A12 W4 Financial Statements Powerpoint Presentation

A ppt presentation about the four financial statements produced by accountants

1. The Financial Statements Learning Objectives : Discuss the need for financial statements. Define the four basic financial statements: income statement, balance sheet, statement of cash flows, and statement of stockholders’ equity.

2. The Need for Financial Statements Companies prepare and make available financial statements to help meet the needs of certain external users including: Creditors such as banks who are trying to decide whether or not to loan money to a company. Investors such as current or potential stockholders who are trying to decide whether to purchase or sell shares of stock in a company. These external users are interested in learning (1) how profitable the company is and (2) what is the company’s financial position (e.g. what assets does the company own and what debts does the company owe).  The 4 basic financial statements can provide this information.

3. 4 Basic Financial Statements BALANCE SHEET (Also called the statement of financial position) - shows the assets, liabilities, and stockholders’ (owner’s) equity of a business entity at a specific date. Assets - what the company owns. Examples: cash, inventory, accounts receivable, notes receivable, equipment, building, land. Liabilities – what the company owes (debts of the company). Examples: accounts payable, taxes payable, notes payable, bonds payable. Owner’s Equity – shows what is the value of the business to the owners ( O E =Assets – Liabilities)

4. 4 Basic Financial Statements INCOME STATEMENT - summarizes the revenues, expenses, and profitability (net income or net loss) of a business entity for a specific time period (such as a year, quarter, or month). Revenues – amounts received (or to be received) from the sales of goods/services to customers for the period. Examples: sales of merchandise for Sears, revenue earned when an accountant prepares your tax return. Expenses – amounts paid (or to be paid) for costs incurred to help generate revenue. Examples: CGS (Sear’s cost of buying the merchandise that they sold), rent expense for the office where the accountant works. Net Income = Revenues - Expenses

5. 4 Basic Financial Statements Statement of Cash Flows - Summarizes a business entity’s cash inflows and outflows for a specific time period (such as a year, quarter, or month). This statement has 3 categories: (1) Operating activities - cash revenue and cash expenses from normal business activities. Ex amples: cash from customers, cash paid for inventory, cash paid for rent. (2) Financing activities - cash to run the business obtained by borrowing , and cash paid for loan payments . Examples: cash from bank loan, cash from owner depositing more money .

6. 4 Basic Financial Statements Statement of Owner’s Equity: Provides information on a business ’s increase or decrease in owner’s equity . Shows money taken out by owner (drawing) or put in by owner (capital investment) .

7. Basic Accounting Equation ASSETS = LIABILITIES + EQUITY  A = L + E This equation asserts that assets must be in balance with the claims to the assets. This relationship is always true for any company. Point to remember  Each transaction affects at least two of a company’s accounts (this is called double-entry accounting).