Accounting:
Financial Statements
o Financial statements as formal records that summarize the financial activities and
position of a business.
o They are audited to ensure accuracy for tax, financing, or investing purposes.
o Purpose: to provide stakeholders with information about the financial performance,
position, and cash flows of the business.
Components of financial statements:
1. Balance Sheet
o A snapshot of the company's financial position at a specific point in time.
o The basic equation of the balance sheet: Assets = Liabilities + Equity. This
equation represents the fundamental principle of double-entry bookkeeping,
where all the assets owned by a company are balanced by the sum of its
liabilities and equity.
o On the top half you have the company’s assets and on the bottom half its
liabilities and Shareholders’ Equity (or Net Worth).
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Accounting:
Financial Statements
o 3 Main Categories:
Assets
Liabilities
Equity
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Accounting:
Financial Statements
2. Income Statements
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Accounting:
Financial Statements
o Shows the revenues and expenses of the business over a specific period.
o Statement of operation/profit and loss
o 3 Main sections:
Revenues - the total income generated by a business from its primary
activities, such as selling goods or providing services to customers. It
represents the amount of money earned before deducting any
expenses.
Expenses - are the costs incurred by a business in order to generate
revenue. They include various items such as salaries, rent, utilities, cost
of goods sold (COGS), marketing expenses, and so on. Expenses are
subtracted from revenue to calculate profit.
Profit or loss / Gross profit or loss - the difference between revenue
and the cost of goods sold (COGS). It represents the profit a company
makes from its core business activities before deducting other
expenses such as operating expenses.
3. Cash flow statement
o Look at the cash position of the company. It answers it answers the questions;
How much of the organization’s cash goes to its creditors and shareholders?’
Does it keep enough for its own investment and growth?
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Accounting:
Financial Statements
o A record of cash inflows and outflows during a specific period.
o Demonstrates:
Where cash is being generated
Where cash is being used in the business
o 3 main sectors
Operations activity
Day-to-day business operations;
Revenues and expenses that have been collected and paid
during the year
Depreciation and amortization are not included.
Investing activities
Non-current assets that support the business: Property, plant
and equipment as well as Business acquisitions
Financing activities
Transactions regarding shares or debt. Company raises funds
by either borrowing or issuing shares
Direct method steps Indirect method steps
o Identify cash receipts from customers: o Start with net income from the income
This includes cash sales and collections statement.
from credit sales. o Adjust net income for non-cash items
o Determine cash payments to suppliers such as depreciation and amortization.
and employees: This includes payments o Adjust for changes in working capital
for inventory, operating expenses, and accounts (e.g., accounts receivable,
wages. accounts payable) by analyzing changes
o Calculate cash flows from other in balance sheet accounts.
operating activities: This may include o Add or subtract changes in non-cash
interest received, dividends received, current assets and current liabilities to
and other operating cash receipts and arrive at the net cash provided by
payments. operating activities.
o Report cash flows from investing and
financing activities separately.
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Accounting:
Financial Statements
o Summarize the cash flows from
operating activities to arrive at the net
cash provided by operating activities.
o Report cash flows from investing and
financing activities separately.
