Overview of the financial statements

- Finance is identifying necessary resources, figuring out how to get the money to buy those resources, and then managing those resources efficiently once you have them. - To identify and determine and manage resources, you need information. - [Speaker In Pink] One source of that information is a company's financial statements, the balance sheet, the income statement, and the statement of cash flows. - Now, let's define the items found in these three financial statements. - [Speaker In Pink] The first primary financial statement is the balance sheet. A balance sheet is a listing of a company's valuable resources, its assets. - [Speaker In Blue] Asset is defined as a tangible thing or an intangible right that a company owns or controls that is expected to generate benefits in the future. - For example, as of January 31st, 2023, Walmart had total assets of $243 billion. Of this amount, 57 billion was the cost of the inventory sitting on the shelves of the 10,623 Walmart stores around the world. Most of the rest of the $243 billion in assets was in the form of land, buildings, and the shelves, display cases, and other equipment in the stores. - [Speaker In Blue] A balance sheet also shows the three general sources that companies use to get money to buy assets. First, they can borrow it, if you borrow money, then of course you have to pay it back. - [Speaker In Pink] This obligation to repay an amount borrowed is called a liability. - [Speaker In Blue] The second source for money to buy assets is that the owners can take money from their private savings and invest it in the business. - [Speaker In Pink] 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. - [Speaker In Blue] 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. - Assets, liabilities, and equity, those are the items found in the balance sheet. - [Speaker In Blue] Now, 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. - [Speaker In Pink] The income statement contains revenues and expenses. - [Speaker In Blue] The revenue amount is the amount of assets generated through doing business operations. In 2022, Walmart generated $611 billion in assets, either cash or credit, debit card, electronic transfers through selling stuff to you and to me. - The expense amount is the amount of assets consumed in doing business operations. - [Speaker In Blue] So during 2022, Walmart consumed $464 billion in paying suppliers for the inventory items sold to you and me. - [Speaker In Pink] 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. - [Speaker In Blue] The third primary financial statement is the statement of cash flows, which is a report of a company's cash receipts and cash payments, separated into three categories, operating, investing, and financing. - Operating cash flows are the things that you do every day, collecting cash from customers, paying employees, and so forth. - Investing cash flows are investments in the productive capacity of the business, buying more buildings, and trucks, and land and so forth. - 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. - [Speaker In Pink] During 2022, Walmart's operations generated $29 billion in net cash. Of this amount, 17 billion was used to buy new long-term assets, such as land and building, and $6 billion was paid to shareholders as dividends. - Well, what about the rest of the cash generated by Walmart in 2022? Well, Walmart used some of it to buy back shares of its own stock from its shareholders, but that is the story for another day. - So those are the three financial statements, the balance sheet, the income statement, and the statement of cash flows.