Introduction to Financial Statement

Form of Financial Statement

Accounting

Equation The Balance Sheet The Income Statement The Cash Flow Statement The statement of Stockholders Equity Statement of Retain Earnings
Foot notes and supplement information to financial statement

Balance Sheet
Mirrors

the Accounting Equation

Assets = Liabilities + Equity Uses of funds = Sources of funds

Assets

are listed in order of liquidity Liabilities are listed in order of maturity

Assets
To be reported on a balance sheet, an asset must

Be owned or controlled by the company

Generally, this means owning title to the asset

Must possess expected future benefits

Generally this means cash inflow Future benefits may mean the receipt of another asset or the reduction of a liability

Assets are Reported in Order of Liquidity

Liquidity refers to the ease of converting a noncash asset to cash. Asset portion of the balance sheet is divided into Current and Noncurrent Assets

Current assets comprise assets that can be converted to cash within a year Noncurrent assets (long-term assets) cannot be easily converted to cash within a year.

Liabilities
Liabilities

maturity

are listed in order of

Current Liabilities come due in less than a year. Noncurrent liabilities come due after a year.
Companies

desire more current assets than current liabilities this difference is called net working capital

Net Working Capital

Equity
Equity consists of:
Contributed Capital (cash raised from the issuance of shares) Earned Capital (retained earnings). Retained Earnings is updated each period as follows:

Income Statement

Income Statement
Revenues

are increases in net assets as a result of business activities. Expenses are the outflow or use of assets to generate revenues, including costs of products and services sold, operating costs like wages and advertising, and nonoperating costs like interest on debt.

Operating vs. Nonoperating

Operating

expenses are the usual and routine costs that a company incurs to support its main business activities Non-operating expenses relate to the companys financing and investing activities

Statement of Stockholders Equity

Statement

of Equity is a reconciliation of the beginning and ending balances of stockholders equity accounts. Main equity categories are:
Contributed capital Retained earnings Treasury stock

Statement of Cash Flows

Statement of cash flows (SCF) reports cash inflows and outflows Cash flows are reported based on the three business activities of a company:
1. Operating activities: transactions related to the operations of the business. 2. Investing activities: acquisitions and divestitures of long-term assets 3. Financing activities: issuances and payments toward equity,