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Understanding of Financial Statement

1. Balance Sheet

2. Income Statement

3. Statement of appropriation of retained earnings

4. Cash Flow Statement

5. Statement of the cost of goods manufactured

(1) Drawing standard of balance sheet(2) Asset (operation of capital)(3) Liabilities and equity (source of financing)(4) Meaning of items on balance sheet

(1) Drawing standard for income statement(2) Composition of income statement

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1. Balance Sheet

What is Balance Sheet ?

Report presenting the financial status of company at certain point

Equality of Balance Sheet

Total Asset = Liabilities + Shareholder’s equity

① Principle of sectional presentation

② Gross amount principle

③ 1 year standard

④ Order of liquidity method

⑤ Section of capital transaction and profit & loss transaction

⑥ Suspended accounts and memorandum accounts

(1) Drawing standard for balance sheet

(2) Asset : operation of capital

Current AssetAsset cashable within short-term or 1 year from the date of drawing balance sheet

Quick Asset

Inventories

Cash & cash equivalents, short-term financial instruments, short-term investment asset, trade receivables, etc

Commodities, goods, work in process, raw material

Time DepositTime Installment

Deposit

-Within 3 months of expiration : cash and cash equivalents

-Over 3 months within 1 year of expiration : short-term financial instrument

-Over 1 year of expiration : long-term financial instrument

Cash & Cash Equivalents

It refers to currency, currency equivalents including personal check, checking account, ordinary deposit, etc.Securities and short-term financial instrument easy for cash conversion and without risk followed by change in interest rate

Current Asset Fixed Asset

Asset

Asset cashable within short-term or

1 year from the date of

drawing balance sheet

Asset that requires more than 1 year

for encashment

All goods and rights

with asset value

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Fixed Asset Over 1 year

• Goodwill, industrial property right, mining rights, fishery right, development cost, etc

• Direct subtraction from book value

Investment Asset

Tangible Asset

Intangible Asset

•Long-term financial instrument, long-term investment & securities, loan of affiliated company, etc•Land, building, structure, ship, vehicle, machinery, etc

•Total depreciation (category of allowance for valuation) indirectly subtracted from book value

It is generated when selling cost is bigger than the net asset acquired from company sold when two or more companies become one company with contract. In opposite case, negative goodwill generates

What is Goodwill? What is Industrial Property Right?

Account category combining each of account that is patent right, design right, utility model right, right of trade mark, etc into one

Current Liabilities Within 1 year

→ Trade payables, short-term borrowings, non-payment, current long-term liabilities, other current liabilities, etc

Transfer of long-term borrowings with arrival of repayment date of within 1 year among fixed assets to current liabilities

(3) Liabilities and capital – source of capital procurement

Current Liabilities Fixed Liabilities

Liabilities

Liabilities with borrowing period within 1 year

Liabilities with borrowing

period of over 1 year

Obligations to pay certain amount to others

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Fixed Liabilities Over 1 year → Company bond, long-term borrowings, other fixed liabilities, etc

Fund provided by shareholders after accepting the stock

Surplus Fund accumulated as a result of management activity

Common Stock

Preferred Stock

Retained earnings

Additional paid-in capital

Reservation of profit created from pure management activity for the certain purpose

Surplus generated from activity other than net management activities

Legal reserve, voluntary reserve, other reserves, etc

Paid-in capital in excess of par value, profit from capital reduction, revaluation surplus reserve, etc

Current AssetAs scale becomes large, company has sufficient payment capability (liquidity) for short-term liability. Risk for default is lowered but possession of excessive current asset may lower profitability of company

(4) Meaning of items on balance sheet

Fixed AssetAs scale of company becomes large, liquidity is lowered and risk is increased. However, company with too small scale of fixed asset is difficult to acquire appropriate profitability.

※ From the perspectives of company, risk is low when capital (equity) is used rather than liabilities. - Liabilities : Means of capital procurement with repayment obligations for principal - Capital : Means of capital procurement without conclusive obligation regarding the principal and error

Fixed Asset Investment

Stability of company can be secured with balanced investment within equity and fixed liabilities with relatively small risk

Paid-in capital

Paid-in capital Surplus

Equity

Fund provided by shareholders

after accepting the stock

Fund accumulated as a result

of management activity

Capital is remaining of asset

after subtracting the liabilities

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2. Income Statement

What is Income Statement ?

