How to Read Financial Statements

Running head: FINANCIAL STATEMENTS 1

Financial Statements

Question 1 

An income statement is used in showing the loss or profit a company has made during any given time. The loss or profit is determined by subtracting all the expenses from both the non-operating and operating activities. The income statement includes the sales or revenues, which represents the amount of money the company has made from sales (Suh, 2017). L3 Harris Technology has made revenues amounting to $5,992,000 in 2016, which increased to $6,801,000 in 2019. The costs of goods represent the amount of money L3 Harris Technologies has used in procuring services or products it sells off to customers (Nasdaq, 2019). The income statement also includes general and administrative expenses. These type of expenses are referred to as fixed or overhead costs and were bot used in procuring or making products/services. L3 Harris Technologies and general expenses for 2019 were $1,242,000 (Nasdaq, 2019). Other expenses include interest rate expenses, minority interest, and income expenses. The net income is referred to as the bottom line as it is at the bottom of the income statement, which represents the profit or loss made by the company. L3 Harris Technology’s net income shows the company made a profit in 2019 amounting to $949,000 (Nasdaq, 2019).

The balance sheet contains information related to a company’s liabilities, shareholder’s equity and assets (Suh, 2017). The assets include things that have value and are owned by a company and can either be sold or used by a firm in making products/services (Suh, 2017). The assets are dived into current assets and long-term assets. L3 Harris Technology’s current and long-term assets for 2019 amounted to $10,117,000. The liabilities represent the amount of money owed by a company to its creditors and/or suppliers. This can include various obligations such as money borrowed, and in 2019, L3 Harris owed $2,763,000 (Nasdaq, 2019). Current liabilities also include rent owed, accounts payables, taxes among others. The shareholder equity refers to money that the company is left in case it sells off all its assets. This money belongs to the shareholders.

Noor et al. (2012) state that the cash flow statement is used in reporting a firm’s cash outflows and inflows. The cash flow is essential, as a firm must have enough cash to purchase assets and pay its expenses. A cash flow uses information from the income statements and balance sheet. The net decrease or increase in cash for a given period is highlighted at the bottom of the cash flow. The cash flow statement includes the operating activities, investing activities and financing activities (Suh, 2017). The operating activities section highlights a firm’s cash flow from net losses or income. The investing activities section is used to highlight cash generated from a firm’s investments. The financing activities is used to show cash generated from all firm’s financing activities such as cash raised during the selling of and purchasing stock, as seen in L3 Harris 2019 case $150,000. Other forms of cash in this section include bank borrowing and bond selling.

Question 2 

The information contained in the income statement shows L3 Harris Technology had increased revenue from $5,992,000 in 2016 to $6,801,000. This led at an increase in its gross profit from $2,160,000 to $2,334,000 representing a $174,000 increase. This is an indication that L3 Harris Technology is making profits from what it is selling to its clients. In general, the company’s net income increased from $324,000 in 2018 to $949,000 in 2019 (Nasdaq, 2019). This is an indication that the company’s business is booming, as it has not faced any form of losses within the four years. In case it had made losses, the firm would have been forced to cut down on some of its expenses and increase its marketing expenses.

The balance sheet figures show that L3 Harris Technology total assets and total liabilities and equity reduced from $12,009,000 in 2016 to $10,117,000 in 2019. This an indication that the company might have sold off some of its assets and repaid most of the debts it owned in 2016 hence reducing the balance sheet figures (Nasdaq, 2019). However, the balance sheet is still strong an indication L3 Harris Technology is liquid and has enough cash to meet its liabilities. This also means the firm will have the ability to survive any tough economic turbulent in its operational market.

L3 Harris Technology had a positive cash flow in 2016, $6,000 though in 2017 and 2018, respectively, the net cash flow was negative -$3,000 and -$196,000 respectively. However, the cash flow in 2019 was positive at $ 242,000 (Nasdaq, 2019). It is an indication cash flow for 2019 showed the firm had higher cash inflows than outflows, which is a direct result of L3 Harris Technology being profitable. According to Noor et al. (2012), positive cash flow is also an indication that L3 Harris Technology can pay its current liabilities and grow its business through investments.

Question 3 

An investor looks at key performance indicators in the financial statements before investing or offering loans to a business. The profit and loss statement is an essential financial statement for an investor. The income statement highlights the net profit or loss a company is making form its operations. A critical question that every investor would want to ask is whether a business is making profits or losses. Another necessary account is the amount of sales made by a firm the revenues indicate that customers are willing to buy the products or services offered by a company. A reduced sales revenue will mean a business is not worth investing in. A balance sheet provides investors with a clear picture of the company liabilities and assets. The balance sheet will inform an investor how much money the firm has in the form of total assets, the money it owes in the form of liabilities and how much money the company is left with represented by the shareholder equity. The cash flow is used to show the amount of cash going in and out of business. As an investor, one would want to know whether a company has adequate cash to pay enough returns on investments in the form of dividends. A business that has no cash to pay back in the form of dividends indicates it is not worth investing in.

Question 4 

Accounting information contained in financial statements is essential to the management. Through the information, the management can determine whether the business is functioning as required and how much it is worth. The management must ensure that a business remains profitable. The management uses a firm’s balance sheet and income statement in gauging financial performance. The management uses the balance sheet in analyzing the company’s financial leverage and liquidity (Adrian & Shin, 2010). The liquidity is measured using the working capital, quick ratio and current ratio. The balance sheet is thus used by management in determining the relationship between a company’s equity capital base and its debt obligations, which are later used in determining the best debt financing option

Any business aims to make profits, and the income statement shows whether the firm is making profits or losses In case the company has losses, the management will use the income statement expenses account in determining which should be reduced to drive up revenues. Noor et al. (2012) state that cash flow statement is also essential as it allows the management in determining how the business can pay for its daily expenses hence helping in the formation of long-term and short-term budgets.

References

Adrian, T., & Shin, H. S. (2010). Liquidity and leverage.  Journal of Financial Intermediation ,  19 (3), 418-437.

Nasdaq. (2019). LHX company financials. Nasdaq.com Retrieved on 5 December 2019, from https://old.nasdaq.com/symbol/lhx/financials?query=income-statement

Noor, M. I., Nour, A., Musa, S., & Zorqan, S. (2012). The Role of Cash Flow in Explaining the Change in Company Liquidity.  Journal of Advanced Social Research Vol ,  2 (4), 231-243.

Suh, C. (2017). The Role of financial statement in the investment decisions of a microfinance institution (MFI): Bamenda Police Cooperative Credit Union Limited, Yaounde (BAPCCUL Yaounde) (Thesis). Centria University of Applied Sciences, Kokkola, Finland.