Accounting 1: Financial Statements

Financial Statements

The financial statements are a set of accounting reports that we use to convey accounting information to outside users such as creditors and investors

income statement

The income statement is the financial statement that shows the profitability of the company for a period of time. gross profit - rev - exp - net income

retained earnings

represents net income earned by the corporation that is kept within the company for growth and expansion (rather than given to the stockholders in the form of a dividend).

liabilities

the debts that are owed by a company, those represent the liabilities of the organization

assets

the financial resources that are owned, one of the things that are found on the balance sheet, those represent the company's assets.

categories of cash flows

Operating Activities • Investing Activities • Financing Activities

Balance Sheet

The balance sheet is also referred to as the statement of financial position, and the basic idea behind the balance sheet is it is the financial statement that is going to show three main things: 1) The economic resources that are owned by a business; 2) the debts that are owed by the business; and 3) the amount of owner investment in the business.

two types of assets

current assets and long-term or non-current assets. 1.) Current assets, giving it a basic definition, represent assets that are expected to either be converted into cash or used up (expire) within one year from the date of the balance sheet. (CASH, ACCOUNTS RECEIVABLE, INVENTORY, SUPPLIES) 2.) Longer than one year in time. Examples of LT assets include 2 categories 1. P-P-E (land, building, equipment). ACCUMULATED DEPRECIATION IS A DECREASE TO PPE 2. Intangibles (patents and copyrights)

liabilities

• Debts owed by the business. • Represent creditor claims against the company's assets.

equity

And the amount of owners' investment in the company, that is the definition of equity

"moment of time" in balance sheet

And the balance sheet shows these things as of a specific point in time. The balance sheet is often referred to as a "snapshot."

investing activities

Cash inflows and cash outflows associated with the purchase or sale of long-term assets such as P-P-E. Examples of Investing Activities • Cash inflows: - From the sale of assets such as land, buildings, and equipment. • Cash outflows: - From the purchase of assets such as land, buildings, and equipment.

operating activities

Cash inflows and cash outflows associated with the primary operations of the business. Include: - The cash effects of transactions that create revenues and expenses and thus enter into the determination of net income.

financing activities

Cash inflows and cash outflows associated with the sources of funding the business. Include: - Obtaining cash from and paying cash to: → Creditors → Stockholders (owners) Examples of Financing Activities • Cash inflows: - From sale of company's own stock (common stock) - From borrowing money (i.e., a bank loan) • Cash outflows: - To stockholders as dividends - To creditors for repayment of funds borrowed

contributed capital

Contributed capital represents investments made by owners into the business through the purchase of the organization's stock. Often, the term common stock will be used in place of contributed capital.

current liabilities

Current Liabilities Liabilities expected to be paid within one year. Examples of Current Liabilities 1. Accounts Payable 2. Short-Term Notes Payable 3. Salaries Payable 4. Income Taxes Payable 5. Utilities Payable NOTE: #3, #4, and #5 above are examples of what is called an accrued liability.

equity

EQUITY The components of the equity section of a balance sheet depend on the type of business organization being used. For a corporation (i.e., a company that sells stock to its owners), there are two types of equity: 1. Contributed Capital 2. Retained Earnings

expenses

Expenses: • Costs incurred in the process of earning revenues Examples of Expenses 1. Cost of Goods Sold (cost of inventory sold) 2. Salaries Expense 3. Rent Expense 4. Utilities Expense 5. Interest Expense 6. Advertising Expense 7. Income Tax Expense

equity (2 components)

For a corporation there are two components of equity: 1. Contributed Capital (Common Stock) 2. Retained Earnings

long term liabilities

Long-Term Liabilities Debts that will be paid in longer than one year. Examples of Long-Term Liabilities 1. Long-Term Notes Payable 2. Mortgage Payable 3. Bonds Payable

revenues

Revenues: • Represent amounts earned during the accounting period (year). • May result from sale of merchandise, services, rental of property, or lending money. Examples of Revenues 1. Sales Revenue (result from sales of inventory) 2. Service Revenue 3. Rental Revenue 4. Interest Revenue 5. Dividend Revenue

statement of cash flows

STATEMENT OF CASH FLOWS The statement of cash flows simply shows the changes in cash for a period of time (the same period of time as that covered by the income statement). It provides information about: • Cash receipts (inflows) • Cash payments (outflows)

statements of owners equity

STATEMENT OF OWNERS'EQUITY The statement of owners'equity simply shows the changes in equity for a period of time (the same period of time as that covered by the income statement).

withdraw by owner

Withdrawals by owners of sole proprietorships and partnerships, like dividends in a corporation, are not considered to be an expense. All withdrawals by owners are simply treated as a reduction of owners'equity. In a corporation, dividends reduce retained earnings while in sole proprietorships and partnerships, withdrawals reduce contributed capita

fundamental accounting equation

assets = liabiliy + equity

dividends: expense or contra equity

contra equity