Intro to Financial Statements
Practice As You Learn
Financial Accounting
Introduction to Financial Statements
Practice as You Learn
You are expected to know if something is an asset, liability, revenue, or expense and how and where it is reported on the financial statements.
Do not memorize what category something falls in. Understand what it is and what makes something an asset, liability, revenue, expense
Elements:
Asset: Something that a company has – owns or controls, a “receivable” is an asset
Liability: Something that a company owes – the word “payable” indicates it is owed
Equity: What is owned by the owners of the company; assets less liabilities = equity
Revenue: Goods or services provided to a customer
Expense:
1) Use up an asset – prepaids, inventory, supplies
2) You were provided a service that you will pay for – employees work, electricity, advertising, interest, taxes, etc.
Gains/Losses: occur from selling an asset
Loss – get less than what you originally paid for it
Gain – get more than what you originally paid for it
Financial Statements:
Balance Sheet: Assets, Liabilities, Owner’s Equity
Show assets on the left and liabilities and owner’s equity on the right
Total assets must always equal total liabilities plus owner’s equity
Income Statement: Revenues and Expenses, Gains and Losses
List revenues first and then expenses underneath revenues
Revenues less Expenses = Net Income/Loss (profit or loss)
Cash Flow Statement: 3 categories of cash flows
Operating Activities: Net Income, current assets and current liabilities
(current means less than 1 year)
Investing Activities: long term assets (use more than 1 year)
Financing Activites: long term liabilities (pay later than 1 year)
receipts and payments from/to shareholders
Introduction to Financial Statements – Practice Problem 1 – What is it?
For each of the following items, state whether it is an asset (A), liability (L),
Owner’s equity (O), revenue (R), or expense (E)
______1. Computers
______2. Amounts that customers owe the company
______3. Land
______4. Owe on account
______5. Accrued expenses
______6. Retained earnings
______7. Trademarks
______8. Cost of goods sold
______9. Providing goods to customers
_____10. Salaries to employees
_____11. Equipment
_____12. Interest payable
_____13. Owe the bank
_____14,. Investments
_____15. Common stock
_____16. Advertising
_____17. Cash
_____18. Dividends paid
_____19. Items held to sell to customers
_____20. Providing services to customers
_____21. Prepaid insurance expense
Answer
Answers to Introduction to Financial Statements – Practice Problem 1 – What is it?
1. Computers – Asset
2. Amounts that customers owe the company – Asset
3. Land – Asset
4. Owe on account – Liability
5. Accrued expenses – Liability
6. Retained earnings – Owner’s Equity
7. Trademarks – Asset
8. Cost of goods sold – Expense
9. Providing goods to customers – Revenue
10. Salaries to employees – Expense
11. Equipment – Asset
12. Interest payable – Liability
13. Owe the bank – Liability
14,. Investments – Asset
15. Common stock – Owner’s Equity
16. Advertising – Expense
17. Cash – Asset
18. Dividends paid – Owner’s Equity
19. Items held to sell to customers – Asset
20. Providing services to customers – Revenue
21. Prepaid Insurance expense – Asset
Assets –
this is not an expense until time passes and the insurance is used up
Introduction to Financial Statements – Practice Problem 2 – Balance Sheet
The following items were taken from the accounting records of a company.
| Accounts Payable | 57,000 | Long-term investments | 35,000 |
| Accounts Receivable | 32,000 | Trademarks | 6,000 |
| Building | 255,000 | Accrued Expenses | 9,000 |
| Cash | 15,000 | Short-term Notes Payable | 35,000 |
| Equipment | 76,000 | Common Stock | 1,000 |
| Retained Earnings | ?? | Interest Income | 2,000 |
| Prepaid Expenses | 12,000 | Inventory | 82,000 |
| Sales | 123,000 | Dividends paid | 25,000 |
| Salary Expense | 22,000 | Cost of Goods Sold | 62,000 |
Prepare a balance sheet.
