Using All Four Financial Statements
Practice As You Learn
Introduction to Accounting
Using All Four Financial Statements
Practice as You Learn
Statement of Stockholder’s Equity: Reports changes to the stockholder’s equity accounts; transactions that impact the owners of the company.
1) The description of the transaction is on the left side.
2) Each stockholder’s equity account has its own column.
3) The amount is reported in the column of the account that changes.
4) The beginning and ending balances agree to the balance sheet for each account.
| Common Shares |
Stock $ |
Paid In Capital |
Treasury Stock |
Retained Earnings |
|
| Balance, December 31, 2020 | 10,000 | $1,000 | $199,000 | ($25,000) | $26,000 |
| Description of trans. | 5,000 | $ 500 | $ 64,500 | ||
| Description of trans. | ($8,000) | ||||
| Description of trans. | $32,200 | ||||
| Balance, December 31, 2021 | 15,000 | $1,500 | $263,500 | ($25,000) | $50,200 |
The Cash Flow Statement
The cash flow statement reports the cash generated from operations, cash invested in long-term assets, and how the company finances business operations (with debt or selling ownership.)
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 that can be used to grow the company or repay debt.
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.
Example:
| Proceeds from selling land | 150,000 |
| Purchases of equipment | (36,000) |
| Cash generated from investing activities | 114,000 |
Financing Activities:
Reports cash related to long-term debt; borrowings or repayments
Reports cash related to owners; received from owners or paid to owners
Example:
| Proceeds from borrowing from banks | 15,000 |
| Repayment of loans to banks | (225,000) |
| Proceeds from issuing common stock | 50,000 |
| Dividend payments | ( 25,000) |
| Cash generated from financing activities | (185,000) |
Using all of the financial statements to understand the company’s operations and financial position:
The four financial statements each present information in a different way. Different information may be presented for the same item on more than one statement.
Let’s review the information each statement presents.
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.
Steps to Take to Interpret the Financial Statements
(help for doing the problems using company financial statements):
1. Read the question and determine what account the question is referring to.
2. Determine if the amount that is being asked for is “to date” or “during this year”?
a. “To date” will always be on the balance sheet
b. “owed” or “have” will always be on the balance sheet
c. “During this year” will never be on the balance sheet and could be on any of the other three financial statements (see 3.)
3. If the question asks for an amount “during this year” determine if it is asking about:
a. “earned” or “incurred” during the period?
Always answered on the income statement.
b. “cash” paid or received during the period?
Always answered on the cash flow statement
c. “transactions with an owner” during the period?
Always answered on the statement of stockholders’ equity
(If the transaction with the owner is in cash, it will also be on the cash flow statement.
Example:
How much is owed to suppliers to date?
Owed means it is a liability; to suppliers means “accounts payable”
“To date” means it will be on the balance sheet because this is the only statement that gives amounts cumulative to date.
The answer will be the amount on the balance sheet for accounts payable.
Example:
How much was earned from selling products only during this year?
Earned from selling products only is gross profit (sales – cost of goods sold)
“Earned” “during this year” means it will be on the income statement.
The answer will be the amount of gross profit reported on the income statement.
Example:
How much was paid to owners (stockholders) during the current year?
Paid to stockholders is called dividends.
Paid indicates CASH
CASH paid during the current year will be an amount on the cash flow statement.
Amounts paid to owners will be in the financing section.
The answer is the dividends paid reported in the financing section of the cash flow statement.
The amount for dividends on the statement of stockholder’s equity may be different because it is the amount promised, not the amount paid.
Practice Problem 1.
State which section of the indirect cash flow statement will report the following transactions. Operating Section (O), Investing Section (I) Financing Section (F)Not reported on a separate line item on the Cash Flow Statement (N)
1. ________ Income earned during the period
2. ________ Depreciation expense
3. ________ Purchase of manufacturing equipment
4. ________ Dividends paid to shareholders
5. ________ Borrowing from the bank
6. ________ Interest expense
7. ________ Cash received from the sale of long-term investments
8. ________ Repay loans
9. ________ Cash received from the sale of a building
10. _________Change in accounts receivable
11. _________ Interest income
12. _________ Purchase an automobile by signing a note payable due in 3 years (no cash is paid)
13. _________ Change in current liabilities
14. _________ Purchase of treasury stock
15. _________ Gain on sale of long-term investments
Answer
1. _O__ Income earned during the period
2. _O__ Depreciation expense (non-cash expense)
3. _I__ Purchase of manufacturing equipment (long-term asset)
4. _F__ Dividends paid to shareholders (with owners)
5. _F__ Borrowing from the bank (long-term liabilities)
6. _N__ Interest Expense (included in NI, not reported separately)
7. _I__ Cash received from the sale of long-term investments (L/T asset)
8. _F__ Repay loans (long-term liability)
9. _I__ Cash received from the sale of a building (long-term asset)
10. _O__ Change in accounts receivable (current asset)
11. _N__ Interest income (included in NI, not reported separately)
12. _N__ Purchase an automobile by signing a note payable due in 3 years
(no cash is paid: non-cash transaction)
13. _O__ Change in current liabilities
14. _F__ Purchase of treasury stock (with owners)
15. _O__ Gain on sale of long-term investments (non cash item)
Practice Problem 2.
