AFM 191 - Chp. 1.2 - intro to financial statements Flashcards
What’s the preparation order of financial statements
- income statement (profit + loss)
- statement of retained earnings
- balance sheet (financial position statement)
- cash flow statement
What’s the purpose, period and basic equation of the income statement
prepared for specific period: month, quarter, year
purpose: to understand a company’s profit/loss for a period
basic equation: total revenue - total expenses = net income
What’s the period, purpose and basic equation of the statement of retained eranings
period: prepared for a specific period; month, quarter, or year
purpose: to understand the change in retained earnings for a period
basic equation: beginning retained earnings + net income - current period dividends = ending retained earnings
What’s the period, purpose, and basic equation of the balance sheet
period: balances at a specific point in time
purpose: to understand the financial position at a particular point in time
basic equation: assets = liabilities + shareholder’s equity
what’s the period, purpose and basic equation of the cash flow statement
Prepared for a specific period: month, quarter, or year
purpose: to understand sources and use of cash during a period
basic equation: operating cash flows + investing cash flows + financing cash flows = net increase (or decrease) in cash for a period + cash balance beginning of the period = cash balance at the end of the period
Which stakeholders are income statements useful to?
external + internal to understand a company’s profit or loss for a particular period
Define income statement
financial statement prepared to understand a company’s profit or loss for a period.
provide examples of revenue accounts and define them
- service revenue - revenue from selling services to customers
- sales revenue - revenue from selling goods to customers
- interest revenue - revenue from lending on credit
- rent revenue - revenues from rent
Define the statement of retained earnings
financial statement prepared to understand a company’s change in retained earnings for a period.
what’s the purpose of the statement of retained earnings
provides financial statement user with the change in retained earnings
what does it mean when the current period net income is greater than the current period dividends paid to shareholders in the context of the statement of retained earnings
the ending retained earnings will eb high than the beginning retained earnings.
How to prepare for a statement of retained earnings
company obtains the beginning retained earnings balance (amount of earning left over from prior period after prior period dividends were paid out to the shareholders) and then net income is added to the beginning retained earnings and the current period dividends are deducted to obtain ending retained earnings.
What connects the balance sheet and statement of retained earnings?
the ending retained earnings is part of the shareholders equity account in the balance sheet
Define a balance sheet
financial statement prepared to understand a company’s financial position at a particular point in time.
allows the use to know the ending balances at a point in time.
what’s the importance of the balance sheet to an external stakeholders
analyze a balance sheet to understand if a company has a strong financial position before it makes a decision to lend money.
Define an asset in context of accounting and basic
an economic resources controlled by the entity resulting from past transaction and from which future economic benefits may be obtained.
what the company owns
provide examples of asset accounts
cash + cash equivalents
accounts receivables
inventory, prepaid expenses, property, plant, equipment
Define liabilities in accounting and basic context
what the company owes
an obligation of the entity arising rom past transactions, the settlement of which is expected to result in an outflow of economic benefits from the entity.
provide examples of liabilities
accounts payable, accrued expenses, long-term debt, bonds payable
define shareholders equity in accounting and basic context
the different between what the company owns and owes
equity is the residual interest in the assets of the entity after deducting all its liabilities.
Define a cash flow statement
financial statement prepared to understand the changes in cash flows for a period.
what’s the use of cash flow statement for internal stakeholders
to understand when additional cash is needed and take the necessary action to ensure the company does not run out of cash
what’s the use of the cash flow statement for external stakeholders
analyze cash flows to determine a company’s ability to pay them dividends and to assess whether a company is effectively investing its cash for future growth potential
what can companies use cash flows from operating activities for?
investing into long-term assets (new equipment)
what happens when companies don’t have sufficient operating cash flows
they need to sources additional cash from banks or investors
How does cash flow statement and balance sheet relate to each other?
ending cash is an asset in the balance sheet.
Define operating activites
business activities which result in changes to operating cash flows related to operating the core business
define investing activities
business activities which result in changes to investing cash flows related to purchasing or disposing long-term assets during a period
define financing activities
business activities which result in changes to financing cash flows related to raising capital
