Financial Statements
LEARNING
OBJECTIVE
5
Describe the four financial statements
and how they are prepared.
Companies prepare four financial statements :
Income
Statement
Owner’s
Equity
Statement
Balance Sheet
Statement of
Cash Flows
LO 5
Financial Statements
Net income is needed to determine the
ending balance in owner’s equity.
SOFTBYTE
Income Statement
For the Month Ended September 30, 2017
Illustration 1-9
Financial statements and
their interrelationships
SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2017
LO 5
SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2017
The ending
balance in
owner’s equity
is needed in
preparing the
balance sheet.
Illustration 1-9
Financial statements
and their
interrelationships
Illustration 1-9
SOFTBYTE
Balance Sheet
September 30, 2017
Financial
Statements
SOFTBYTE
Balance Sheet
September 30, 2017
Balance sheet and
income statement
are needed to
prepare statement of
cash flows.
SOFTBYTE
Statement of Cash Flows
For the Month Ended September 30, 2017
Illustration 1-9
Financial statements
and their
interrelationships
Income Statement

Reports the revenues and expenses for a specific
period of time.

Lists revenues first, followed by expenses.

Shows net income (or net loss).

Does not include
investment and
withdrawal transactions
between the owner and
the business in
measuring net income.
LO 5
Owner’s Equity Statement

Reports the changes in owner’s equity for a specific
period of time.

The time period is the same as that covered by the
income statement.
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Balance Sheet

Reports the assets, liabilities, and owner's equity at a
specific date.

Lists assets at the top, followed by liabilities and owner’s
equity.

Total assets must equal total liabilities and owner's
equity.

Is a snapshot of the company’s financial condition at a
specific moment in time (usually the month-end or yearend).
LO 5
DO IT!
5
Financial Statement Items
Presented below is selected information related to Flanagan Company
at December 31, 2017. Flanagan reports financial information monthly.
Equipment
Cash
Service Revenue
Rent Expense
Accounts Payable
$10,000
8,000
36,000
11,000
2,000
Utilities Expense
Accounts Receivable
Salaries and Wages Expense
Notes Payable
Owner’s Drawings
$ 4,000
9,000
7,000
16,500
5,000
(a) Determine the total assets of at December 31, 2017.
(b) Determine the net income reported for December 2017.
(c) Determine the owner’s equity at December 31, 2017.
LO 5
DO IT!
5
Financial Statement Items
Presented below is selected information related to Flanagan Company
at December 31, 2017. Flanagan reports financial information monthly.
Equipment
Cash
Service Revenue
Rent Expense
Accounts Payable
$10,000
8,000
36,000
11,000
2,000
Utilities Expense
Accounts Receivable
Salaries and Wages Expense
Notes Payable
Owner’s Drawings
$ 4,000
9,000
7,000
16,500
5,000
(a) Determine the total assets of at December 31, 2017.
The total assets are $27,000, comprised of
•
Cash $8,000,
•
Accounts Receivable $9,000, and
•
Equipment $10,000.
LO 5
DO IT!
5
Financial Statement Items
Presented below is selected information related to Flanagan Company
at December 31, 2017. Flanagan reports financial information monthly.
Equipment
Cash
Service Revenue
Rent Expense
Accounts Payable
$10,000
8,000
36,000
11,000
2,000
Utilities Expense
Accounts Receivable
Salaries and Wages Expense
Notes Payable
Owner’s Drawings
$ 4,000
9,000
7,000
16,500
5,000
(b) Determine the net income reported for December 2017.
LO 5
DO IT!
5
Financial Statement Items
Presented below is selected information related to Flanagan Company
at December 31, 2017. Flanagan reports financial information monthly.
Equipment
Cash
Service Revenue
Rent Expense
Accounts Payable
$10,000
8,000
36,000
11,000
2,000
Utilities Expense
Accounts Receivable
Salaries and Wages Expense
Notes Payable
Owner’s Drawings
$ 4,000
9,000
7,000
16,500
5,000
(c) Determine the owner’s equity at December 31, 2017.
LO 5
Preparing Statements from a Worksheet
Illustration 4-7
Financial statements
from a worksheet
LO 1
Preparing Statements from a Worksheet
Illustration 4-7
Financial statements
from a worksheet
LO 1
Illustration 4-7
LO 1
LEARNING
OBJECTIVE
4
Identify the sections of a classified
balance sheet.

Presents a snapshot at a point in time.

To improve understanding, companies group similar
assets and similar liabilities together.
Standard Classifications
Illustration 4-20
Assets
Liabilities and Owner’s Equity
Current assets
Long-term investments
Property, plant, and equipment
Intangible assets
Current liabilities
Long-term liabilities
Owner’s (Stockholders’) equity
LO 4
The Classified Balance Sheet
Illustration 4-21
LO 4
The Classified Balance Sheet
Illustration 4-21
LO 4
Current Assets

Assets that a company expects to convert to cash or
use up within one year or the operating cycle, whichever
is longer.

Operating cycle is the average time that it takes to
purchase inventory, sell it on account, and then collect
cash from customers.
LO 4
Current Assets
Illustration 4-22
Usually listed in the order they expect to convert them into cash.
LO 4
Current Assets
Question
The correct order of presentation in a classified balance sheet
for the following current assets is:
a. accounts receivable, cash, prepaid insurance, inventory.
b. cash, inventory, accounts receivable, prepaid insurance.
c. cash, accounts receivable, inventory, prepaid insurance.
d. inventory, cash, accounts receivable, prepaid insurance.
LO 4
Long-Term Investments

Investments in stocks and bonds of other companies.

Investments in long-term assets such as land or buildings
that is not currently being used in operating activities.

Long-term notes receivable.
Illustration 4-23
LO 4
Property, Plant, and Equipment

Long useful lives.

Currently used in operations.

Depreciation - allocating the cost of assets to a number
of years.

Accumulated depreciation - total amount of
depreciation expensed thus far in the asset’s life.
LO 4
Property, Plant, and Equipment
Illustration 4-24
LO 4
Intangible Assets

Long-lived assets that do not have physical substance.
Illustration 4-25
LO 4
Current Liabilities

Obligations the company is to pay within the coming year
or its operating cycle, whichever is longer.

Usually list notes payable first, followed by accounts
payable. Other items follow in order of magnitude.

Common examples are accounts payable, salaries and
wages payable, notes payable, interest payable, income
taxes payable current maturities of long-term obligations.

Liquidity - ability to pay obligations expected to be due
within the next year.
LO 4
Current Liabilities
Illustration 4-26
LO 4
Long-Term Liabilities

Obligations a company expects to pay after one year.
Illustration 4-27
LO 4
Owner’s Equity

Capital

Revenues

Expenses

Withdrawals
Illustration 4-28
LO 4
DO IT! 4
Balance Sheet Classifications
The following accounts were taken from the financial statements of Callahan
Company.
Match each of the following accounts to its proper balance sheet
classification, shown below. If the item would not appear on a balance sheet,
use “NA.”
Current assets (CA)
Long-term investments (LTI)
Property, plant, and equipment (PPE)
Intangible assets (IA)
Current liabilities (CL)
Long-term liabilities (LTL)
Owner’s equity (OE)
LO 4