Financial Management CH.12
What is the difference between a balance sheet and an income statement?
A balance sheet reports assets, liabilities, and owner's equity as of a specific date. An income statement reports sales, expenses, and net profit or loss for a specified time period.
Income statement
A report of revenue, expenses, and net income or loss from operations for a specific period.
Balance sheet
A report that lists a company's assets, liabilities, and owner's equity at a specific point in time.
How has the process of maintaining financial records been affected by technology?
Also, businesses use computerized financial systems that complete the necessary mathematical calculations and compare those records with budgets.
The income statement
An income statement usually covers six months or a year, but may also encompass a shorter period such as a month. Revenue is all income received by the business during the period. Sources of income include the sale of products and services, plus interest earned from investments.
(FINANCIAL RECORDS) Type of records
Asset records Depreciation records Inventory records
Asset records
Asset records identify the buildings and equipment owned by the business, their original and current value, and the amount owed if money was borrowed to purchase the assets.
Maintaining financial records
Businesses use computerized financial systems that have templates for each financial record.
Cash records
Cash records list all cash received and spent by the business.
The left side of the balance sheet lists all assets. Assets are anything of value owned by the business. There are two common divisions of assets.
Current assets include cash and those items that can be readily converted to cash such as inventory and accounts receivable
Depreciation records
Depreciation records identify the amount assets have decreased in value due to their age and use.
The income statement
Expenses are all of the costs of operating the business during the period. Expenses include things such as rent, supplies, inventory, payroll, and utilities. The business has net income when revenue is greater than expenses. A net loss occurs when expenses are greater than income.
The balance sheet
Finally, owner's equity is the value of the business after liabilities are subtracted from assets. It shows how much the business is worth on the date the balance sheet is prepared. Another way of looking at owner's equity is that it shows the value of the investments owners have made in the business
Financial records
Financial documents that are used to record and analyze the financial performance of a business.
Maintaining financial records
Financial software completes the necessary mathematical calculations. It updates records and compares those records with budgets.
Inventory records
Inventory records identify the type and quantity of resources and products on hand along with the current value of each.
The balance sheet
Long term liabilities are debts that will continue for longer than a year. Current liabilities include payments owed to banks and other financial institutions for short-term loans. Also included are payments due to suppliers for inventory purchases, supplies, and inexpensive equipment. Long-term liabilities are debts owed for land, buildings, and expensive equipment.
The balance sheet
Long-term assets (also known as fixed assets) are the assets with a life span of more than a year. Common fixed assets are land, buildings, equipment, and expensive technology
How has the process of maintaining financial records been affected by technology?
Most financial information is collected using point-of-production and point-of-sale technology and sent electronically to the people who prepare the financial records.
Maintaining financial records
Much of the information is now collected using point-of-production and point-of-sale technology such as scanners, touch screens, and personal digital assistants (PDAs).
Payroll records
Payroll records contain information on all employees of the company, their compensation, and benefits.
Records of accounts
Records of accounts identify all purchases and sales made using credit. An accounts payable record identifies the companies from which credit purchases were made and the amounts purchased, paid, and owed
FINANCIAL STATEMENTS
Reports that sum up the financial performance of a business are financial statements. A company reports its assets, liabilities, and owner's equity on the balance sheet
Tax records
Tax records show all taxes collected, owed, and paid.
Maintaining financial records
Technology is changing the way financial information is collected, prepared and maintained.
The balance sheet
The balance sheet is often prepared every six months or once a year. The assets, liabilities, and owner's equity for a specific date are listed on the balance sheet
The balance sheet
The right side of the balance sheet is divided into two categories. Liabilities are amounts owed by the business to others. As with assets, there are two types of liabilities. Current liabilities are those that will be paid within a year.
How has the process of maintaining financial records been affected by technology?
The software can even complete what-if comparisons to help managers determine the impact of changes in budgets and financial performance.
FINANCIAL STATEMENTS
The three most important elements of a company's financial strength are its assets, liabilities, and owner's equity. In simple terms, assets are what a company owns, liabilities are what a company owes, and owner's equity is the value of the owner's investment in the business.
Owner's equity
The value of the business after liabilities are subtracted from assets; the value of the owner's investment in the business.
The financial sheet
Three other key financial elements for a business are the amounts of sales, expenses, and profits. Sales, expenses, and profits (or losses) for a specific time period are reported on the company's income statement.
Liabilities
What a company owes.
Assets
What a company owns; anything of value owned by a business.