Introduction-to-Financial-Statements.pptx

Sure, let's go through the main concepts of financial statements, their advantages and disadvantages, and provide examples and relevant ratio calculations.
Main Financial Statements
1. Income Statement
2. Balance Sheet
3. Cash Flow Statement
4. Statement of Changes in Equity
1. Income Statement
Concept:
• Shows the company's revenues, expenses, and profits or losses over a specific period.
• Key components include revenues, cost of goods sold (COGS), gross profit, operating expenses, operating income, interest, taxes, and net income.
Advantages:
• Provides a clear picture of profitability.
• Helps in assessing operational efficiency.
• Useful for trend analysis over different periods.
Disadvantages:
• Can be manipulated through accounting practices.
• Does not provide a complete financial health picture (e.g., cash flow).
Example:
Sure, let's go through the main concepts of financial statements, their advantages and disadvantages, and provide examples and relevant ratio calculations.
Main Financial Statements
1. Income Statement
2. Balance Sheet
3. Cash Flow Statement
4. Statement of Changes in Equity
1. Income Statement
Concept:
• Shows the company's revenues, expenses, and profits or losses over a specific period.
• Key components include revenues, cost of goods sold (COGS), gross profit, operating expenses, operating income, interest, taxes, and net income.
Advantages:
• Provides a clear picture of profitability.
• Helps in assessing operational efficiency.
• Useful for trend analysis over different periods.
Disadvantages:
• Can be manipulated through accounting practices.
• Does not provide a complete financial health picture (e.g., cash flow).
Example:
Sure, let's go through the main concepts of financial statements, their advantages and disadvantages, and provide examples and relevant ratio calculations.
Main Financial Statements
1. Income Statement
2. Balance Sheet
3. Cash Flow Statement
4. Statement of Changes in Equity
1. Income Statement
Concept:
• Shows the company's revenues, expenses, and profits or losses over a specific period.
• Key components include revenues, cost of goods sold (COGS), gross profit, operating expenses, operating income, interest, taxes, and net income.
Advantages:
• Provides a clear picture of profitability.
• Helps in assessing operational efficiency.
• Useful for trend analysis over different periods.
Disadvantages:
• Can be manipulated through accounting practices.
• Does not provide a complete financial health picture (e.g., cash flow).
Example:
Sure, let's go through the main concepts of financial statements, their advantages and disadvantages, and provide examples and relevant ratio calculations.
Main Financial Statements
1. Income Statement
2. Balance Sheet
3. Cash Flow Statement
4. Statement of Changes in Equity
1. Income Statement
Concept:
• Shows the company's revenues, expenses, and profits or losses over a specific period.
• Key components include revenues, cost of goods sold (COGS), gross profit, op

1. UNDERSTANDING ACCOUNTING EQUATION AND ITS APPLICATIONS IN FINANCIAL ANALYSIS Financial statements are formal records of the financial activities and position of a business, person, or other entity. They give a clear overview of the financial health and performance of an organization. ma by mohamed Garane Sanei

2. Assets: Definition and Examples Definition Assets are resources with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide future benefit. Examples Common examples of assets include cash, accounts receivable, inventory, investments, and property.

3. Cash: Physical currency or money in a bank account that a company uses to conduct its business. Accounts Receivable: Amounts owed to the company by customers for goods or services provided on credit. Allowance for Doubtful Accounts: A contra-asset account that represents the estimated amount of uncollectible accounts receivable. Interest Receivable: Interest income that has been earned but not yet received. Prepaid Insurance: Insurance premiums that have been paid in advance and are recorded as an asset until the coverage period expires. Prepaid Rent: Rent that has been paid in advance and is recorded as an asset until the rental period expires.

4. Land: The cost of land owned by the company, which is recorded at its original purchase price. Equipment: Physical assets used in the operations of a business, such as machinery, vehicles, and computers. Accumulated Depreciation—Equipment: A contra-asset account that represents the total depreciation expense recognized on equipment since it was acquired. Goodwill: The excess of the purchase price of a business over the fair value of its identifiable net assets. Patents: Exclusive rights granted to the inventor of a new product or process to use and profit from the invention for a specified period

5. Liabilities: Definition and Examples Definition Liabilities are legal obligations or debt, arising from past transactions, that are settled by the transfer of economic benefits like money or goods. Examples Examples of liabilities include loans, accounts payable, bonds, and mortgages.

6. Notes Payable: Written promises to pay a specified amount of money at a future date. Accounts Payable: Amounts owed by the company to suppliers for goods or services purchased on credit. Unearned Service Revenue: Revenue received in advance for services that have not yet been provided. Salaries and Wages Payable: Amounts owed by the company to employees for work performed but not yet paid. Interest Payable: Interest expense that has been incurred but not yet paid. Dividends Payable: Dividends declared by a company's board of directors but not yet paid to shareholders. Mortgage Payable: Long-term debt secured by a mortgage on the company's assets

7. Owner's Equity: Definition and Examples 1 Definition Owner's equity represents the owner's investment in the business. It's the portion of the total value of a company’s assets that can be claimed by the owners. 2 Examples Examples of items included in owner's equity are owner's capital, retained earnings, and stock.