State the transactions that occurred with owners that is reported on the following statement of stockholder’s equity.
| Common Shares |
Stock $ |
Paid In Capital |
Treasury Stock |
Retained Earnings |
|
| Balance, December 31, 2020 | 10,000 | $1,000 | $199,000 | ($25,000) | $26,000 |
| 1) | 5,000 | $ 500 | $ 25,000 | ||
| 2) | ($8,000) | ||||
| 3) | $20,000 | ||||
| 4) | ($6,800) | ||||
| Balance, December 31, 2021 | 15,000 | $1,500 | $224,000 | ($13,000) | $19,200 |
Answer
1) Issued Common Stock: ownership was exchanged for cash
2) Purchased the company’s own stock from previous owners
3) Sold treasury stock owned by the company to outside owners (again)
4) The company incurred a net loss for the period
Practice Problem 3.
State the financial statement and the account name or line item that will be used to answer each of the following questions.
A. How much does the company owe suppliers; expected to be paid in 30 days?
B. How much is owed to banks and financing institutions that is payable within the next year, to date?
C. How much did the company spend to acquire its own stock during the current year?
D. How much do customers owe the company that is due within 30 days, to date?
E. How much cash does the company have in the bank or invested for less than 90 days with no interest rate risk?
F. How much was incurred to acquire customers, ship products, and run the day to day operations of the business during the current year?
G. How much has been contributed by stockholders, to date?
H. How much total cash was paid for dividends during the current year?
I. How much does the company have in assets that are held for sale to customers?
J. What is the company’s profit or loss less dividends paid, cumulative to date?
K. How much must be paid to the federal government for earnings for the current year?
L. What was the total price of goods provided to customers during the current year?
M. What is the cost of the products that were sold to customers during the current year?
N. How much has been paid for services not yet provided to the company, to date?
O. How much cash was paid to repay long term debt during the current year?
P. How much cash was generated from buying and selling long term assets during the current year?
Q. How much did the company earn for each share of common stock outstanding during the current year?
Answer
A. How much does the company owe suppliers; expected to be paid in 30 days?
Owe: Balance Sheet
Current Liability; accounts payable
B. How much is owed to banks and financing institutions that is payable within
the next year, to date?
Owe: Balance Sheet
Current Liability; short-term notes payable
C. How much did the company spend to acquire its own stock during the year?
Spend, during the year: Cash Flow
Financing Section: Owners
Repurchase of stock
D. How much do customers owe the company that is due within 30 days, to date?
Owe: Balance Sheet
Current Asset; accounts receivable
E. How much cash does the company have in the bank or invested for less than 90 days with no interest rate risk?
Have: Balance Sheet
Current Asset; cash and cash equivalents
F. How much was incurred to acquire customers, ship products, and run the day to day operations of the business during the current year?
Incurred: Income Statement
Day to Day; Total Operating Expenses
(Do not include cost of goods)
G. How much has been contributed by stockholders to date?
To date: Balance Sheet
Owner’s Equity; common stock and paid in capital added together
H. How much total cash was paid for dividends during the current year?
Cash Paid: Cash Flow Statement
Financing section; owners
Cash paid for dividends
I. How much does the company have in assets that are held for sale to customers?
Have: Balance Sheet
Current Assets; inventory
J. What is the company’s profit or loss less dividends paid, cumulative to date?
To Date: Balance Sheet
Stockholder’s Equity: Retained Earnings
K. How much must be paid to the federal government for earnings for the current year?
Earnings: Income Statement
Tax Expense (or provision for tax)
L. What was the total price of goods provided to customers during the current year?
Earned (goods provided):
Income Statement
Sales
M. What is the cost of the products that were sold to customers during the current year?
Expense (assets used):
Income statement
Cost of Sales or Cost of Goods Sold
N. How much has been paid for services not yet provided to the company, to date?
Asset (future benefit): Balance Sheet
Prepaid Expenses
O. How much cash was paid to repay long term debt during the current year?
Cash: Cash Flow Statement
Long-term Debt; Financing section
Repayment of L/T Debt
P. How much cash was generated from buying and selling long term assets during the current year?
Cash: Cash Flow Statement
Long-term Assets; Investing section
Total reported amount
Q. How much did the company earn for each share of common stock outstanding for the current year?
Earned: Income Statement
Earnings per Share