formal financial statements income statement
DESCRIPTION
TRANSCRIPT
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FORMAL FINANCIAL STATEMENTS
Income statement
Statement of stockholders’ equity– Retained earnings
Balance sheet
Statement of cash flows
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INCOME STATEMENTStatement of Earnings
Report on the operations of the entity
Listing of Revenues, Gains, Expenses, & Losses
Covers a period of time
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STATEMENT OF STOCKHOLDERS’ EQUITY
“Retained earnings”
Report on the changes in Retained Earnings
Covers a period of time
Link between the Balance Sheet & Income Statement
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STATEMENT OF FINANCIAL POSITION
Balance Sheet Report on the financial position of
the entity
Listing of Assets, Liabilities, & Owners’ Equity items
A specific point in time
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STATEMENT OF CASH FLOWS
Report on financial activities of the entity
Shows the changes in cash (and cash equivalents)
Covers a period of time
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“FINANCIAL STATEMENT PACKAGE”
Formal financial statements
Footnotes
Supplementary information
Attestation reports
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OTHER INFORMATION
Footnotes– Refers to a specific item or section
Supplementary information– All additional disclosures
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ATTESTATION REPORTS
Management report
Report of the audit committee
Report of the independent auditor (CPA)
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BASIC ACCOUNTING EQUATION[Corporation]
Assets = Liabilities + Stockholders’ Equity
Contributed (Paid-in) Capital
Retained Earnings
Net Income (+) Dividends (-)
Revenues & Gains (+) Expenses & Losses (-)
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RELATIONSHIP OF FINANCIAL STATEMENTS
AssetsLiabilitiesOwners’ equity
AssetsLiabilitiesOwners’ equity
Revenues - Expenses=
Net Income (or Loss)
Balance 1-1-x2(+/-) Net income or loss - Dividends = Balance 12-31-x2
Income StatementFor Year 2
Statement of Retained EarningsFor Year 2
Balance Sheet12-31-x1
Balance Sheet12-31-x2
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IMPLEMENTATION PRINCIPLES
Cost/Exchange Transactions
Revenue Realization
Matching
Full Disclosure
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The Quick CorporationRetained Earnings Statement
Total stockholders' equity
Accounts payable
The Quick CorporationBalance Sheet
January 1, 2003
Assets Liabilities
CashCash $15,000$15,000 $84,000
Accounts receivable 4,000 Notes payable
Inventories 86,000 Total liabilities
Land 2,000 Stockholders' equity
Plant and Equipment 100,000 Capital stock $85,000
Retained earningsRetained earnings $18,000$18,000103,000
Total liabilities and
Total assets $207,000 stockholders' equity
The Quick CorporationIncome Statement
For the Year Ended 12/ 31/03
Revenues
Fees earned $541,000
Expenses
Cost of goods sold $215,000
Salary expense 85,000
Rent expense 45,000
Supplies expense 15,200
Utilities expense 75,000
Insurance expense 1,200
Interest expense 3,000
Total expenses 439,400
Income before taxes 101,600
Income taxes 40,640
Net IncomeNet Income $ 60,960$ 60,960
For the Year Ended December 31, 2003Retained Earnings, January 1,Retained Earnings, January 1,
Add: Net Income for the yearAdd: Net Income for the yearSubtotal
Less: Dividends paid
Retained earnings, December 31, 2003Retained earnings, December 31, 2003
The Quick CorporationStatement of Cash Flows
For the Year Ended December31, 2003
Cash flows from operating activities Cash revenues 535,000$ Less: Cash expenses 485,000
Net cash provided by operating activities 50,000$ Cash flows from investing activities Purchase of land (30,000) Sale of equipment 10,000
Net cash used by investing activities (20,000) Cash flows from financing activities Issuance of capital stock 10,000 Less: Issuance of dividends (15,000)
Net cash used by financing activities (5,000)
Cash balance January 1, 2003Cash balance January 1, 2003 $15,000$15,000
Cash balance December 31,Cash balance December 31, $40,000$40,000The Quick Corporation
Balance SheetDecember 31, 2003
Assets
$40,000$40,000Liabilities
CashCash Accounts payable $80,000
Accounts receivable 5,000 Notes payable 20,000
Inventories 90,000 Total liabilities $100,000
Land 10,000 Stockholders' equity
Plant and Equipment 125,000 Capital stock $145,000
Retained earningsRetained earnings $25,000$25,000 Total stockholders' equity 170,000
Total liabilities and
Total assets $270,000 stockholders' equity $270,000
ARTICULATIONARTICULATION
$18,000$18,000
$60,960$60,960
$78,960
(53,960)
$25,000$25,000
