it came

from, and how much went out and where it went
over a period of time.
Examples of such cash flows would be:
 receiving repayment of money that you
loaned, repaying money that you
borrowed, or using money in exchanges
such as buying or selling an asset.
FIGURE 3.6 ALICE’S CASH FLOW STATEMENT FOR THE YEAR 2009
Cash from gross wages 44,650
Cash paid for:
Income taxes and (8,930)
deductions
Rent expense (10,800)
Food (3,900)
Car expenses (3,600)
Clothing (1,800)
Cell phone (1,200)
Internet and cable TV (1,200)
Entertainment, travel, etc. (2,700)
Car loan interest (240)
Student loan interest (4,240)
Operating cash flows 6,040
Cash for repayment for (2,160)
cash loan
Cash for repayment for (3,480)
student loan
Financing cash flows (5,640)
Net cash flow 400
 BALANCE SHEET

 It is a critical piece in assessing the current situation. It is often referred to as the

“Statement of Financial Condition”.
 It is a list of assets, debts or liabilities, and equity or net worth, with their values.
IN BUSINESS IN PERSONAL FINANCE

Assets = Liabilities + Equity Assets – Debt = Net worth

 Net worth – it is the difference between what you have and what you owe.
Literally, it is the share that you own of everything that you have.
 FIGURE 3.7 ALICE’S BALANCE SHEET, DECEMBER 31, 2009

Assets Liabilities

Car 5,000 Car Loan 2,700

Saving 250 Student Loan 53,000

Total 5,250 Total 55,700

Net Worth (50,450)

NET WORTH AND BANKRUPTCY

In personal finance, personal bankruptcy may occur when
debts are greater than the value of assets.
 Current studies show that a college education has economic value. Because
a college graduate earns more over a lifetime that a high school graduate.
Recent estimates put that difference about $1,000,000.

FIGURE 3.8 ALICE’S BALANCE SHEET (REVISED),

DECEMBER 31, 2009

Assets Liabilities
Car 5,000 Car Loan 2,700
Savings 250 Student Loan 53,000
Education 1,000,000 Total 55,700
Total 1,005,250 Net Worth 949, 550
3.2 Comparing and Analyzing Financial
Statements

COMMON-SIZE STATEMENTS
 On common-size statements, each item’s value is listed as a
percentage of another. On the income statement, each income
and expense may be listed as a percentage of the total income.
FIGURE 3.9 COMMON COMMON-SIZE STATEMENTS

Income Cash Flow Balance Sheet

Statement Statement
Items as a % of Total Income Total Positive Total Assets
Cash Flows
 COMMON-SIZE INCOME STATEMENT
FIGURE 3. 10 ALICE’S COMMON-SIZE INCOME STATEMENT FOR THE YEAR
2009
Gross Wages 44,650 100.00%
Income taxes and 8,930 20.00%
deductions
Disposable income 35,570 80.00%

Rent expense 10,800 24.19%

Food 3,900 8.73%
Car expenses 3,600 8.06%
Clothing 1,800 4.03%
Cell phone 1,200 2.69%
Internet and cable TV 1,200 2.69%

