Corporate Value Creation: An Operations Framework for Nonfinancial Managers

CHAPTER TEN

Understanding Financial Statements

CHAPTER 10 TAKEAWAYS

Financial Statements

There are three basic financial statements that define the financial performance of an enterprise: the Income Statement, Balance Sheet, and Cash Flow Statement. The relationships between all of the accounts in these statements can be derived by inspection.

Income Statement

• The purpose of the Income Statement is to quantify the financial consequences of the activities that take place in a company when it serves customers' needs during a particular period of time. The various accounts follow a logical process, starting with revenues and ending with net income. All of the line items in the statement are important, but one in particular, EBIT, deserves special mention.
• Technically, earnings before interest and taxes (EBIT) is an indicator of profitability after accounting for depreciation and amortization but before the impact of interest and taxes. In practice, it is much more. It is a measurement of “value added” in the sense that higher EBITs are associated with higher value added as perceived by the customers and their willingness to recognize the value by the price they are prepared to pay.
• The following equations define the Income Statement.

  

  

Balance Sheet

• The Balance Sheet portrays the ...