Why Are Relationships among Financial Statements Important? | immobilier-haute-garonne.info
The cash-flow statement exists to bring transparency to how both the balance sheet and income statement impact a company's cash positions. The three primary financial statements of a business — the balance sheet, the income statement, and the statement of cash flows — are intertwined and. The income statement, balance sheet and cash flow statement are all interrelated . The income statement describes how the assets and liabilities were used in.
Depreciation and amortization Video transcript Let's see if we can use our example to understand the three types of income statements, and hopefully understanding those income statements will also help us understand this example.
So I'm going to start off-- we're going to focus on month two. And what I have done is I've just rewritten some of this accrual income statement down here. So it really looks like a statement. So this right here is the income statement for month two on an accrual basis. An income statement tells us what happened over a period of time. What was the activity-- how much revenue, how much expenses, and other things.
How the 3 Financial Statements are Linked Together - Step by Step
This is just a super simplified one without taxes, without interest, without other types of expenses over here. I also have drawn the balance sheet at the end of month one and the balance sheet at the end of month two.
Or you could also view this balance sheet here as the balance sheet at the beginning of month two. And the main thing to realize is income statement tells you what happens over a time period, while balance sheets are snapshots, or they're pictures at a given moment-- snapshots.
So this tells us essentially what did I have. The assets are the things that can give me future benefit, so what do I have. And the liabilities are things that I have to give future benefit to, or things that I owe. So this is what I have. This is what I owe. And then the equity is what I really have to my name if I net out the liabilities from the assets. And again in real life you would probably link all or most of these to the Loans on the Assets side. We can add up all of these. You link in the Net Income to Common at the top of Cash Flow Statement, and then you factor in any Common Stock Issuances and then any Dividends to Common as well, because those are going to reduce this number.
For Preferred Stock we just take our old number and then we add the Preferred Stock Issuances, this might also be projected as a percent of Loans or Deposits. Then we can add this up. And then for Total Liabilities and Equity we can just add these two numbers together. And for the Balance check, we can go up and just take our Total Assets and subtract our Liabilities and Equity.
Now, we have to go back and then flesh this out on the Balance Sheet. We can sum this up. Generally, as I said in the preceding lessons, these are going to be linked to the historical loan balance, and the percentages of these items as percentages of that loan balance.
Balance sheet and income statement relationship (video) | Khan Academy
It might be linked to what pure companies are doing or something else like that. This part is actually fairly easy, because we already have all our interest rates up here, and then down here for the Liabilities and Equity. So we have that. And then we can sum up everything here. So we have all these figures for the Interest Income and Interest Expense, and at this point we can actually go over to Step 4 and link and flesh out the Income Statement.
This is actually a Dividend. If we did not have these, we would have to project them ourselves based on the underlying metrics for these business divisions. Provision for Credit Losses is just going to be linked to our number over here for our Loan Loss Reserve Calculation math. So Tax Rate, and then Net Income.
And then for the Preferred Stock Dividend, remember we have this calculating on our Balance Sheet analysis below. So we can just go in and this is not really Interest Expense for the Preferred Stock.
Why Are Relationships among Financial Statements Important?
And then we get to our Net Income to Common below all of that. In real life, yes, it gets more complicated. And then you link them and show it on the Income Statement and you factor in these other items like the Provisions for Credit Losses that are coming from other schedules. And we can go up and take that number from right there. And then Changes in Other Assets, go over here and then subtract the ending one.
Changes in Deposits, this is considered an operational item for a lot of banks, so we take our Ending Balance and then subtract our Beginning Balance right here. AFS Securities we can link to our beginning number, and then just subtract our ending number right here.
But we can go back down and do that. To put everything together we can actually sum up Total Assets now and see what this comes out to. You can go in and test it yourself if you want to see exactly how this works. But for the most part, our jobs on the Balance Sheet here are done. So we have this in place, and this should be a good review of what these items mean and how they link together for now. The next step, really the last one here, is to calculate Regulatory Capital and then the Key Metrics and Ratios for commercial banks.
For this part to really, to really finish this off you have to calculate the Regulatory Capital, and then you also have to go over here and calculate the Key Operating Metrics and Ratios for this bank. Go through it and make all these calculations yourself. Calculations are laid out here pretty well. And then you can calculate the Assets and the Ratios, and some of the other Balance Sheet metrics at the bottom.
And you can find the formulas and the explanations for all of these in the slides in the Excel files.
Preferred Stock, we can just link in from our Balance Sheet, and then we can just add these up to get to our Tier 1 Capital. To simplify it, I just kept out all of that. And then Subordinated Notes, so we can add that. In real life, for both these, you might only have a portion that actually qualifies to be counted as Tier 2 Capital.