8. Owner’s Capital: The owner's equity in the business, representing the owner's investment in the company. Owner’s Drawings: Withdrawals of cash or other assets made by the owner of a business for personal use. Common Stock: The capital stock of a corporation that represents ownership in the company. Preferred Stock: A class of stock that typically has preferential rights over common stock, such as priority in dividend payments. Dividends: Distributions of earnings to shareholders, usually in the form of cash or additional shares of stock.

9. Revenue: Definition and Examples Definition Revenue is the income generated from normal business operations. It's the total amount of money received from the sale of goods or services. Examples Examples of revenue include sales revenue, service revenue, and interest revenue.

10. Service Revenue: Revenue generated by providing services to customers. Sales Revenue: Revenue generated by selling goods to customers. Sales Discounts: Discounts given to customers for early payment of invoices. Sales Returns and Allowances: Reductions in sales revenue for returned goods or allowances granted to customers for damaged or defective goods.

11. Expense: Definition and Examples Definition Expenses represent the cost of doing business. It includes all costs incurred to generate revenue such as wages, rent, utilities, and supplies. Examples Common examples of expenses are rent, utilities, salaries, advertising, and insurance.

12. Advertising Expense: The cost of advertising and promoting a company's products or services. Bad Debt Expense: An expense incurred when a company is unable to collect on accounts receivable. Cost of Goods Sold: The direct costs attributable to the production of goods sold by a company. Freight-Out: The cost of shipping goods to customers. Interest Expense: The cost of borrowing money, typically on loans or bonds. Maintenance and Repairs Expense: The cost of maintaining and repairing the company's assets. Rent Expense: The cost of renting or leasing property for the company's operations. Salaries and Wages Expense: The cost of paying employees for their work. Supplies Expense: The cost of supplies used in the company's operations. Utilities Expense: The cost of utilities, such as electricity, water, and gas, used in the company's operations.

13. Relationship between Assets, Liabilities, and Owner's Equity Assets Assets are financed by both liabilities and owner's equity. Liabilities Liabilities represent the debts and obligations a company owes. Owner's Equity Owner's equity reflects the value of the business to its owners.

14. Importance of Understanding Financial Statements 1 Decision Making Financial statements provide vital information for decision-making and strategic planning. 2 Investor Confidence Understanding financial statements can attract potential investors and shareholders. 3 Compliance Understanding financial statements is essential for regulatory compliance and tax requirements.

15. TRANSACTION (1). I NVESTMENT BY OWNER Ali starts a smartphone app development company which he names soft byte. On September 1, 2017, he invests $15,000 cash in the business. This transaction results in an equal increase in assets and owner’s equity. TRANSACTION (2). PURCHASE OF EQUIPMENT FOR CASH Soft byte purchases computer equipment for $7,000 cash . This transaction results in an equal increase and decrease in total assets, though the composition of assets changes.

16. TRANSACTION (3 ). PURCHASE OF SUPPLIES ON CREDIT Soft byte purchases for $1,600 from Mobile Solutions headsets and other computer accessories expected to last several months. Mobile Solutions agrees to allow soft byte to pay this bill in October.

17. TRANSACTION (4). SERVICES PERFORMED FOR CASH Soft byte receives $1,200 cash from customers for app development services it has performed. This transaction represents Soft byte’s principal revenue-producing activity. Recall that revenue increases owner’s equity. TRANSACTION (5). PURCHASE OF ADVERTISING ON CREDIT Soft byte receives a bill for $250 from the Daily News for advertising on its online website but postpones payment until a later date. This transaction results in an increase in liabilities and a decrease in owner’s equity.

18. TRANSACTION (6). SERVICES PERFORMED FOR CASH AND CREDIT Soft byte performs $app development services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account . This transaction results in an equal increase in assets and owner’s equity3,500 of. TRANSACTION (7). PAYMENT OF EXPENSES Soft byte pays the following expenses in cash for September: office rent $600, salaries and wages of employees $900 , and utilities $200 . These payments result in an equal decrease in assets and owner’s equity

19. TRANSACTION (8). PAYMENT OF ACCOUNTS PAYABLE Soft byte pays its $250 Daily News bill in cash. The company previously [in Transaction (5)] recorded the bill as an increase in Accounts Payable and a decrease in owner’s equity.

20. TRANSACTION (9). RECEIPT OF CASH ON ACCOUNT Soft byte receives $600 in cash from customers who had been billed for services [in Transaction (6)]. Transaction (9) does not change total assets, but it changes the composition of those assets.

21. TRANSACTION (10). WITHDRAWAL OF CASH BY OWNER ALI withdraws $1,300 in cash from the business for his personal use. This transaction results in an equal decrease in assets and owner’s equity.