6. FINANCIAL STATEMENTS AND THE VALUE OF MONEY
This chapter provides an overview of financial statements and the value of money. Business
people and financial analysts use and examine four financial statements: the income statement,
balance sheet, statement of changes to stockholder’s equity, and statement of cash flow. Since
all accountants record financial statements in a currency, then they must discount future
payments and receipts of money using the present value formula. Consequently, students will
learn to use the present value formula to compute a value today of future withdrawals,
payments, and investments. Furthermore, students will learn to use the present value formula to
calculate the amortization table for a mortgage, annuity payments, value of savings accounts,
and investments. Then we expand the present value formula for foreign currency.
The Financial Statements
Accountants use and create four financial statements. Income statement is the first and most
important financial statement because investors must know whether a business has earned a
profit or a loss. We also call a profit the net income, and every income statement has two items:
Revenues are inflows of assets received in exchange for goods and services that the
business produces. Businesses earn revenue by selling products or services. Expenses are outflows of assets because a business pays costs to operate a business. A
business must pay workers’ salaries, materials, taxes, and utilities.We show an example of an income statement in Table 1. PEMEX is Mexico’s Petroleum
Company, and the p refers to the Mexican currency, the peso. The Mexican government owns
PEMEX after it established PEMEX as a monopoly over all Mexican petroleum production,
refining, and distribution. We omitted some categories to simplify the income statement. In
2005, PEMEX’s net sales were 505,109,185 pesos for domestic sales and 423,533,791 pesos for
exports. Thus, PEMEX sold 505 million peso products within Mexico and exported 423 million
pesos of petroleum to the United States.
Next category is PEMEX’s operating costs, and they are separated into three categories.
First, PEMEX incurred a cost of sales of 361,177,339 pesos for petroleum production, refining,
and distribution. Cost of sales is the cost PEMEX pays to supply its customers with petroleum
and petroleum products. Second, PEMEX paid 21,910,789 pesos to transport its products
between its facilities or retail markets. Furthermore, the corporation paid 46,800,391 pesos to
administer the corporation. Finally, we add all costs and write negative numbers as a red number
in a parenthesis.
Exchange gain (or loss) influences the company financially because a country’s exchange
rate had changed. International petroleum market is denominated in U.S. dollars, and PEMEX
sold petroleum to the United States for U.S. dollars and exchanged dollars to pesos. Thus,