Financial Statements
The 4 general purpose financial statements are:
1. Income Statement
2. Balance Sheet
3. Statement of Owner’s Equity
4. Statement of Cash Flows
Accounting Concept: Adequate
Disclosure
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Businesses communicate financial
information to the public.
In order to better understand accounting as a
language, there must be detailed analysis of
financial statement.
Elements
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The items reported in the financial statements are
organized into classes or categories known as
elements.
There are ten elements of financial statements:
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Assets
Liabilities
Equity
Common stock
Revenue
- Expenses
- Distributions
- Net Income
- Gains
- Losses
Accounts
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Elements represent broad classifications as
opposed to specific items.
The sub classification of these elements are
called accounts.
Chart of Accounts
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Accounts are organized into ledgers.
A ledger is a group of accounts.
A general ledger contains all accounts
needed to prepare a financial statement.
Accounts are listed in the chart of accounts
and assigned an account number.
File Maintenance
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The procedure for arranging accounts,
assigning account numbers, and keeping
records current.
Account numbers are assigned based on the
account’s location in the general ledger.
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Asset – 100
Liability – 200
Owner’s Equity – 300
Revenue – 400
Expense – 500
Existing accounts are numbered by 10’s to
allow room for new accounts to be added.
Organization of accounts in the
chart of accounts
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Assets are organized by liquidity—the ease
with which an asset can be converted into
cash.
Liabilities are listed alphabetically.
Owner’s equity – capital, then drawing
Revenue – Sales
Expenses – are listed alphabetically.
Sample Chart of Accounts
Financial Statements: 4 common
reports
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Income Statement
Balance Sheet
Statement of Owner’s Equity
Statement of Cash Flows
Income Statement
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The report of a company’s operating
performance, in financial terms, over a period
of time.
Reports information in 5 major sections:
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Revenue
Costs of goods sold
Gross profit
Operating expenses
Net income or net loss
Income Statement Format
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Income statement has 3-line heading.
The income statement reporting date is for a
specified period of time.
The time period covered by the financial
statements is called the accounting period.
Elements of an Income Statement
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Revenue
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–
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Sales is the earnings from the
sale of goods or the
performance of service
Sales return and Allowances
is the refunds or adjustments
for unsatisfactory
merchandise or service
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Cost to the business for
merchandise or goods sold
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Calculated as Beginning
inventory + purchases –
ending inventory = cost of
goods sold
The difference between the net
sales and the cost of goods sold
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Calculated as Revenue –
Expenses
Operating Expenses
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Cost of goods sold
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Expenses
–
Gross profit on sales
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Overhead or cost incurred in
operating a business
Calculated by adding up all the
expenses
Net Income
–
Gross profit on sales – total
expenses
Tips
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Single v. Double underline
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Use a single underline for subtotals
Double underline for totals
Dollar signs
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Dollar signs are included for the first amount on a
list of values and for the totals. Not necessary for
each amount.
Statement of Owner’s Equity
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Also referred to as Statement of
Stockholder’s equity and Statement of
Retained Earnings.
Reports the way that net income and
distribution of dividends affects the
company’s financial position during the
accounting period.
OWNERS’ EQUITY STATEMENT
1
2
3
4
5
6
1. Heading
2. First Partner’s Name
3. First Partner’s
Ending Capital
4. Second Partner’s Name
5. Second Partner’s
Ending Capital
6. Total Owners’ Equity
7. Double Lines
7
Lesson 16-3, page 405
How to calculate Owner’s Equity on the
balance sheet
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To simplify the balance sheet, the capital
figure represents capital, sales and
expenses.
To calculate this:
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ending capital + sales – expenses.
Balance Sheet
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Describes the financial situation of a
company at a specific point in time.
List the assets of a business and the sources
of those assets.
The name ‘balance sheet’ comes from the
accounting equation.
Can be prepared at any point in time to show
the assets, liabilities and O.E. for a company.
Heading of Balance Sheet
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Name of Business
Name of Financial Statement
Specific Date
Major Headings of Balance Sheet
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Assets
Liabilities
Owner’s Equity
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Accounting Equation
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Assets = Liabilities + Owner’s Equity
Assets are on left; Liabilities & O.E. on right
Purpose of a Balance Sheet
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To show the assets owned by a company.
To show the liabilities owed by a company.
To represent a company’s net worth.
Elements of a Balance Sheet
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Assets
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Current assets—turned into cash within 1 year
Long-term assets—Used in transacting business,
more long-term in nature. Ex: buildings,
equipment.
Recorded at the total cost to acquire the asset
Liabilities
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Current liabilities—paid within 1 year
Long-term liabilities—paid in more than 1 year
Elements, cont.
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Owner’s equity—represents the amount of
financing provided by the owners of the
business and earnings.
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Contributed capital—invested by owner
Retained earnings—earnings/profits reinvested in
the business.
Statement of Cash Flows
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A financial statement that reports the cash
flows of a business for a fiscal period.
Useful to provide detailed information about
the sources and uses of cash in a business.
Statement of Cash Flows (cont.)
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Divides cash inflows (receipts) and outflows
(payments) into three primary categories of
cash flows in a typical business:
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Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
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Cash Flows from operating activities—
reports the amount of cash generated from
the sale of goods and services.
Cash Flows from investing activities—reports
the cash used to purchase plant assets and
other long-term assets.
Cash Flows from financing activities—reports
the cash generated by issuing long-term debt
and stock.
Relationship among financial
statements (See p. 308)
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The relationship among the financial statements is
imperative to understanding the components of each
statement.
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Net Income from the income statement results in an
increase in ending capital on the statement of owner’s
equity.
Ending capital from the statement of owner’s equity is the
value of owner’s equity on the balance sheet.
The change in cash of the Statement of Cash Flows added
to the beginning of the year in cash is equal to the end of
the year cash on the balance sheet.
Assignment:
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14.7.1 Matching Elements with Financial
Statements.
14.7.2 Classifying Accounts
14.7.3 Computing Missing Amounts
Relationships
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The net income from the income statement
results in an increase in ending capital on the
statement of owner’s equity.
Ending capital from the statement of owner’s
equity is the value of owner’s equity on the
balance sheet.
The change in cash of the Statement of Cash
Flows added to the beginning of the year in
cash is equal to the end of the year cash on
the balance sheet.
Summary of Financial Statements
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Financial Statement
Purpose
Structure
Examples of Content
See p. 309