Entertainment, travel, 2,700 6.05%

etc.
Total living expenses 25,200 56.44%

Car loan interest 240 0.54%

Student loan interest 4,240 9.50%

Total interest expense 4,480 10.03%

Net income 6,040 13.53%

 COMMON-SIZE CASH FLOW STATEMENT
FIGURE 3.11 ALICE’S COMMON-SIZE CASH FLOW STATEMENT FOR THE
YEAR 2009
Cash from gross wages 44,650 100.00%
Cash paid for:
Income taxes and (8,930) -20.00%
deductions
Rent expense (10,800) -24.19%
Food (3,900) -8.73%
Car expenses (3,600) -8.06%
Clothing (1,800) -4.03%
Cell phone (1,200) -2.69%
Internet and cable TV (1,200) -2.69%
Entertainment, travel, etc. (2,700) -6.05%
Car loan interest (240) -0.54%
Student loan interest (4,240) -9.50%
Operating cash flows 6,040 13.53%
Cash for repayment for (2,160) -4.84%
car loan
Cash for repayment for (3,480) -7.79%
student loan
Financing cash flows (5,640) -12.63%
Net cash flow 400 0.00%
 Common-Size Balance Sheet
 On the balance sheet, looking at each item as a percentage of total assets
allows for measuring how much of the assets’ value is obligated to cover each
debt, or how much of the assets’ value is claimed by each debt.
FIGURE 3.12 ALICE’S COMMON-SIZE BALANCE SHEET, DECEMBER 31, 2009

Assets Liabilities
Car 5,000 Car Loan 2,700
95% 51%
Savings 250 Student Loan 53,000
5% 1,010%
Total 5,250 Total 55,700
100% 1,061%
Net Worth (50,540)
(961%)
 Relating the Financial Statements
FIGURE 3.13 RELATIONSHIPS AMONG FINANCIAL STATEMENTS

What
happened
Income
Statement
Where Where
you were you are
Beginning Ending
Balance Balance
Sheet Sheet
What
happened
Cash Flow
Statement
 Ratio Analysis

Creating ratios is another way to see the numbers in relation to

each other. Any ratio shows the relative size of the two items
compared, just as a fraction compares the numerator to the
denominator or a percentage compares a part to the whole.

Ratio analysis is used to make comparisons across statements.

Ratios provide meaningful relationships between individual values

in the financial statements.
 FIGURE 3.14 ALICE’S RATIO ANALYSIS, 2009
Ratio Calculation Result
Net income margin Net income / Total 0.1353
assets
Return on assets Net income / Net 1.1505
worth
Return on net worth Total debt / Total (0.1197)
assets
Debt to assets Total debt / Net worth 10.6095

Internet coverage Income before interest 2.3482

/ Interest expense
Cash flow to income Net cash flow / Net 0.0662
income
Cash flow to assets Net cash flow / Total 0.0762
assets
Free cash flow Free cash flow / Net 1.0000
cash flow
 Comparison over Time

Provides insights into the effects of past financial

decisions and changes in circumstance.

The insight can guide you in making future financial

decisions, particularly in foreseeing the potential costs
or benefits of a choice.
FIGURE 3.15 ALICE’S CASH FLOW STATEMENTS: COMPARISON OVER TIME
For the Year Ending 12/31/09 12/31/19 Change % Change
Cash from gross wages 44,650 74,000 29,350 65.73%
Cash paid for:
Income taxes (8,930) (18,500) (9,570) 107.17%
and deduction
Rent expense (10,800) (18,000) (7,200) 66.67%
Food (3,900) (3,900) 0 0.00%
Car expenses (3,600) (3,600) 0 0.00%
Clothing (1,800) (1,800) 0 0.00%
Cell phone (1,200) (1,200) 0 0.00%
Internet, and cable TV (1,200) (1,200) 0 0.00%
Entertainment, travel, 2,700 (5,200) (2,500) 92.59%
etc.
Car loan interest (240) (757) (517) 215.42%
Student loan interest (4,240) 0 4,240 -100.00%
Operating cash flows 6,040 19,843 13,803 228.53%
Cash invested in 40k 0 (3,000) (3,000) 100.00%
Cash invested in car 0 (6,300) (6,300) 100.00%
Investing cash flows 0 (9,300) (9,300) 100.00%
Cash for repayment of (2,160) (4,610) (2,450) 113.43%
car loan
Cash for repayment of (3,480) - -100.00%
student loan
Financing cash flows (5,640) (4,160) 1,030 -18.26%
 FIGURE 3.16 ALICE’S BALANCE SHEETS: COMPARISON OVER TIME