Reports to coped with income and expense for sales result of company within a certain period

Equality for Income

Statement

Expense + Profit = IncomeGross Income – Gross Expense = Gross Profit

① Accrual principle : All income and expense shall be processed so that it can be reasonably distributed at the generation② Principle of matching : Each income item and relevant expense item shall be indicated correspondingly

③ Gross amount principle

④ Principle of section indication

Same as concept in balance sheet

(1) Drawing standard for income statement

(2) Composition of income statement

1) Sales : Income from sales at current term or provision of service

(total sales – sales allowances and returns)

2) COGS : Economic value consumed at production or purchase process to realize the sales

- Wholesale industry : Inventory at beginning of term + product purchase of current term – inventory at end of term

- Manufacturing : Inventory at beginning of term + product manufacturing cost of current term － Inventory at end of term

3) Sales and management expense : It is the expense generated in sales activity of goods and service or management or maintenance of company . It includes all operating expense not included in the sales cost.

→ Salary, retirement benefit, welfare cost, rental expenses, depreciation, tax and utility, etc

1. Sales

2. Cost of goods sold (COGS)

3. Gross Profit (1-2) -----------------------> Product and Purchase Efficiency

4. Sales and Management Expense

5. Operating Profit (3-4) --------------------> Operating Efficiency

6. Non-Operating Profit

7. Non-Operating Expense

8. Ordinary Profit (5+6-7) -------------------> Financial Efficiency

9. Special Profit

10. Special Loss

11. Net Profit before Subtraction of Corporate Tax Expense (8+9-10)

12. Corporate Tax

13. Net Profit of Current Term (11-12) -----------> Efficiency of Company

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4) Non-operating profit : Banking or financial profit generated without direct relevance to sales, the original purpose of company → Interest income, dividend income, rental, gains from disposition of securities, gains from valuation of securities, gain on foreign exchange, gain on foreign currency transactions, gain on equity method valuation, gain on disposition of investment asset, gain on disposition of tangible asset, etc 5) Non-operating expense : Expense generated circulating from incidental activity other than operating activity with expense corresponding to non-operating profit → Interest expense, other depreciation, loss on disposition of securities, loss on valuation of securities, inventories, loss on valuation, loss on foreign exchange, loss on foreign currency transactions, loss on disposition of investment asset, loss on disposition of tangible asset, etc

※ Loss or profit on foreign exchange : Loss or profit generated with change in exchange rate ※ Loss or profit on equity method valuation : Loss or profit generated when value of investment stock increases with change of net asset of company invested

<Cases of Loss or profit on equity method valuation>

6) Special loss or profit: Loss or profit item generated extraordinarily without direct relevance to operating activities including gain from assets contributed, gain from liabilities exempted, gain on insurance claim, loss from disasters, etc

3. Surplus Appropriation Statement

- Draw up the statement of loss disposition when there is deficit rather than surplus with generation of loss- Surplus appropriation shall be concluded with approval of shareholder’s meeting as prescribed in regulation of commercial law

What is Statement of appropriation

of retained earnings?

It is the calculation indicating the total change in surplus to clearly report the revision of

earned surplus carried forward to following term of company and appropriate of earned surplus

4. Cash Flow Chart

- Importance is shed light on with recent change in review on loan

Review on Loan from Collateral → Cash Flow

What is Cash Flow Statement?

Char drawn with purpose to provide information relevant to inflow and outflow of cash to clearly report the change in cash of company at certain period

5. Manufacturing Cost Statement

<Composition of Statement of cost of goods manufactured>+ Material Cost+ Labor Cost+ Expense Total manufacturing expense at current term+ Raw cost of work in process at beginning of term - Raw cost of work in process at end of term- Substitution of tangible asset (or other account) Manufacturing cost of product at current term

What is Statement of the cost of

goods manufactured?Cost statement drawn by company that leads the manufacturing industry among various

cost statements

Corporation A Corporation B

Investment of 30 million won

Acquisition of 30% of issuing stock

2002. 1.3 Acquiring 30% of stock of Corporation B with 30 million won,

Investment Securities 30 million won/ Cash 30 million won

2002. 12. 31 Corporation B achieves net profit of 20 million won at current term,

Investment Securities 6 million won/ Gain on Equity Method Valuation 6 million won

2003. 1. 31 Corporation B pays 50% of profit at previous term to shareholders,

Cash received as Dividend 3 million won/ Investment Securities 3 million won