Tool Kit for Financial Statements, Cash Flows, and Taxes
FINANCIAL STATEMENTS AND REPORTS (Section 3.1)
THE BALANCE SHEET (Section 3.2)
The annual report contains a verbal section plus four key statements: the balance sheet, income statement, statement of
retained earnings, and statement of cash flows.
These statements contain a wealth of information that
is used by bankers,
stock and bond analysts, and managers.
Hence, they are quite important.
Spreadsheets are used both to create and to
analyze these statements, as we demonstrate in this model.
Regarding statement creation, firms' accounting information is maintained in computer files, which are adjusted as sales
occur, materials are purchased, and so forth.
The firm's accountants periodically--monthly, quarterly, and annually--
extract information from the general files and compile the four statements.
These statements-- in both printed and
spreadsheet format--are made available to security analysts, and if the firm wants to borrow money, the same information
is provided to potential lenders.
The firm's financial staff also uses the data to analyze the firm's condition--its strengths and weaknesses--and this
information is used in the quest to improve operations and increase the firm's value.
In this model, we start with the same balance sheet and income statement that was used in the chapter, but in an Excel
format, and then we show how Excel (and other spreadsheet packages) can be used to analyze the data.
In addition, note that in cells which summarize data in other cells, such as sums or differences, the spreadsheet uses
formulas rather than fixed numbers.
For example, the cell for Total assets contains the Sum formula rather than just
$2,000. (The cell itself shows $2,000, but if you put the pointer on the cell, then the formula line will show that the cell
actually contains a formula.) That way, if the data for any input (cash, for instance) changes, the spreadsheet will
automatically recalculate and provide the correct net value for Total assets.
As you will see as you go through our models,
this automatic recalculation feature is one of the most useful and powerful aspects of Excel and other spreadsheets.
Finally, note that we show just below this introduction, before the financial statements, some information that is used to
develop aspects of the financial statements, including the tax rate, number of shares outstanding, and price per share.
Generally, in financial models, data that are used to construct statements are shown in an Input Data Section toward the
top of the model.