Primary Financial Statements
Basic financial statements:
Balance Sheet
Income Statement
Statement of Retained Earnings
Statement of Cash Flows
The Balance Sheet
• Summary of the financial position of a company at a
particular date
• Assets: cash, accounts receivable, inventory, land,
buildings, equipment and intangible items
• Liabilities: accounts payable, notes payable and
mortgages payable
• Owners’ Equity: net assets after all obligations have
been satisfied
The Balance Sheet
• What are the resources of the company?
• What are the company’s existing obligations?
• What are the company’s net assets?
Accounting Equation
Assets = Liabilities + Owners’ Equity
Resources Sources of Funding
Resources Creditors’ Owners’
to use to claims claims
generate = against + against
revenues resources resources
Sample Balance Sheet
Assets Liabilities
Cash $ 40 Accounts payable $ 50
Accounts receivable 100 Notes payable 150
Land 200 $200
Owners’ Equity
Total assets $340
Capital stock $100
Retained earnings 40
$140
Must Total liabilities
Equal and owners’ equity $340
The Income Statement
• Shows the results of a company’s operations over a
period of time.
• What goods were sold or services performed that
provided revenue for the company?
• What costs were incurred in normal operations to
generate these revenues?
• What are the earnings or company profit?
The Income Statement
Revenues
• Assets (cash or AR) created through business
operations
Expenses
• Assets (cash or AP) consumed through business
operations
Net Income or (Net Loss)
• Revenues - Expenses
McGraw-Hill/Irwin, 2003
The Example Company
Income Statement
For the Years Ended December 31, 2010 and 2011
2011 2010
Revenues:
Sales $100 $ 85
Other revenue 30 15
Total revenues $130 $100
Expenses:
Cost of goods sold $ 62 $ 58
Operating & admin. 16 12
Income tax 20 18
Total expenses $ 98 $ 88
Net Income $ 32 $ 12
Statement of Retained Earnings
An additional financial
Beginning retained earnings
statement that identifies
+ Net income changes in retained
earnings from one
– Dividends paid accounting period to the
next.
= Ending retained earnings
Net income results in: Dividends result in:
Increase in net assets Decrease in net assets
Increase in retained earnings Decrease in retained
Increase in owners’ equity earnings
Decrease in owners’ equity
Statement of Cash Flows
• Reports the amount of cash collected and paid out
by a company in operating, investing and
financing activities for a period of time.
• How did the company receive cash?
• How did the company use its cash?
• Complementary to the income statement.
• Indicates ability of a company to generate income
in the future.
Statement of Cash Flows
Cash inflows
• Sell goods or services
• Sell other assets or by borrowing
• Receive cash from investments by owners
Cash outflows
• Pay operating expenses
• Expand operations, repay loans
• Pay owners a return on investment
Match Classification of
Cash Flows
• Operating activities – Transactions and events
that enter into the determination of net income.
• Investing activities – Transactions and events that
involve the purchase and sale of securities,
property, plant, equipment, and other assets not
generally held for resale, and the making and
collecting of loans.
• Financing activities – Transactions and events
whereby resources and obtained from, or
repaid to, owners and creditors.
Operating Activities
Cash Inflow Cash Outflow
• Sale of goods or • Inventory payments
services • Interest payments
• Sale of investments • Wages
in trading securities • Utilities, rent
• Interest revenue • Taxes
• Dividend revenue
Investing Activities
Cash Inflow Cash Outflow
• Sale of plant assets • Purchase of plant assets
• Sale of securities, • Purchase of securities,
other than trading other than trading
securities securities
• Collection of principal
• Making of loans to
on loans
other entities
Financing Activities
Cash Inflow Cash Outflow
• Issuance of own stock • Dividend payments
• Borrowing • Repaying principal on
borrowing
• Treasury stock
purchase
Statement of Cash Flows
Operating Investing Financing
CASH Activities Activities Activities
INFLOWS
CASH
OUTFLOWS
Operating Investing Financing
Activities Activities Activities
The Example Company
Statement of Cash Flows
December 31, 2011
Cash Flows From Operating Activities:
Receipts 48
Payments (43) 5
Cash Flows From Investing Activities:
Receipts 0
Payments (4) (4)
Cash Flows Used By Financing Activities:
Receipts 10
Payments (6) 4
Net Cash Flow 5
Notes to the Financial Statements
• Notes are used to convey information required
by GAAP or to provide further explanation.
