Financial Statements
INCOME STATEMENT &
BALANCE SHEET
What Is a Financial
Statement ?
Income Statement
Income Statement - It presents financial record of a
company’s revenues and expenses, and profits over a
period of time.
It also gives firm’s financial performance in terms of
revenues, expenses, and profits over a given time
period.
It focus on revenues and costs associated with
revenues.
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The operating section of an income statement
includes revenue and expenses.
The non-operating section includes revenues and
gains from non-primary business activities also
expenses that are either unusual or infrequent,
finance costs like interest expense, and income
tax expense.
Reading an Income Statement
Sales XXX
(-) Cost of goods sold XXX
XXX
Gross Profit
Operating Expenses
+ General & Administrative Expenses XXX
+Selling & Marketing Expenses XXX
+Research & Development Expenses XXX XXX
Operating Income XXX
Interest Expenses XXX
Income Before Tax XXX
(-) Taxes XXX
Net Income Available to Shareholders
XXX
Why Income Statement ?
The income statement is one of the major financial
statements used by accountants and business
owners.
It shows the profitability of a company during the time
interval specified in its heading
It helps in identifying Risks and Opportunities &
forecast future performance for :-
Owners
Investors
Creditors
Competitors
Usefulness
Evaluate past performance.
Predicting future performance.
Help assess the risk or uncertainty of
achieving future cash flows.
Limitations
Companies omit items that cannot be
measured reliably.
Income is affected by the accounting
methods employed.
Income measurement involves judgment.
Balance Sheet
•A financial statement that summarizes a
company's assets, liabilities and shareholders'
equity at a specific point in time.
•The accounting balance sheet is one of the major
financial statements used by accountants and
business owners.
• It is also referred to as the statement of
financial position.
Functions of a Balance Sheet
A Balance Sheet exhibits the true financial position of a firm at a
particular date.
Financial position can be ascertained clearly with the help of
Balance Sheet.
It provides valuable information to the management for taking
better decision through ratio analysis.
Balance Sheet helps in knowing past and present position of an
enterprise. It may be called the horoscope of the concern.
It is a mirror of a business.
Components of Balance sheet
Assets – Its anything tangible or intangible which is
owned or leased by a business.
Liability – Its any obligation which a company owes to
another business entity
Owner’s equity - all claims of the proprietor, partners,
or stockholders against the assets of a firm, equal to
the excess of assets over liabilities.
Basic accounting equation - relationship that states
that assets equal liabilities plus owners’ equity.
Reading a Balance sheet
Assets Liabilities
Current Assets Current Liabilities
Cash Accounts payable
Accounts receivable Accrued Expenses
Inventories IT Payable
Prepaid Expenses Short Term debt
Fixed Assets Non Current Liabilities
Land & Building Bonds Payable
Equipments Long Term Borrowings
Investments Owner's Equity
Common Stock
Goodwill Retained earnings
Why Balance sheet
•A balance sheet offers a way to look inside your business and
outline what it is really worth. A balance sheet is different from
a measure of profit and loss.
• It’s a list of assets and liabilities. Any good balance sheet
includes some basics:
1) What the business owns (real estate, vehicles, office
equipment, etc.)
2) Revenue you expect to take in (accounts receivable)
3) Expenses you expect to pay out (accounts payable)
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The balance sheet is used to assess the value of
your business at any given point
It helps to keep track of finances
It helps for showing it to investors & Bank
Managers
It is also useful for annual accounts too.
Limitations of Balance Sheet
It is prepared on a historical cost basis. Changes in prices are not
considered.
Window-dressing may be done in Balance Sheet.
Historical Cost of Balance Sheet does not convey fruitful
information.
Different assets are valued according to different rules.
It cannot reflect the ability or skill of staff.
It is measured in terms of money or money’s worth. That is, only
those assets are recorded in it which can be expressed in money.
In inflationary trend, if the readers are not expert may mislead.
Balance Sheet has some fictitious assets, which have no market
value. Such items are unnecessarily inflate the total value of assets.
Formulas
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