Corporate Financial Reporting and Analysis, 3rd Edition

Chapter 2

The Balance Sheet and Income Statement

In Chapter 1 we introduced the three principal financial statements – the balance sheet, income statement, and statement of cash flows – and the role they play in the financial reporting process. In this chapter, we discuss the first two statements in greater depth, focusing on the statements from SAP Group’s 2009 Annual Report. (Cash flows are examined in Chapter 5.)

A further look at the balance sheet

The balance sheet reports the financial position of a company at a particular point in time. By “financial position” we mean the resources available to managers to run the business (i.e., “assets”), and the financing that made the acquisition of those resources possible (liabilities and shareholders’ equity).

In Exhibit 1.1 you will have noticed the word “consolidated” at the top of SAP Group’s balance sheet. This means that the document before you represents not just the balance sheet of SAP AG, the parent company, but also the balance sheet of any entity controlled by the parent. It’s not the balance sheet of any one company, but rather that of a group of companies known to the investing world as “SAP.”

To understand this idea, imagine that you buy shares in the company. What do you get for your investment? Not only do you obtain ownership rights over the legal entity whose shares you are buying, but you gain indirect ownership rights over any business or entity effectively controlled by that company. This means that when you want ...