- Let's define the items found in the financial statements.
- The first primary financial statement
is the balance sheet.
A balance sheet is a listing
of a company's valuable resources, its assets.
- [Man With Glasses] An asset is defined
as a tangible thing, or an intangible right
that a company owns or controls
and that's expected to generate benefits in the future.
- For example, land a company owns is an asset
because in the future that land can be sold,
generating a benefit in the form of cash received.
Or the land can be used in the business,
providing a benefit in the form of the location
of business operations.
- A balance sheet also shows the three general sources
that companies use to get money to buy assets.
First they can borrow it.
Now if you borrow money, of course you have to pay it back.
- [Man Without Glasses] This obligation
to repay an amount borrowed is called a liability.
- [Man With Glasses] The second source for money
is the owners or shareholders that can take money
from their private savings and invest it in the business.
And the third source
is that the company can generate profits,
which belong to the owners that are then kept
in the business to buy more assets.
- [Man Without Glasses] Together,
these two sources of financing,
owner-direct investment and retained profits
are called equity.
Equity is the amount of total financing provided
by the owners.
- The fundamental difference between liabilities and equity
is that liability amounts must be repaid to the lenders,
whereas equity amounts do not have to be repaid.
If owners repay equity amounts, they are reclaiming
some of their investment funds
and voluntarily shrinking the size of their investment
in their business.
- Assets, liabilities and equity, those are the items
found in the balance sheet.
- [Man With Glasses] The second primary financial statement
is the income statement.
An income statement is a report telling how much money
a company made during the month or the quarter or the year,
whatever period is covered by the income statement.
- [Man Without Glasses] Now the income statement
contains revenues and expenses.
- [Man With Glasses] The revenue amount
is the amount of assets generated
through business operations.
In 2018, Walmart generated over $500 billion in assets
by selling stuff to you and to me.
- [Man Without Glasses] Now the expense amount
is the amount of assets consumed
in doing business operations.
- [Man With Glasses] During 2018,
Walmart consumed $385 billion in paying suppliers
for the inventory items sold to you and me.
- [Man Without Glasses] Now the difference
between revenues and expenses is called net income.
Hopefully this difference is positive,
meaning that the company's business operations
have generated more assets than they've consumed.
- [Man With Glasses] The third primary financial statement
is the statement of cash flows or cash flow statement,
which is a report of a company's cash receipts
and cash payments, separated into three categories,
operating, investing, and financing.
- [Man Without Glasses] Operating cash flows
are the things that companies do every day,
collecting cash from customers,
paying employees and so forth.
- [Man With Glasses] Investing cash flows are investments
in the productive capacity of the business.
Buying more buildings and trucks and land and so forth.
- [Man Without Glasses] Now financing activities
involve getting the money to buy the stuff
that I need through borrowing
and through shareholder investment, and then repaying loans
and paying dividends to shareholders.
- All right, so those are the three
primary financial statements.
The balance sheet, the income statement,
and the statement of cash flows.
- The balance sheet contains assets,
liabilities, and equity.
- The income statement contains revenues and expenses,
with the difference labeled net income.
- And the statement of cash flows contains cash in
and cash out from operating,
investing, and financing activities.
- So now of the three primary financial statements,
which is your favorite one?
- Now that's a tough question,
I'm going to have to think about that.