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BASIC FINANCIAL
STATEMENTS
Introduction to Financial Statements
What is financial statement?
Because
Balance sheet provides investors with a snapshot of a company's
health as of the date provided on the financial statement.
If a company assets are large relative to liabilities, it's in
good shape. Conversely, if a company with a large amount of
liabilities relative to assets has risk to creditors.
The higher the debt ratio, the greater risk will be associated
with the firm's operation. In addition, high debt to assets ratio
may indicate low borrowing capacity of a firm, which in turn
will lower the firm's financial flexibility.
THE INCOME STATEMENT
What is Income Statement?
The income statement shows an information about the
revenues, expenses and profit that was generated as a result
of the business' operations for that period and it measures a
company's performance over a specific time frame.
business operations.
Cash from Investing: Cash used for investing in assets,
These accounting
Stable-Dollar principles support Going-Concern
Assumption cost as the basis Assumption
for asset valuation.
Assets
Assets == Liabilities
Liabilities ++ Owners’
Owners’Equity
Equity
$300,000
$300,000 == $80,000
$80,000 ++ $220,000
$220,000
Business transactions affect the elements
of the accounting equation:
EXAMPLE TRANSACTION.ppt
Let’s analyze some transactions for Abeba’s Care Service company
On May 1, Abeba and her family invested $8,000 in her Care Service company
and received 800 shares of stock.
These
These transactions
transactions
impact
impact the
the
Statement
Statement of
of Cash
Cash
Flows.
Flows.
These
These transactions
transactions
impact
impact the
the Income
Income
Statement.
Statement.
To explain how the income statement reports an enterprise’s financial
performance for a period of time in terms of the relationship of
revenues and expenses.
Investments
Investments by by and
and payments
payments to to the
the owners
owners
are
are not
not included
included on
on the
the Income
Income Statement.
Statement.
To explain how the statement of cash flows presents the change in cash
for a period of time in terms of the company’s operating, investing, and
financing activities.
These
These balances
balances will
will
appear
appear on
on the
the
Balance
Balance Sheet.
Sheet.
Abeba's Care Service Company
Balance Sheet
May 31, 2007
Assets Liabilities
Cash $ 4,125 Notes payable $ 13,000
Accounts receivable 75 Accounts payable 150
Tools & equipment 2,650 Owners' Equity
Truck 15,000 Capital stock 8,000
Retained earnings 700
Total assets $ 21,850 Total liabilities & equity $ 21,850
Assets
Assets == Liabilities
Liabilities ++ Owners’
Owners’ Equity
Equity
$21,850
$21,850 == $13,150
$13,150 ++ $8,700
$8,700
To explain the important relationships among the statement of financial
position, income statement, and statement of cash flows, and how
these statements relate to each other.
Relationships Among Financial
Statements
Date at Date at
beginning end of
of period Time period
Balance Balance
Sheet Sheet
Income Statement
Statement of Cash Flows
Financial Statement Articulation
Sole
Sole
Proprietorships Partnerships
Partnerships Corporations
Corporations
Proprietorships
Forms of Business Organization
Most business organizations are organized as a sole proprietorship, a
partnership or a corporation.
Sole proprietorship:- is unincorporated business owned by a
single person. It is separated from the other
affairs of its owner. It is common for small
retailer stores, farms, service business and
professional practices, like in law, medicine and
accounting.
Partnership: is unincorporated business owned by two or more
persons agree to act as partners (co-owners). It is widely
used for small business.
Corporation: is a type of business organization that is recognized
under the law as an entity separate from its owners.
GAAP can be applied to the financial statements of all three forms of
organization.
Characteristics of Business organizations
Sole proprietorship Partnership Corporation
Legal viewpoint Owner and business entity are not Owners and business entity Separate entity from owners
regarded as separate are not regarded as separate
Accounting viewpoint Business entity is separated from other Business entity is separated Business entity is separated
affairs of owner from other affairs of owners from other affairs of owners
Transferability of ownership Only by sale of entire business or Can sell all or a portion of Can easily transfer(sell) all or a
creation of different entity partnership interest portion of stock
Reporting Ownership Equity in the
Statement of Financial Position
Sole
Sole
Proprietorships
Proprietorships
Partnerships
Partnerships
Owners' equity
Capital stock $ 7,000
Corporations
Corporations Retained earnings 1,000
Total stockholders' equity $ 8,000