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ELEMENTS OF FINANCIAL STATEMENTS
Assets
Liabilities
Equity (Owners’)– Investments by
Owners– Distributions to
Owners
Revenues Expenses Gains Losses Comprehensive
Income
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BALANCE SHEET
Resources (Assets)
Resources (Assets)
Claims against resources (Liabilities)
Claims against resources (Liabilities)
Remaining claims accruing to owners
(Owner’s Equity)
Remaining claims accruing to owners
(Owner’s Equity)
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BALANCE SHEET ELEMENTS Assets
– Economic resources with probable future value– Controlled by management– Resulting from past transactions
Liabilities– Probable future sacrifices of economic benefits
(debts/obligations)– Require transfer of assets– Terms of obligations are specified– Result from past transactions
Equity– Residual interest in the assets of the entity– “Net assets”– Represents the “investment” by owners
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BALANCE SHEET CLASSIFICATIONS
Assets– Current Assets– Long-term
Investments– Property, Plant,
and Equipment– Intangible
Assets– Other Assets
Liabilities– Current Liabilities– Long-term
Liabilities
Stockholders’ Equity– Contributed Capital– Retained Earnings– Other Items
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BALANCE SHEET
LiquidityLiquidity - length of time until assets are converted to cash or until a liability must be paid
Solvency – the ability of a firm to meet its debts as they come due
Financial flexibilityFinancial flexibility - ability of company to manage its cash flows (deal with emergencies or take advantage of unexpected opportunities)
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THE INCOME STATEMENT
Describes a company’s operating performance for a specified period of time
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INCOME STATEMENTELEMENTS
Revenues– Inflows of assets (settlement of liabilities)– From delivery or production of goods or rendering of
services Gains
– Increases to equity– From peripheral or incidental transactions
Expenses– Outflows of assets (incurrance of liabilities)– Consumption or expiration of assets in an attempt to
generate revenue Losses
– Decreases in equity– From peripheral or incidental transactions
Earnings per share– Basic – Fully diluted
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INCOME STATEMENT“Multiple-Step”
Operations section– Gross margin (Sales - Cost of goods
sold)– Operating expenses
Other items (“nonoperating”) “Special items” Net income - “the bottom line” Earnings per share
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INCOME STATEMENT“Multiple-Step”
Items within “Income from continuing operations”
• Unusual OR infrequent gains and losses
Below “Income from continuing operations”
• Discontinued Operations• Extraordinary items (unusual AND
infrequent)• Cumulative effect of “Changes in Accounting
Principles”
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Income Statement (Multiple-Step)
Operations
Other
Specialitems
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Revenue Principle
Revenue should be recognized in the financial statements when . .
It is earned, and …
It is realized or realizable.
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REVENUE RECOGNITION POINTS
Design and production,construction in progress,minerals discovered
Goods completedand ready for sale,contract complete
Delivery ofproduct or
service
Cash collectedfor goods or
services
Right ofreturn expires
Recognition before delivery
Recognition after delivery
Recognitionat delivery
Percentage-ofcompletion method
Productionmethod
Completedcontractmethod
Pointof salemethod
Installment method
Costrecovery method
Right ofreturn
expiration method
RELEVANCE RELIABILITY
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Matching
Once revenues are determined, the expenses incurred in attempting to generate the revenue should be recognized.
As revenues are earned, certain assets are consumed and services are used.
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Expense Classification
Direct
Period
Allocated
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EXPENDITURES vs. EXPENSES
Assets as ofJan. 1, 2003
Expendituresduring 2003
Directassociation
withrevenue
Assets as of12-31-03
Associationwith
activities
Associationwith
future
No
No
Expenses of 2003Yes
Yes
Yes
No
Example: Cost of goods sold
Example: Office expenses
Example: Obsolete merchandise
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BUSINESS CYCLECollect cash
from customer
Purchase materials
Convert materialsinto finished product
Inspect product
Store productin warehouse
Receive orderfrom customer
Ship product& invoice customer
Customerreceives item