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Financial Statements Transcript

Speakers: Interviewer, Paul Kimmel, Ph.D., CPA

(Music playing)

(On-screen text: Author's Corner)

(On-screen text: Paul Kimmel, PhD, CPA, Accounting)

(On-screen text: What are the 3 financial statements and what do they provide?)

INTERVIEWER: Can you talk of little bit about the three financial statements and what they provide?

PAUL KIMMEL, PHD, CPA: The three primary financial statements are the income statement which reports on the profitability of the company, the balance sheet which reports on the financial position of the company, and the cash flows statement which reports the inflows and outflows of cash during a period of time.

(On-screen text: Accounting in Business, Income statement, Reports profitability, Balance sheet, Financial position, Statement of cash flows, Inflows and outflows of cash)

(On-screen text: What types of information does an income statement provide?)

(Music playing)

INTERVIEWER: Can you also discuss what types of information an income statement provides?

(On-screen example of income statement)

PAUL KIMMEL, PHD, CPA: The income statement reports on the revenues which are the amounts that were earned by the company during a period of time, and it reports on the expenses which are the costs incurred by the company during a period of time. And that difference of revenues minus expenses is net income which is the basic and most commonly referred to measure of profitability for companies.

(On-screen text: What types of information does a balance sheet provide?)

INTERVIEWER: And what type of information does a balance sheet provide?

PAUL KIMMEL, PHD, CPA: The balance sheet reports assets which are what the company owns, liabilities which are the amounts that are owed to its creditors, and equity which is the net difference between assets and liabilities which is the net ownership position of the owners of the company. If it's a single company, a single-owner company such as sole proprietorship, or if it's shareholders, in either case, equity represents the net amount that they own in the firm.

(On-screen text: Balance Sheet)

The key thing to understand about the balance sheet is it reports the financial position at a specific point in time.

(On-screen text: Balance Sheet, Specific point in time)

So you might think of the income statement as being like a movie that covers a period of time, versus the balance sheet is a snapshot at one specific point in time.

(Music playing)

(On-screen text: What types of information does the cash flows statement provide?)

INTERVIEWER: And the third financial statement, the statement of cash flows, can you talk a little bit about that?

PAUL KIMMEL, PHD, CPA: The cash flows statement reports on the sources and uses of cash over a period of time.

(On-screen text: Cash Flows Statement, Sources and uses of cash over a period of time)

And one of the things that a lot of people ask is, well, how does the cash flows statement differ from the income statement. Both are reporting over the same, identical period of time. And one of the things, frankly, that most nonaccountants don't understand is the difference between what we refer to as accrual accounting, which is what the income statement and the balance sheet use, versus cash accounting which is what the cash flows statement is reporting.

(On-screen example of a cash flows statement)

The cash flows statement simply reports on the amount of cash received during the period of time and where it came from and where it went to. How did you use your cash during that period of time? And analysts, especially if they have any concerns about the accounting methods that are being used by a company, will carefully evaluate the differences between the cash flows statement and the income statement and try to get a good understanding of why those differences exist.

(Music playing)

(On-screen text: What are other elements of the annual report?)

INTERVIEWER: Are there any other elements of the annual report that you'd like to talk about?

PAUL KIMMEL, PHD, CPA: The other elements of the annual report would be the management discussion and analysis section, the notes to the financial statements, and the auditor's opinion.

(On-screen text: Annual Report, Management discussion and analysis, Notes to the financial statements, Auditor's opinion)

The management discussion and analysis is a required part of the financial statements, a required part of the annual report, that is supposed to provide a candid discussion by management about the performance of the company during the period of time that's covered by the financial statements.

(On-screen example of Management's Discussion and Analysis of Financial Condition and Results of Operations)

It's supposed to provide a candid discussion about the company's ability to raise funds, remain solvent, and that it's -- the FCC closely monitors the management discussion and analysis to ensure that it's not simply a boilerplate discussion. That is is that they actually make a legitimate effort to try to communicate to the users of the financial statements what management really believes is going on in the company. So it's very important that if you're interested in analyzing a company and getting an understanding of that company, that you take the time to read the management discussion and analysis section.

The notes to the financial statements provide additional information, additional detail, that couldn't be provided on the face of the financial statements.

(On-screen example of Notes to Financial Statements)

So, for example, if you're looking at the company's inventory, and on the face of the statement, it might say that they have $10 million of inventory. Well, in the notes to the financial statements, it will describe what methods are being used to account for that inventory. And there are a wide variety of ways that inventory could be accounted for, and so it's important that you know what methods the company has used.

And then lastly, the auditor's report, the auditor's report provides an outside evaluation by independent accountants about the accuracy of the financial statements and how well those financial statements accurately portray the company's profitability during the period and their financial position at the end of the period.

(On-screen example of Auditor's Report)

And so it's important that somebody who is using these financial statements has a basic understanding of, you know, what it is that the auditor is doing, what that auditor's report is conveying, and how much it can be relied upon.

(Music playing)

[End Audio]

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