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