Strategic Management: Formulation and Implementation

The Analysis Of Financial Statement

In this section I first examine the basic financial data available for managers and investors. This primary sources of company financial data the company's annual repots are: balance sheet, income statement, and statement of changes in financial position.

Balance sheet or statement of financial position:
Assets = Liabilities + Owners' Equity
Income statement or statement of results from operations:
Revenues + Gains - Expenses - Losses = Income
Statement of changes in financial position:
Cash Inflow - Cash Outflow = Change in Cash

The balance sheet represents a statement of the financial position of the firm on a given date, including its assets holdings, liabilities, and owner's equity. The balance sheet for Jimco, Inc., is shown in Table 5-1.

Assets are the resources that an organization controls, fall into two main categories: current and fixed. Current assets are cash and other assets that usually are converted to cash or are used within 1 year (e.g., marketable securities, accounts receivable).

Fixed assets are assets that have a useful life that exceeds 1 year (such as property, buildings, and equipment). Liabilities are claim by nonowners against company assets (such as banks). Liabilities fall into two main categories: current and long-term. Current liabilitiesare accounts that typically are paid within 1 year (such as current bills the company must pay, and short term loan). Long term liabilities are debts usually paid over a period that exceeds 1 year (such as bonds).

Shareholders' equity represents claims by owners against the assets. Shareholders' equity is equal to the company's assets minus liabilities.

The income statement is a financial statement that summarizes the financial results of company operations over a specified time period, such as a quarter or year. It shows revenues and expenses. revenues are the assets derived from selling goods and services. Expenses are the costs incurred in producing the revenue.

The difference between revenues and expenses represents the profits or losses over a given period of time and is often referred to as the bottom line. A income statement for Jimco, Inc., is shown in Table 5-2. Table 5-2 determinates three types of activities:

  1. the cost of producing or acquiring the goods or services sold;
  2. the expenses incurred in marketing and distributing the product or service to the customer, along with administrative operating expenses;
  3. the financing costs of doing business, for example, interest expense and dividend payments to the proffered stockholders.

The statement of changes in financial position emphasizes the availability to the firm of liquid resources to reflect the cash flows in the operating, financing, and investing activities of the firm. This statement is usually given a prominent place in the firm's annual report. Table 5-4 illustrates Jimco's statement of changes in financial position for the year ended December 31,1991.

The preparation the this statement require the use of comparative balance sheets for 1992 and 1993 as shown in Table 5-3. The purpose of comparing accounts of the balance sheet is to determine the effect of changes in the accounts on the firm's cash balance. Three fundamental issues are relating to the year which is being examined:

A closer look at Table 5-5 can help to determine the degree to which actually answers these three questions. The financial analyst may also wish to isolate the cash flows occurring from operations are shown in Table 5-4. Such a summary enables the analyst to determine the effect of the firm's primary business on cash flows.