1d. Financial Statements

Question 1

1. What are financial statements?

2. How often are they prepared?

Answer 1

1. Financial statements = summaries of financial activities
2. They are prepared on a regular basis at the end of an accounting period - the accounting period is typically 1 year however it can be anywhere from 1 month to 1 year / any length of time for which records are maintained)

Question 2

1. What are examples of financial statements?

2. What is it important to do for financial statements?

Answer 2

1.
- income statement
- statement of owner’s equity 
- balance sheet
(These must be completed in this order)

2. It is very important to always check your numbers since an incorrect number will affect more than 1 statement.

Question 3

INCOME STATEMENT

1. What is an income statement?
2. What does it show?
3. How are these shown?
4. What is NET INCOME?
5. What is NET LOSS?

Answer 3

INCOME STATEMENT

1. = a summary of a business’s revenue and expenses for a specific period of time
2. It ONLY shows revenue and expenses
3. These should be listed in order from largest to smallest.
4. NET INCOME is realised when revenue exceeds expenses
5. NET LOSS is realised when expenses exceed revenue

Question 4

INCOME STATEMENT

1. What is revenue and how is it usually received?
2. What is it called when revenue > expenses?
3. What is it called when expenses > revenue?

Answer 4

INCOME STATEMENT

1. Revenue = the gross income received by an entity before expenses have been deducted (income may be received as cash or cash equivalent and is typically generated from the sale of goods or rendering of services for a particular period of time)
2. Net income
3. Net loss

Question 5

STATEMENT OF OWNER’S EQUITY

1. What is it?
2. What will it show?

Answer 5

STATEMENT OF OWNER’S EQUITY

1. = a summary of the changes that have occurred in the owner’s equity during a specific period of time
2. This statement will show either an INCREASE or DECREASE in the capital account

Question 6

BALANCE SHEET

1. What is it?
2. What is it important to remember?

Answer 6

BALANCE SHEET

1. = a list of the firm’s assets, liabilities and owner’s equity at a specific point in time
2. Accounting equation must be balanced: total assets = liabilities + owner’s equity