As of 12/31/09 12/31/19 Change % Change

Assets
Cash/checking 0 5,000 5,000 100.00%
Savings 250 250 0 0.00%
Money market 0 2,600 2,600 100.00%
Retirement 0 13,000 13,000 100.00%
401k
Retirement IRA 0 7,400 7,400 100.00%
Car 5,000 15,000 10,000 200.00%
Total assets 5,250 43,250 38,000 723.81%
Liabilities
Car loan 2,700 4,610 1,910 70.74%
Student loan (53,000) 0 (53,000) -100.00%
Total liabilities 55,700 4,610 (51,090) -91.72%
Net worth (50,450) 38,640 89,090
FIGURE 3.17 COMPARING ALICE’S COMMON-SIZE STATEMENTS FOR 2009 AND 2019: CASH
FLOW STATEMENTS
For the Year Ending 12/31/09 12/31/19
Cash from gross wages 100.00% 100.00%
Cash paid for:
Income taxes and deductions -20.00% -25.00%

Rent expense -24.19% -24.32%

Food -8.73% -5.27%
Car expenses -8.06% -4.86%
Clothing -4.03% -2.43%
Cell phone -2.69% -1.62%
Internet and cable TV -2.69% -1.62%
Entertainment, travel, etc. -6.05% -7.03%
Car loan interest -0.54% -1.02%
Student loan interest -9.50% 0.00%
Operating cash flows 13.53% 26.81%
Cash invested in 40k 0.00% -4.05%
Cash invested in car 0.00% -8.51%
Investing cash flows 0.00% -12.57%
Repayment of car loan -4.84% -6.23%
Repayment of student loan -7.79% 0.00%
Financing cash flows -12.63% -6.23%
Net cash flow 0.90% 8.02%
FIGURE 3.18 COMPARING ALICE’S COMMON-SIZE STATEMENTS FOR 2009 AND 2019:
BALANCE SHEETS

As of 12/31/09 12/31/19
Assets
Cash/checking 0.00% 11.56%
Savings 4.76% 0.58%
Money market 0.00% 6.01%
Retirement 401k 0.00% 30.06%
Retirement IRA 0.00% 17.11%
Car 95.24% 34.66%
Total assets 100.00% 100.00%
Liabilities 0.00% 0.00%
Car loan 51.43% 10.66%
Student loan 1009.52% 0.00%
Total liabilities 1060.95% 10.66%
Net worth -960.95% 89.34%
 FIGURE 3.19 RATIO ANALYSIS COMPARISON

Ratio Analysis 12/31/09 12/31/19

Net income margin 0.1353 0.2681

Return of assets 1.505 0.4588
Return on net worth -0.1197 0.5135
Debt to assets 10.6095 0.1066
Interest coverage 1.3482 26.2127
Cash flow to income 0.0662 0.2990
Cash flow to assets 0.0762 0.1372
Free cash flow 1.0000 2.5675
3.3 Accounting Software: An overview

they are designed to make the recordkeeping

aspects of personal finance–the collection,
classification, and sorting of financial data–as easy as
possible.

COLLECTING THE DATA

Checkbook is the primary source of data
REPORTING RESULTS AND PLANNING AHEAD

 WHAT IF – a marvelous feature of computing power and the virtual world in

general and certainly helpful when it comes to making financial decisions.

SECURITY, BENEFITS, AND COSTS

 Personal computer or handheld device such as a Personal Digital Assistant (PDA) or smart phone.
 Product and service providers are very concerned with security.
 Hard copies must be disposed of periodically
 Throwing them in the trash may be risky because of “dumpster diving”
 Dumpster diving is a well-known method of identity theft.
CHAPTER 3: FINANCIAL
STATEMENTS

Prepared by:
Peña, Ella Greanne G. – BSBA-MKT2A
Sawyer, Lindsay A. – BSBA-FM2B
INSTRUCTOR: MS. KRYSTA LY RIVERA, CPA