Intro to Financial Statements
Key Things To Know
Introduction to Accounting
Introduction to Financial Statements
Key Things To Know
The Purpose of Financial Accounting is to:
1) Record 2) Summarize 3) Report transactions of the company
Transaction:
An act that creates an exchange of something for something else
- provide a service or goods to a customer in exchange for cash
- purchase a delivery truck, pay cash for the truck
- pay an employee for work
- pay the utility company for providing electricity
- receive money from the bank and agree to pay it back later
Most often the exchange is giving or receiving cash either now or in the future
Record:
Enter each transaction into a system – record what is increasing or decreasing
– use descriptive names for “accounts” to put things in categories
Summarize:
Net the impact of the increases and decreases for each item – “account”
The total of the “accounts” will be what you have and what you owe; what you have earned from providing goods and services and what it costs you to provide goods and services
Report:
Provide useful information to investors and creditors regarding cash flows, resources (assets/have), and obligations (liabilities/owe).
4 Primary Financial Statements are used:
- Balance Sheet
- Income Statement
- Statement of Stockholder’s Equity
- Statement of Cash Flows
Report to:
Internal Users: Managers who plan, organize and run the company
External Users: Investors who invest in the company
Creditors who loan money to the company
Financial Statements:
Balance Sheet:
States what your business owns (assets) and owes (liabilities) on a specific date.
Also shows the amount owned – assets less liabilities
Income Statement:
Shows how much the business earned during a period of time.
This is what you have earned from providing goods and services less what it costs you to provide goods and services
Statement of Owner’s Equity:
Shows the activity of shareholder’s (owners) during a period of time
Shows receipt of funds from shareholders and payments back to shareholders in the form of dividends.
Shows the earnings of the business that go to the shareholders (Some companies present a “statement of retained earnings” showing earnings and dividends paid only)
Cash Flow Statement:
Shows the source of cash and what the cash was used for during a period of time (Cash and Income are not the same)
What does each financial statement really tell you about the business?
Each statement has a heading that states the company name and the date or time period covered.
Balance Sheet:
What the company has and what they owe on a certain date along with the ownership interest
Income Statement:
How much the company earned during a specific period of time (monthly, quarterly, year)
Owner’s Equity:
What occurred that impacted the owners of the company during a specific period of time
Cash Flows:
How much cash was generated from day to day operations?
What the cash was used for?
Where additional cash came from and how much was received?
Additional Information on the Statement of Retained Earnings:
“Retained Earnings” is the amount of cumulative profits and losses kept by the company since the first day of operations.
Retained earnings changes with net income (profits and losses) and dividends paid to shareholders (owners)
Beginning Retained Earnings
+ Net Income or – Net Loss
– Dividends Paid
= Ending Retained Earnings
Additional Information on the Statement of Cash Flows:
The cash flow statement has 3 separate sections:
Operating Activities: directly related earnings from day to day business operations
Investing Activities: directly related to buying and selling assets used long term in the business
Financing Activities: directly related to borrowing and repaying debt and receipts and payments from/to owners
“Elements” that are reported on financial statements
Asset:
The company’s economic resources used to operate the business
What the company HAS
- Probable future economic benefit
- Owned or controlled by the company
- Resulting from a past transaction, something that has already occurred
The economic benefit is using the asset to generate future cash flows or the asset itself will convert to cash
Liability:
The company’s debts and obligations
What the company OWES
- Probable use of a future economic benefit (an asset)
- Owed
- Resulting from a past transaction
You will give up an asset to pay what you owe
Stockholder’s Equity:
Earnings kept in the company / financing provided by the owners
- Owner contributions to the company
- Less dividends paid to owners
- Plus profits and less losses, also called net income
Stockholder’s Equity is also equal to total assets less total liabilities
Revenues:
Earned from providing goods or services in exchange for an asset.
This is the amount the customer is expected to pay for the goods or services they received
A revenue occurs when the good/service is provided to the customer regardless of whether the customer has paid or not
Expenses:
Using an asset of the company to provide goods or services
What it costs the company to provide the goods or services to the customer.
A service or good is provided to the company that the company will have to pay for. The expense occurs when the company receives the service or the asset is used up, not when the company pays for the goods or service
Important:
Revenues and expenses do not occur when the cash is received or paid. They occur when the good or service is exchanged.
Revenues: the company gives the good or service
Expense: the company receives the service or uses up the asset
** Net Income (Revenues – Expenses) will not equal cash.
The Accounting Equation: Must always stay in balance
Assets = Liabilities + Stockholder’s Equity
Have = Owe + Own (Includes net profits)
What you have you owe for or own outright
Revenues
-Expenses
Net profit or loss
Generally Accepted Accounting Principles “GAAP”:
Guidelines established by various accounting standard-setting groups in consultation with accounting professionals that give guidance on
- What type of financial information must be provided
- What format to use to provide information
- How to measure assets, liabilities, revenues and expenses
“FASB” – Financial Accounting Standards Board
Is the primary accounting standards setting authority in the US
“IASB” – International Accounting Standards Board
Is the primary accounting standards setting authority for several countries outside of the US
“SEC” – Securities & Exchange Commission
The government agency that oversees US financial markets and accounting standards for public companies
Financial statements that follow consistent guidelines are comparable among companies and much easier to interpret for investors and creditors
Footnotes:
Additional information provided after the financial statements
3 types of footnotes:
- provides a description of the accounting rules followed
- provides more details for the items listed on the financial statements
- provides information on things not listed on the financial statements
Auditor’s Report:
A professional accountant examines the company’s financial statements and gives a report that determines if the statements are fairly stated in accordance with GAAP.