Intro To Financial Statements Flashcards
Sole Proprietorship
- A business owned by one person
- Simple to set up
- gives owner control of business
- more favorable tax treatment
- personally liable for debts and obligations
Partnership
- owned by 2 or more people
- personally liable to debts and obligations
- often formed because multiple partners bring unique skills or resources
Corporation
- investors receive stock shares to indicate ownership claim and easier to transfer ownership
- business organized as a separate legal entity
- easier to raise funds
- higher taxes
- limited liability
Types of users: INTERNAL
Management of the company
Types of users: EXTERNAL
Public; don’t work for company
- investor
- creditors (bank)
- prospective employee
- prospective customer
Financial Reports
Financial statements include information about a company’s PAST performance
Types of Financial Statements
- Income statement
- Statement of Retained Earnings / Stockholder’s Equity Statement
- Balance Sheet
- Statement of Cash Flows
Income Statement
- statement of results of operations
- reports revenues, expenses, and net income (profit) or net loss of a specific period of time (i.e. only 2023)
- excludes revenues/expenses from prior periods
- lists company’s revenues followed by its expenses
Net Income FORMULA
REVENUES - EXPENSES = NET INCOME (LOSS)
Income Statement FORMAT
Company name
Income Statement
For the period ended 12/31/23
Revenues
Inflows from operating a company or money earned from doing business.
Main source of revenue: SALES REVENUE: amount charged to customers for products or services
Retained Earnings Statement
- net income retained in the corporation
- “saved net income” includes net income from prior years
- shows the amounts and causes in retained earnings for a specific period of time (same as I/S)
Retained Earnings Statements FORMULA
Beginning retained earnings
+/- net income
- dividends
= ended retained earnings
Dividends
Distributions of earnings (in either the form of stock or cash) to stockholders
Balance Sheet (Statement of Financial Position)
- reports assets, liabilities, and stockholders equity as a specific date (cumulative)
- occurs at a specific date
Accounting FORMULA
Assets = liabilities + stockholders equity
Assets - liabilities = stockholders equity
- accounting equation is the balance sheet formula or “financial picture of the company”
Sections of a Balance Sheet
Assets, liabilities, and stockholders equity
Assets
- listed first and in order of liquidity (how quickly it can be converted to cash)
- owned by the company
- have a value (future benefit)
- ex: cash, office supplies, computers, accounts receivables
Liquidity
How quickly it can turn to cash
Liabilities
What a company owes
Stockholders Equity
- owners share of the assets after liabilities are paid (“leftover” / “residual”)
1. Common Stock
2. Retained Earnings - law: creditors are paid before the owners (shareholders)
Common Stock
Money earned from selling stock
Retained Earnings
Money earned from running the company
Statement of Cash Flows
- reports why a company receives cash (resources) and used cash (uses) during a specific time period
- helps determine if a company has enough cash to operate and pay dividends
- all increases and decreases in cash are recognized in operating, investing, and financing activities
Operating Activites
Cash to and from most revenue and expense (I/S) items
Operating Activities INFLOW
Inflow: cash from
- customers (sales, rent)
- interest earned
- dividends received
Operating Activities OUTFLOW
Outflow: cash paid to/for
- suppliers (of inventory)
- raw materials
- employees (salaries)
- landlords for rent
- interest expenses
Investing Activities
Cash to and from the purchase of the resources a company needs to operate
Investing Activities INFLOW
Inflow: cash from
- sales of long term assets (such as land, buildings, equipment)
- sales of investments in other companies
- collections on loans made to other companies
Investing Activities OUTFLOW
Outflow: cash paid for/to
- purchase of a long term asset
- investments in other companies (purchase of stocks/bonds)
- loans to other companies
Financing Activities
- cash to and from external financing (selling stock or borrowing)
- generally related to stocks, bonds, and loans from banks
Financing Activities INFLOWS
Inflows: cash from
- sale of company’s own stock
- sale of corporate bonds
- bank loans
Financing Activities OUTFLOWS
Outflows: cash to/ for
- dividends to stockholders
- reacquire (purchase) company’s own stock (treasury stock)
- repayments of principal portion of loans, including payment of corporate bonds
Annual Report 10K
Must contain:
- Financial statements for the year
- Management Discussion and Analysis (MD+A)
- covers background of the company, trends, and risks - Notes of the Financial Statements
- explanation and details about items in the financial statements - Auditors Report
- CPA inspects company’s financial statements/records to determine if the company is following GAAP and presents a fair financial picture
- best report contains an unqualified “clean” opinion
Auditors Report
A report prepared by an independent outside auditor stating the auditors opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with GAAP
Unqualified Opinion “clean”
Statements are ok, best one
Qualified Opinion
Statements are ok but with one exception
Adverse Opinion
Not good; GAAP not followed
Disclaimer Opinion
- No opinion is provided
- not able to perform the audit
- very bad
