How to Read a Financial Report. John A. Tracy

almost all cases financial statements are supplemented with additional information, which is presented in footnotes and supporting schedules. One very common supporting schedule is the statement of changes in stockholders’ (owners’) equity. The broader term financial report refers to all this, plus any additional commentary from management, narrative explanations, graphics, and promotional content that accompany the financial statements, footnotes, and supporting schedules. Distribution of the financial reports of a private business may be restricted to its top-level managers, its shareholders, and major creditors. Federal laws require publicly owned businesses to make their financial reports publicly available.

The income statement and balance sheet for the company example introduced in Chapter 1 are presented here in Exhibits 2.1 and 2.2, respectively. The format and content of these two financial statements apply to manufacturers, wholesalers, and retailers—businesses that make or buy products that are sold to their customers. Although the financial statements of service businesses that don’t sell products differ somewhat, Exhibits 2.1 and 2.2 illustrate the basic framework and content of income statements and balance sheets for all businesses.

EXHIBIT 2.1 INCOME STATEMENT FOR YEAR

Dollar Amounts in Thousands
Sales Revenue	$ 52,000)
Cost of Goods Sold Expense	(33,800)
Gross Margin	$ 18,200)
Selling, General, and Administrative Expenses	(12,480)
Depreciation Expense	(785)
Earnings Before Interest and Income Tax	$ 4,935)
Interest Expense	(545)
Earnings Before Income Tax	$ 4,390)
Income Tax Expense	(1,748)
Net Income	$ 2,642)

EXHIBIT 2.2 YEAR-END BALANCE SHEETS

Dollar Amounts in Thousands
	Last Year-End)	This Year-End)	Change)
Cash)	$ 3,735)	$ 3,265)	$0(470)
Accounts Receivable)	4,680)	5,000)	320)
Inventory)	7,515)	8,450)	935)
Prepaid Expenses)	685)	960)	275)
Current Assets)	$ 16,615)	$ 17,675)
Property, Plant, and Equipment)	$ 13,450)	$ 16,500)	3,050)
Accumulated Depreciation)	(3,465))	(4,250))	(785)
Cost Less Depreciation)	$ 9,985)	$ 12,250)
Intangible Assets)	$ 5,000)	$ 5,575)	575)
Long-Term Operating Assets)	$ 14,985)	$ 17,825)
Total Assets)	$ 31,600)	$ 35,500)	$ 3,900)
Accounts Payable)	$ 2,675)	$ 3,320)	$ 645)
Accrued Expenses Payable)	1,035)	1,515)	480)
Income Tax Payable)	82)	165)	83)
Short-Term Notes Payable)	3,000)	3,125)	125)
Current Liabilities)	$ 6,792)	$ 8,125)
Long-Term Notes Payable)	$ 3,750)	$ 4,250)	500)
Capital Stock—793,000 shares and 800,000 shares respectively)	$ 7,950)	$ 8,125)	175)
Retained Earnings)	13,108)	15,000)	1,892)
Stockholders’ Equity)	$ 21,058)	$ 23,125)
Total Liabilities and Stockholders’ Equity)	$ 31,600)	$ 35,500)	$ 3,900)

Reporting Profit Performance: The Income Statement

      The first question on everyone’s mind is usually whether a business made a profit