Financial Statements Financial Statements financial information to outside users such as creditors and investors a set of accounting reports that convey economic and Types Balance Sheet statement of financial positions Income Statement Statement of Owner s Equity Statement of Cash Flows Balance Sheet shows o 1 The economic resources owned by a business assets o 2 The debts owed by a business liabilities o 3 The amount of owner s investment in the business equity o Snapshot specific point in time o These 3 things form Fundamental Accounting Equation Assets Liabilities Equity Assets 1 Current Assets assets that are expected to be either converted into cash or expire be used up in a year Ex o Cash o Accounts Receivable its customers inventory Identify Current Assets o Inventory o Supplies represents the amounts owed to the company by the product the company sells to its customers items used in the normal course of business not the same as 2 Long Term Assets assets that are expected to be used in business operations for longer than one year o Types Property Plant Equipment P P E Long term assets that have a physical substance touch feel see Ex Land buildings equipment o PPE is a decrease to long term assets Intangible Assets lack a physical substance Ex Trademark patent copyright Historical Cost Concept assets are shown on balance sheet at their cost not current value Liabilities debts owed by business Represents creditors claims against company s assets Current Liabilities expected to be paid within one year o Ex Accounts payable short term notes payable salaries payable income taxes payable utilities payable accrued liability debts paid in longer than one year Long term Liabilities o Ex Long term notes payable mortgage payable bonds payable Equity represents amount of owner investment For a corporation there are two types o 1 Contributed Capital investments made by owners into the business through the purchase of the organization s stock common stock o 2 Retained Earnings net income that is earned by the corporation that is kept within the company for growth and expansion rather than given to stockholders in dividends For sole proprietorships and partnerships contributed capital represents investments made by the owners into the business o Do not report retained earnings Income Statement the financial statement that shows the profitability of the company for a period of time Includes o Revenues represents amounts earned during the accounting period year May result from sale of merchandise services rental of property or lending money Ex 1 Sales revenue results from sales of inventory 2 Service Revenue 3 Rental Revenue 4 Interest Revenue 5 Dividend Revenue o Expenses costs incurred in the process of earning revenues Ex 1 COGS 2 Salary Expense 3 Rent Expense 4 Utilities Expense 5 Interest Expense 6 Advertising Expense 7 Income Tax Expense Income Statement Equations Revenue Expenses Net Income Sales Revenue COGS Gross Profit Income Statement begins with Sales Revenue selling price of inventory cost of the Inventory sold COGS Gross Profit the profit earned from selling Other Revenues Other Expenses Net Income inventory Statement of Owner s Equity Shows the changes in equity for a period of time same period as income statement Two components Retained Earnings o Common stock Beginning Balance January 1 Additional Sales of Common Stock Ending Contributed Capital Beginning Balance Net Income Dividends Ending Retained Earnings Dividends paid by the company to its stockholders are not an expense o Since it is not a legal duty Sole proprietorship and partnership s equity is only contributed capital Beginning Balance Additional Investments by Owners Net Income Withdrawals by Owners Ending Balance Withdrawals are similar to dividends because they are not considered an expense o Considered decrease in activity Dividends have no effect on net income because they aren t expenses Statements of Cash Flows Shows the change in cash for a period of time same period as income statement o Provides information about 1 Cash Receipts inflows 2 Cash Payments outflows o Inflows and outflows Operating activities Investing activities Financing activities Operating Activities Cash inflows ad outflows associated with the primary operations of the business o Ex Inflows from sales of goods and services o Outflows to suppliers for inventory to employees for taxes to lender for interest Investing Activities Cash inflows and outflows associated with purchase or sale of long term assets such as P P E Ex Cash inflows Ex Cash outflows o From the sale of assets such as land buildings and equipment o From the purchase of assets such as land buildings and equipment Financing Activities Cash inflows and outflows associated with the source of funding the business o Obtaining cash from and paying cash to Creditors Stockholders owners o Ex Cash inflows o Cash outflows From sale of company s own stock common stock From borrowing money To stockholders as dividends To creditors for repayment of funds borrowed How do the 4 statements work together Begin with income statement to obtain net income o Then use that number to complete statement of owner s equity Net income allows us to determine the ending balance in retained earnings o Use end balance in retained earnings to complete the balance sheet o The statements of cash flows describes in depth the changes in cash 1 Assets Liabilities Equity 2 Revenues Expenses Net Income 3 Beginning Retained Earnings Net Income Dividends Ending Retained Earnings 4 Sales Revenue COGS Gross Profit 5 Total Equity for a Corporation Contributed Capital Retained Earnings Review Module Problems