Financial Statements Module 1 Module 2 A Financial Statements Accounting Reports Income Statements a Balance Sheets b c Statement of Owner s Equity d Statement of Cash flow B Balance Sheets Show assets liabilities and equity at a certain time a Assets Liabilities Equity i Current Assets In one year or less 1 Cash 2 Accounts Received Money owed to us 3 4 Supplies Inventory ii Long term Assets Greater than one year 1 Property Plant Equipment PPE a Ex Land Equipment Buildings b Accumulated depreciation of these items is shown as a decrease on the balance sheet 2 Intangibles b Liabilities Debts owed by the business Represents creditor claims a Ex Trademarks Copyrights Patents against company s assets i Current Liabilities Expected to be paid within one year 1 Accounts payable 2 Short Term note payable 3 Salaries Payable 4 Income taxes payable 5 Utilities Payable ii Long Term Liabilities 1 Long term Notes Payable 2 Mortgage Payable 3 Bonds payable Examples of Accrued Liability c Equity The amount of owner investment in the company the components of the equity section of a balance sheet depend on the type of business organization being used i Corporation Company that sells stock 1 Contributed Capital Common Stock a Represents investments made by owners into the business through stock purchase 2 Retained Earnings a Represents net income earned by the corporation that is kept within the company for growth and expansion rather than paying dividends to stockholders b Reinvest extra rather than paying dividends ii Proprietorship Partnerships Don t sell stocks 1 Contributed Capital a Represents investments made by owners into the business 2 These companies do no report retained earnings C Fundamental Accounting Equation a Assets Liabilities Equity Module 3 A Income Statement company for a period of time Not just one day a period of time Financial statement that shows the profitability of the a Revenues Represents amounts earned during the accounting period year i May result from the sale of merchandise services rental of property or lending money 1 Sales Revenue primary source Service Revenue Rental Revenue Interest Revenue Dividend Revenue b Expenses Costs incurred in the process of earning revenues 1 Cost of Goods Sold Salar Utilities Expense Interest Expense Advertising Expense Income Tax Expense B Income Statement Equations a Revenues Expenses Net Income b Sales Revenue Cost of Goods Sold Gross Profit i Gross Profit earned from selling inventory Module 4 A Statement of Owners Equity time Same period of time covered by the income statement Shows the changes in equity for a period of a Corporation i Contributed Capital Common Stock 1 Beginning Balance Additional sales of stock Ending Contributed Capital At end of year period a Additional sales of stock increase stock price ii Retained Earnings Reinvested Profits 1 Beginning Balance Net Income Dividends Ending Retained Earnings At end of year period 2 Beginning Balance Net income that is earned and reinvested paid out as a dividend 3 DIVEDENS PAID BY THE COMPANY TO THE STOCKHOLDERS ARE NOT CONSIDERED TO BE AN EXPENSE a Because it is not a legal requirement for the company to pay dividends b Sole Proprietorships and Partnerships i Contributed Capital 1 Beginning Balance Additional Investments by Owners Net Income Withdrawals by Owners Ending Balance 2 WITHDRAWLS BY OWNERS OF SOLE PROPRIETERSHIPS AND PARTNERSHIPS LIKE DIVIDENS IN A CORPORATION ARE NOT CONSIDERD TO BE AN EXPENSE 3 They are simply a reduction of an owners equity c In a corporation dividends reduce the retained earnings but in a sole proprietorship partnership withdrawals reduce contributed capital d DIVIDENDS have no effect on the company s net income because they are not considered an expense Module 5 B Statement of Cash Flows same period of time as that covered by the income statement Shows the changes in cash for a period of time the a Provides information about 1 Cash Receipts inflows and 2 Cash Payments Outflows i Categorized as either 1 Operating Activities 2 Investing Activities 3 Financing Activities b Operating Activities primary operations of the business Cash inflows and cash outflows associated with i Include The cash effects of transactions that create revenues and expenses and thus enter into the determination of net income 1 Basically just cash transactions of revenues and expenses impact net income ii Examples 1 Cash Inflows a From sale of goods services 2 Cash Outflows a To suppliers for inventory b To employers for services c To government for taxes d To lenders for interest c Investing Activities the purchase of sale of long term assets such as PPE Cash inflows and cash outflows associated with i Examples 1 Cash Inflows a From the sale of assets such as land buildings and equipment 2 Cash Outflows a From the purchase of assets such as land buildings and equipment Cash inflows and cash outflows associated with d Financing Activities sources of funding the business i Include a Creditors b Stockholders ii Examples 1 Cash Inflows 1 Obtaining cash from and paying cash to a From sale of company s own stock common stock 2 Cash Outflows b From borrowing money Bank loan a To stockholders as dividends b To creditors for repayment of funds borrowed Module 6 together C How do the four financial statements we have just learned about work a Start with the income statement to determine the net income Then you use that number to complete the statement of owners equity Specifically net income allows us to determine the ending balance in retained earnings NEXT you use the ending balance in the retained earning to complete the balance sheet retained earnings is part of owners equity which is found on the balance sheet FINALLY the statement of cash flows describes in depth the changes in cash an asset found on the balance sheet Slide 5 has picture of this KEY FINANCIAL STATEMENT RELATIONSHIPS 1 Assets Liabilities Equity 2 Revenues Expenses Net Income 3 Beginning Retained Earnings Net Income Dividends Ending Retained Earnings 4 Sales Revenue Cost of Goods Sold Gross Profit 5 Total Equity for a Corporation Contributed Capital Retained Earnings