Understanding Financial Statements 1 Users of Financial Information Internal Users Managers plan, organize and run a business 2 Users of Financial Information External Users Investors Creditors Others Primary users Taxing authorities Regulatory agencies Customers Labour unions Economic planners 3 Objective of Financial Reporting Provide the most useful financial information for decision making This is accomplished through the development of financial statements. 4 How much is Joe Student Worth? HE HAS - cash - beer can empties - CDs - ’97 beater $19.22 $45.38 $345.12 (new) $1200.00 (market) TOTAL $1609.72 5 How much is Joe Student Worth? HE OWES Back Rent Std Loan* $400 (current) $1000 (long term) TOTAL $1400 HE IS WORTH 1609.72 – 1400 = $209.72 6 Accounting Equation Assets = Liabilities + Shareholders’ Equity Assets = Liabilities + net worth Basic Terms Assets - resources owned by a business Liabilities - obligations of the business Shareholders’ equity Share capital - representing the primary ownership interest in a corporation Retained earnings – accumulated earnings of corporation that have not been distributed to shareholders 8 CSU CORPORATION Balance Sheet December 31, 2006 Balance Sheet Head up the statement name of company name of statement date (as at a specific point in time) CSU CORPORATION Balance Sheet December 31, 2006 Assets Cash Accounts receivable Inventory Equipment Total assets $ 2,000 4,000 1,800 16,000 $23,800 List the assets and total Note the order of listing CSU CORPORATION Balance Sheet December 31, 2006 Assets Cash Accounts receivable Supplies Equipment Total assets Liabilities and Shareholders’ Equity Liabilities Accounts payable Notes payable Total liabilities $ 2,000 4,000 1,800 16,000 $23,800 $ 2,000 5,000 7,000 List the liabilities and subtotal Hmm .. Same order for liabilities CSU CORPORATION Balance Sheet December 31, 2006 List shareholders’ equity. Subtotal Add to liabilities, total CSU CORPORATION Balance Sheet December 31, 2006 Assets Cash Accounts receivable Supplies Equipment Total assets Liabilities and Shareholders’ Equity Liabilities Accounts payable Notes payable Total liabilities Shareholders’ equity Common shares $10,000 Retained earnings 6,800 Total shareholders’ equity Total liabilities and shareholders’ equity $ 2,000 4,000 1,800 16,000 $23,800 $ 2,000 5,000 7,000 16,800 $23,800 Classified Balance Sheet Generally contains the following standard classifications: Assets Current assets Long-term investments Capital assets Liabilities Current liabilities Long-term liabilities Shareholders’ Equity Share capital Retained earnings 14 Stop and Check Total assets must equal total liabilities and shareholders’ equity Yeah, but I have a job now. I’ll have money coming in. Money coming in (for October) - wages $1800 Money going out Rent Food Entertainment IMPROVED NET WORTH $400 $400 $800 $200 16 Revenues (money coming in) Revenues arise from sale of a product or service Revenues result in an inflow of assets 17 Expenses Expenses are the costs of assets consumed or services used to generate revenues Examples Cost of sales Store operating expenses General and administrative expenses Interest expense 18 Net Earnings Net earnings are the excess of revenue over expenses Revenue Less: Expenses Net earnings $10,000 3,000 $ 7,000 (Net loss is the excess of expenses over revenues) 19 CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006 Statement of Earnings Head up the statement name of company name of statement period of time covered CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2001 Revenues Service revenue List the revenues $22,200 CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006 Revenues Service revenue Expenses Rent expense Insurance expense Supplies expense Total expenses Earnings before income tax Income tax expense $22,200 $9,000 1,000 200 10,200 12,000 5,200 List and total the expenses. Note that income tax is shown separately from other expenses CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006 Revenues Service revenue Expenses Rent expense Insurance expense Supplies expense Total expenses Earnings before income tax Income tax expense Net earnings $22,200 $9,000 1,000 200 10,200 12,000 5,200 $ 6,800 Subtract expenses from revenues to obtain net earnings (loss) 23 Joe Student’s Worth Now? He was worth He has since cleared $209.72 $200.00 His current Net Worth $409.72 At end of October 24 CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006 Statement of Retained Earnings Head up the statement name of company name of statement period of time covered (same period as statement of earnings) CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006 Retained earnings, January 1 $ 0 Start with beginning retained earnings (same as ending retained earnings of prior period) CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2001 Retained earnings, January 1 Add: Net earnings $ 0 6,800 6,800 Add net earnings (subtract loss) from the current year (see Statement of Earnings) Subtotal CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006 Retained earnings, January 1 Add: Net earnings Less: Dividends Retained earnings, December 31 $ 0 6,800 6,800 0 $ 6,800 Subtract current year’s dividends (if any) and total In what order are financial statements prepared? Presented? WHY? CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006 Revenues Service revenue Expenses Rent expense Insurance expense Supplies expense Total expenses Earnings before income tax Income tax expense Net earnings $22,200 $9,000 1,000 20 10,200 12,000 5,200 $ 6,800 Net earnings is needed for the Statement of Retained Earnings CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006 Retained earnings, January 1 Add: Net earnings Less: Dividends Retained earnings, December 31 $ 0 6,800 6,800 0 $ 6,800 Ending retained earnings is needed for the Balance Sheet CSU CORPORATION Balance Sheet December 31, 2006 Assets Cash Accounts receivable Supplies Equipment Total assets Liabilities and Shareholders’ Equity Liabilities Accounts payable Notes payable Total liabilities Shareholders’ equity Common shares $10,000 Retained earnings 6,800 Total shareholders’ equity Total liabilities and shareholders’ equity $ 2,000 4,000 1,800 16,000 $23,800 $ 2,000 5,000 7,000 16,800 $23,800 Remember … Remaining liquid and solvent is as important as making a profit because... A company can survive without earnings, but it can’t survive very long without cash “B u r n R a t e” Financial Accounting Statements Statement of Earnings Reports the results of operations for a specific period of time Statement of Retained Earnings Reports the changes in retained earnings for a specific period of time Balance Sheet Reports the assets, liabilities, and shareholders’ equity as at a specific point in time Statement of Cash Flows Reports the cash receipts and payments for a specific period of time 34 Elements of an Management Discussion and Analysis Auditor's Report Financial Statements Statement of Earnings Statement of Retained Earnings Balance Sheet Statement of Cash Flows Notes to Financial Statements