INTRODUCTION TO
FINANCIAL
STATEMENTS
WEEK 3 MODULE 3
FINANCIAL
STATEMENTS
Summarized records of the financial activities of an
entity.
These are formal written reports which present the
financial condition or status, health, and performance
of the company.
Are essentially the report cards for businesses. They
tell the story, in numbers, about the financial health of
the business.
Are prepared by summarizing all the records of a
business's transactions, following generally accepted
accounting principles.
1. INCOME STATEMENT
Is also known as the Profit and Loss Statement. It
reports the company’s financial performance in
FOUR TYPES
terms of net profit or loss over a specified period.
FINANCIAL
Income statement is composed of the following two
elements:
STATEMENTS Income – What the business has earned over a
period (e.g. sales, revenue, etc.)
Expense – The periodic costs incurred by the
business to generate income (e.g. salaries and
wages, utilities rental charges, etc.)
Net Profit or Net Loss is arrived by deducting
expenses from income.
2. Statement of Changes in Equity
FOUR TYPES
The Statement of Changes in Equity details the
movement in owner’s equity over a period.
OF FINANCIAL The movement in owner’s equity is derived
STATEMENTS
from the following components:
Additional investment from the owner
Net Profit or loss during the period as
reported in the income statement
Withdrawal by the owner
3. Statement of Financial Position
Also known as the Balance Sheet. It presents the financial
position of an entity at a given date.
It comprises the following three elements:
Assets: Something a business owns or controls (e.g. cash,
inventory, plant and machinery, etc.)
Liabilities: Something a business owes to someone (e.g.
creditors, bank loans, etc.)
Equity: This represents the amount of capital that remains
in the business after its assets are used to pay off its
outstanding liabilities.
4. Cash Flow Statement
tracks the inflow and outflow of cash, providing
insights into a company's financial health and
operational efficiency.
The cash flows are classified into the following segments:
Operating Activities: Cash flow from daily business
operations, like sales and paying expenses.
Investing Activities: Cash flow from buying or selling
assets, such as equipment or property.
Financing Activities: Cash flow from taking out or
repaying loans, owner’s investment, additional
investment, and owner withdrawals.
IMPORTANCE OF THE VARIOUS TYPES OF
FINANCIAL STATEMENTS
Income Statement: Shows the business's profitability by detailing income and expenses. It
helps the owner understand if the business is making a profit or a loss.
Statement of Owner’s Equity: Shows changes in the owner’s capital over a period. It’s
important for understanding how much of the profit is reinvested in the business or withdrawn by
the owner.
Balance Sheet: Provides a snapshot of the business’s financial position, listing assets,
liabilities, and owner's equity. This helps the owner see what the business owns and owes at any
given time.
Cash Flow Statement: Tracks the flow of cash in and out of the business. It helps the owner
manage cash to ensure there’s enough to cover expenses and plan for future investments.
MEASUREMENT LEVELS
LIQUIDITY SOLVENCY PROFITABILITY STABILITY
Measures a company's Measures a company's Measures a company's Refers to a company's
ability to meet its short- ability to meet its long- ability to generate overall financial health
term financial term debts and profits from its and its ability to
obligations. Assets can financial obligations. It operations. withstand economic
be easily converted into shows whether a downturns.
company has enough
cash.
assets to cover its long-
term liabilities.
Thank You
