Using All Four Financial Statements

Key Things To Know

Introduction to Accounting

Key Things To Know

 

Statement of Stockholder’s Equity: Reports changes to the stockholder’s equity accounts; transactions that impact the owners of the company.

Common Format:

Common
  Shares
Stock
   $
Paid In
Capital
Treasury
   Stock
Retained
Earnings
Balance, December 31, 2020 10,000 $1,000 $199,000 ($25,000) $26,000
Issued Common Stock 5,000 $  500 $ 64,500
Paid Dividends ($8,000)
Net Income $32,200
Repurchased Common Stock ($10,000)
Balance, December 31, 2021 15,000 $1,500 $263,500 ($35,000) $50,200

Note: A public company’s statement of stockholder’s equity lists many transactions that are not discussed in the introductory financial accounting class. Every transaction that impacts owners is listed on the statement of stockholder’s equity. The items listed on the left are the transactions generally discussed in an introductory financial accounting class.

The Cash Flow Statement:

The cash flow statement reports the cash generated from operations, how cash is invested in long-term assets, and how the company finances operations.

The Cash Flow Statement includes three separate sections: 1) operating activities, 2) investing activities, and 3) financing activities

Operating Activities:

Reports the cash generated from selling to customers and operating the business that can be used to grow the company or repay debt. .

Two different methods (formats) are used for the operating section:

1) Direct: States cash received and cash paid for specific items.
Cash received from customers
Cash received from investments
Cash paid for each major expense

2) Indirect:
Begins with net income (which is not cash)
States all the items are a difference in what is included in net income on the income statement and cash received or paid related to operations during the period.

Typical differences in net income and cash are:

1) “non cash” revenue and expenses (never received or paid in cash)
2) changes in current assets and current liabilities

Investing Activities:

Reports cash paid (purchases) or received (sold) related to long-term assets

The amount reported on the cash flow statement is the cash paid or received.

Financing Activities:

Reports cash related to long-term debt; borrowings or repayments

Reports cash related to owners; received from owners or paid to owners

The amount reported on the cash flow statement is the cash paid or received.

 

See the cash flow statement topic on this website for information on how to prepare the cash flow statement.

See the Balance Sheet and Income Statement Topics for further discussion on these two financial statements.

Using all of the financial statements to understand a company’s operations and financial position:

The four financial statements each present information in a different way:

Balance Sheet:

Cumulative, amounts are a running total to date.

The balance sheet answers questions related to what the company
HAS, OWES, or OWNS, TO DATE

Income Statement:

Net Earnings for a certain period of time.
Amounts are earned and incurred and are not the cash paid or received.

The income statement answers questions related to what the company has
EARNED or INCURRED during a PERIOD OF TIME.

 

Cash Flow Statement:

States the CASH the company received or paid during a certain period of time.

Cash from Operating Activities:
States the reconciled CASH from day to day operations.

Cash from Investing Activities:
States the CASH paid or received for all long-term assets.

Cash from Financing Activities:
States the CASH received from borrowings (debt) or paid to repay borrowings.
States the CASH paid to investors or received from investors.

Statement of Stockholders’ Equity:

States transactions directly with owners.
Amounts are for a certain period of time.

The statement shows one year on top of another.
The most current year is normally at the bottom of the statement.

A description of the transactions with owners is listed on the left side of the statement. The amount is in the column of the account that changed.