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The Appendix
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Financial Statements, Taxes, and Cash Flow > Introducing Financial Statements
Introducing Financial Statements
• Defining the Financial Statement
• Uses of the Financial Statement
• Limitations of Financial Statements
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Financial Statements, Taxes, and Cash Flow > Introducing Financial Statements
Defining the Financial Statement
• Financial statements are formally prepared documents communicating an entity's
financial activities to parties including investors, management and tax officials.
• An entity's financial statement typically includes four basic components: a balance
sheet, income statement, cash flow statement, and statement of changes in
equity.
• The balance sheet reports a point-in-time snapshot of the assets, liabilities and
equity of the entity.
• An income statement reports on a company's expenses and profits to show
whether the company made or lost money.
• The cash flow statement reports the flow of cash in and out of the business,
Keeping Money Organized
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dividing cash into operating, investing and financing activities.
• A statement of changes in equity explains the changes of the company's equity
throughout the reporting period, including profits or losses, dividends paid and
issue or redemption of stock.
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Financial Statements, Taxes, and Cash Flow > Introducing Financial Statements
Uses of the Financial Statement
• Owners and managers use financial statements to make important long-term
business decisions. For example: whether or not to continue or discontinue part of
its business, to make or purchase certain materials, or to acquire or rent/lease
certain equipment in the production of its goods.
• Prospective investors use financial statements to perform financial analysis, which
is a key component in making investment decisions.
• A lending institution will examine the financial health of a person or organization
and use the financial statement to decide whether or not to lend funds.
Budget
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Financial Statements, Taxes, and Cash Flow > Introducing Financial Statements
Limitations of Financial Statements
• One limitation of financial statements is that they are open to human interpretation
and error, in some cases even intentional manipulation of figures to inflate
economic performance.
• Another set of limitations of financial statements arises from different ways of
accounting for activities across time periods and across companies, which can
make comparisons difficult.
• Another limit to financial statements as a window into the creditworthiness or
investment attractiveness of an entity is that financial statements focus solely on
financial measures. Some argue for a "triple bottom line" including social and
environmental measures.
Consolidated financial statements
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Appendix
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Financial Statements, Taxes, and Cash Flow
Key terms
• Assets economic resources that represent value of ownership that can be converted into cash (although cash itself is also
considered an asset)
• audit an audit of financial statements is the verification of the financial statements of a legal entity intended to enhance the
degree of confidence of intended users in the financial statements by providing reasonable assurance that the financial
statements are presented fairly.
• corporate governance involves the roles and relationships between a company's management, its board, its shareholders and
other stakeholders, and the goals for which the corporation is governed. Much of the contemporary interest in corporate
governance is concerned with mitigation of the conflicts of interests and the nature and extent of accountability of people in the
business.
• equity The residual claim or interest to investors in assets after all liabilities are paid. If liability exceeds assets, negative equity
exists and can be purchased through stock.
• financial analysis Financial analysis (also referred to as financial statement analysis) refers to an assessment of the viability,
stability, and profitability of an organization or project.
• GAAP Generally Accepted Accounting Principles refer to the standard framework of guidelines, conventions, and rules
accountants are expected to follow in recording, summarizing, and preparing financial statements in any given jurisdiction.
• liabilities an obligation of an entity arising from past transactions or events, including any type of borrowing
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Financial Statements, Taxes, and Cash Flow
Consolidated financial statements
Financial statements can include a number of inaccuracies and limitations that affect the way a company can be viewed.
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http://acmilan-shqip.org/eng/editorials/milan-group-financials/attachment/consolidated-balance-sheet/. CC BY http://acmilan-shqip.org/eng/editorials/milan-groupfinancials/attachment/consolidated-balance-sheet/ View on Boundless.com
Financial Statements, Taxes, and Cash Flow
Keeping Money Organized
Financial Statements help keep money organized.
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Flickr. "All sizes | Personal Finance | Flickr - Photo Sharing!." CC BY-SA http://www.flickr.com/photos/[email protected]/6757875045/sizes/z/ View on
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Financial Statements, Taxes, and Cash Flow
Budget
One of the uses of financial statements is as a budgeting tool, as in this example.
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Wikimedia. "AFRH Budget Chart." CC BY-SA http://commons.wikimedia.org/wiki/File:AFRH_Budget_Chart.jpg View on Boundless.com
Financial Statements, Taxes, and Cash Flow
Which of the following best defines financial statements in
general?
A) A listing of a company's assets and liabilities.
B) A detailed report of a company's income and expenses.
C) An analysis of the flow of cash into and out of a business.
D) A collection of reports that describes a company's financial activities to
a third party.
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Financial Statements, Taxes, and Cash Flow
Which of the following best defines financial statements in
general?
A) A listing of a company's assets and liabilities.
B) A detailed report of a company's income and expenses.
C) An analysis of the flow of cash into and out of a business.
D) A collection of reports that describes a company's financial activities to
a third party.
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Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Financial Statements, Taxes, and Cash Flow
Which of the following can be determined through an analysis of a
company's financial statement?
A) The company's creditworthiness.
B) All of these answers.
C) The accuracy of the company's tax returns.
D) The company's profitability.
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Financial Statements, Taxes, and Cash Flow
Which of the following can be determined through an analysis of a
company's financial statement?
A) The company's creditworthiness.
B) All of these answers.
C) The accuracy of the company's tax returns.
D) The company's profitability.
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Financial Statements, Taxes, and Cash Flow
There has been a recent push to standardize accounting
standards worldwide. Which limitation of financial statements
does this step address?
A) Financial statements can be intentionally manipulated to make the
company look better.
B) Financial statements may not provide a complete picture of a
company's economic prospects.
C) All of these answers.
D) Cross-time or cross-company comparison of financial statements can
be difficult.
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Financial Statements, Taxes, and Cash Flow
There has been a recent push to standardize accounting
standards worldwide. Which limitation of financial statements
does this step address?
A) Financial statements can be intentionally manipulated to make the
company look better.
B) Financial statements may not provide a complete picture of a
company's economic prospects.
C) All of these answers.
D) Cross-time or cross-company comparison of financial statements can
be difficult.
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Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Financial Statements, Taxes, and Cash Flow
Many countries require that a company's financial statements be
audited by an unbiased third party. Which limitation of financial
statements does this requirement address?
A) Cross-time or cross-company comparison of financial statements can
be difficult.
B) Financial statements may not provide a complete picture of a
company's economic prospects.
C) All of these answers.
D) Financial statements can be intentionally manipulated to make the
company look better.
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Financial Statements, Taxes, and Cash Flow
Many countries require that a company's financial statements be
audited by an unbiased third party. Which limitation of financial
statements does this requirement address?
A) Cross-time or cross-company comparison of financial statements can
be difficult.
B) Financial statements may not provide a complete picture of a
company's economic prospects.
C) All of these answers.
D) Financial statements can be intentionally manipulated to make the
company look better.
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Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Financial Statements, Taxes, and Cash Flow
Attribution
• Wikipedia. "Financial statement." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Financial_statement
• Wiktionary. "equity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/equity
• Wiktionary. "liabilities." CC BY-SA 3.0 http://en.wiktionary.org/wiki/liabilities
• Wikipedia. "Assets." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Assets
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/financial-analysis
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/corporate-governance
• Wiktionary. "audit." CC BY-SA 3.0 http://en.wiktionary.org/wiki/audit
• Wiktionary. "GAAP." CC BY-SA 3.0 http://en.wiktionary.org/wiki/GAAP
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