Answer
Answers to – Introduction to Financial Statements – Practice Problem 2 – Preparing a Balance Sheet
1st – Identify what each is and put an A, L, O.E, R, E. by the account
|
Accounts Payable
|
L
|
Long-term investments
|
A
|
|
|
Accounts Receivable
|
A
|
Trademarks
|
A
|
|
|
Building
|
A
|
Accrued Expenses
|
L
|
|
|
Cash
|
A
|
Short-term Notes Payable
|
L
|
|
|
Equipment
|
A
|
Common Stock
|
OE
|
|
|
Retained Earnings
|
OE
|
Interest Income
|
R
|
|
|
Prepaid Expenses
|
A
|
Inventory
|
A
|
|
|
Sales
|
R
|
Dividends paid
|
OE
|
|
|
Salary Expense
|
E
|
Cost of Goods Sold
|
E
|
2nd – Recognize that only assets, liabilities and owner’s equity are reported on
the balance sheet. Ignore revenues and expenses
3rd – List the assets on the left – list them in the order of liquidity-
List the liabilities on the right in the order of when they will be paid
List the owner’s equity underneath the liabilities and then total the two
Balance Sheet
For _________Company
As of the given date
|
Assets
|
Liabilities
|
||
| Cash |
15,000
|
Accounts Payable |
57,000
|
| Accounts Receivable |
32,000
|
Accrued Expense |
9,000
|
| Inventory |
82,000
|
Short Term Notes Pay |
35,000
|
| Prepaid Expenses |
12,000
|
Total Liabilities |
101,000
|
| Long Term Investments |
35,000
|
Owners Equity:
|
|
| Building |
255,000
|
Common Stock |
1,000
|
| Equipment |
76,000
|
Retained Earnings |
411,000
|
| Trademarks |
6,000
|
Total Owner’s Equity |
412,000
|
| Total Assets |
513,000
|
Total Liabilities & O.E. |
513,000
|
To find the amount for retained earnings:
Total the assets first. Assets have to equal Total Liabilities plus total Owners Equity
Assets are 513,000 Total Liab. + O.E must = 513,000 and for this to be, total O.E.
must be $412,000 (513,000 – 101,000) and therefore R.E. must be $411,000
Dividends Paid is not separately listed on the balance sheet, it is part
of retained earnings. (Beginning R.E + Profit – Dividends paid = Ending R.E.)
Introduction to Financial Statements – Practice Problem 3 – Income Statement
The following items were taken from the accounting records of a company
| Accounts Payable | 57,000 | Long-term investments | 35,000 |
| Accounts Receivable | 32,000 | Trademarks | 6,000 |
| Building | 255,000 | Accrued Expenses | 9,000 |
| Cash | 15,000 | Short-term Notes Payable | 35,000 |
| Equipment | 76,000 | Common Stock | 1,000 |
| Retained Earnings | 411,000 | Interest Receivable | 2,000 |
| Prepaid Expenses | 12,000 | Inventory | 82,000 |
| Sales | 123,000 | Dividends paid | 25,000 |
| Salary Expense | 22,000 | Cost of Goods Sold | 62,000 |
| Utility Expense | 8,000 | Income Tax Expense | 9,000 |
Prepare an income statement.
Answer
1st – Identify the revenues
Sales 123,000 Provided goods to customers
2nd – Identify the expenses
Salary expense 22,000 employees worked
Utilities expense 8,000 used utilities for the period
Income tax expense 9,000 government provided services
Cost of goods sold 62,000 inventory used to provide to customers
Prepaid expenses is an asset – paid ahead makes it a future benefit – it is not
an expense until it is used up or time passes
Accrued expenses is a liability – accrued means it has not been paid
Interest receivable is an asset – will receive cash in the future
3rd – List the revenues first and then list and subtract expenses
|
Sales
|
123,000
|
|
– Cost of Goods Sold
|
(62,000)
|
|
= Gross Profit
|
61,000
|
|
– Salary expense
|
(22,000)
|
|
– Utilities expense
|
(8,000)
|
|
Income before tax
|
31,000
|
|
– Income Tax Expense
|
(9,000)
|
|
= Net Income
|
22,000
|
Dividends paid are not shown on the income statement, it is part of retained earnings
Assets, liabilities and owner’s equity are never shown on the income statement
Introduction to Financial Statements – Practice Problem 4 – Cash Flow Statement
The following items occurred during the year. State where the item would be reported on the cash flow statement: Operating Activities (O), Investing Activity (I), or Financing
Activity (F)
_____1. Collections from customers
_____2. Payments to suppliers
_____3. Payments for income taxes
_____4. Payments for salaries
_____5. Proceeds from selling equipment
_____6. Purchase of Investments
_____7. Borrow from the bank
_____8. Issue stock to shareholders
_____9. Pay dividends to shareholders
_____10.Pay interest to the bank
_____11.Collect dividends from investments
_____12.Repay a long term notes payable
Answer
Answers to – Introduction to Financial Statements – Practice Problem 4 – Cash Flow Statement
O Collections from customers
O Payments to suppliers
O Payments for income taxes
O Payments for salaries
I Proceeds from selling equipment
I Purchase of Investments
F Borrow from the bank
F Issue Stock to shareholders
F Pay dividends to shareholders
O Pay interest to the bank
O Collect dividends from investments
F Repay a long term notes payable
Operating – Things that relate to day to day business, part of income, current assets and current liabilities
Investing – Things related to assets that are held more than one year
Financing – Things related to liabilities to be paid in > 1 year and owner’s equity