Module 2:
Introducing Financial
Statements and
Transaction Analysis
Balance Sheet
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Reflects the Accounting Equation
Assets = Liabilities + Equity
Uses of funds = Sources of funds
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Assets are listed in order of liquidity
Liabilities are listed in order of maturity
Equity consists of Contributed Capital and
Retained Earnings
Assets
To be reported on a balance sheet, an asset must
1.
Be owned (or controlled) by the company
2.
Must possess expected future economic benefits
Examples of Current Assets
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Cash—currency, bank deposits, and investments with an
original maturity of 90 days or less (called cash equivalents);
Marketable securities—short-term investments that can be
quickly sold to raise cash;
Accounts receivable, net—amounts due to the company from
customers arising from the sale of products and services on
credit (“net” refers to uncollectible accounts explained in
Module 6);
Inventory—goods purchased or produced for sale to customers;
Prepaid expenses—costs paid in advance for rent, insurance,
advertising or other services.
Examples of Long-term Assets
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Property, plant and equipment (PPE), net—land, factory
buildings, warehouses, office buildings, machinery, motor
vehicles, office equipment and other items used in operating
activities (“net” refers to subtraction of accumulated
depreciation, the portion of the assets’ cost that has been
transferred from the balance sheet to the income statement,
which is explained in Module 6);
Long-term investments—investments that the company does
not intend to sell in the near future;
Intangible and other assets—assets without physical
substance, including patents, trademarks, franchise rights,
goodwill and other costs the company incurred that provide
future benefits.
Examples of Current Liabilities

Accounts payable—amounts owed to suppliers for goods and
services purchased on credit.
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Accrued liabilities—obligations for expenses that have been
incurred but not yet paid; examples are accrued wages payable (wages
earned by employees but not yet paid), accrued interest payable
(interest that is owing but has not been paid), and accrued income
taxes (taxes due).
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Unearned revenues—obligations created when the company
accepts payment in advance for goods or services it will deliver in the
future; also called advances from customers, customer deposits, or
deferred revenues.
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Short-term notes payable—short-term debt payable to banks or
other creditors.
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Current maturities of long-term debt—principal portion of
long-term debt that is due to be paid within one year.
Net Working Capital
Examples of Noncurrent Liabilities
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Long-term debt—amounts borrowed from creditors that are
scheduled to be repaid more than one year in the future; any
portion of long-term debt that is due within one year is
reclassified as a current liability called current maturities of long-term
debt. Long-term debt includes bonds, mortgages, and other long-term
loans.
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Other long-term liabilities—various obligations, such as
pension liabilities and long-term tax liabilities, that will be settled
a year or more into the future. We discuss these items in later
modules.
Equity
Equity consists of:

Contributed Capital (cash raised from the
issuance of shares)
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Earned Capital (retained earnings). Retained
Earnings is updated each period as follows:
Examples of Equity Accounts
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Common stock—par value received from the original sale of common
stock to investors.
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Preferred stock—value received from the original sale of preferred
stock to investors; preferred stock has fewer ownership rights compared
to common stock.
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Additional paid-in capital—amounts received from the original sale
of stock to investors in addition to the par value of common stock.
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Treasury stock—amount the company paid to reacquire its common
stock from shareholders.
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Retained earnings—accumulated net income (profit) that has not been
distributed to stockholders as dividends.
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Accumulated other comprehensive income or loss—accumulated
changes in equity that are not reported in the income statement (explained
in Module 9).
Income Statement
When are Revenues and Expenses Recognized?
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Accrual Accounting:
Revenue Recognition Principle—recognize
revenues when earned
 Matching Principle—recognize expenses when
incurred
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Operating vs. Nonoperating
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Operating expenses are the usual and
customary costs that a company incurs to
support its main business activities
Nonoperating expenses relate to the
company’s financing and investing activities
Statement of Cash Flows
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Statement of cash flows (SCF) reports cash inflows
and outflows
Cash flows are reported based on the three business
activities of a company:
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Cash flows from operating activities - Cash flows from
the company’s transactions and events that relate to its
operations.
Cash flows from investing activities - Cash flows from
acquisitions and divestitures of investments and long-term
assets.
Cash flows from financing activities - Cash flows from
issuances of and payments toward borrowings and equity.
Cash Flow from Operations
Articulation of Financial Statements
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Financial statements are linked within and
across time – they articulate.
Balance sheet and income statement are
linked via retained earnings.
Recording transactions
• Understand basic recording of transactions.
• Pay $100 wages in cash:
• Cash assets are reduced by $100, and wage expense of $100 is
reflected in the income statement, which reduces income and
retained earnings by that amount.
Wages Expense
$100
Cash
$100
• All transactions incurred by the company during the accounting
period are recorded similarly.
Adjusting Accounts
Information at the SEC
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Form 10-K – Annual Report
Form 10-Q – Quarterly Report
For 8-K—Significant events, as change in officers,
business, auditor, control of company, bankruptcy
Form 4—insider transactions
Global Accounting

Balance Sheet The most visible difference is that the typical
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IFRS-based balance sheet is presented in reverse order of
liquidity.
Income Statement The most visible difference is that GAAP
requires three years’ data on the income statement whereas IFRS
requires only two.