Module 2 Flashcards
4 Key Financial Statements
[Used to periodically report on a company’s business activities]
- Balance sheet
- Income statement
- Statement of stockholder’s equity
- Statement of cash flows
Leading of each statement: Company Name, Statement title, date or time period
- One-year or annual period is common [there is also semi-annual, quarterly, and monthly reporting periods, they are also relatively common]
- Accounting, or fiscal year
Balance sheet
-Lists the company’s investments and sources of financing using the accounting equation [point in time]»there’s beginning of period sheet(s) OR end of period balance sheet(s).
-Reflects cumulative history of a company’s activities.
-Reports a company’s financial position AT A POINT IN TIME.
-Summarizes the result of the company’s investing and financing activities by listing amounts for assets, liabilities, and equity.
-Amounts listed in balance statement carry over from one fiscal year and to the beginning of the next fiscal year.
-Balance sheet based on accounting equation which is also called the BALANCE SHEET EQUATION
ASSETS= LIABILITIES + EQUITY
Income statement
-Which reports the results of operations [over a period of time]
Statement of stockholder’s equity
-Which details changes in owner financing [over a period of time]
Statement of cash flows
-Which details the sources and uses of cash (at a point in time)
Balance sheet equation (accounting equation a balance sheet is based on)
Assets=liabilities + equity
Income statement
-“STATEMENT OF INCOME, STATEMENT OF EARNINGS, STATEMENT OF OPERATIONS, STATEMENT OF PROFIT AND LOSS”
- Reports the results of a company’s operation activities over a period of time.
- Details amounts for revenues and expenses and the difference between those two amounts is net income.
- Amounts listed in the income statement do not carry over.
- Reports a company’s financial position over a PERIOD OF TIME.
- “STATEMENT OF INCOME, STATEMENT OF EARNINGS, STATEMENT OF OPERATIONS, STATEMENT OF PROFIT AND LOSS”
Revenue
- Revenue is an increase in equity that results from selling goods or providing services to customers.
- Expense is the cost incurred to generate revenue.
- Net income is the increase in equity after subtracting expenses from revenues
revenues - expenses = net income [increase in equity]
Cost of goods sold and GROSS
-For manufacturing and merchandising companies, the cost of goods sold is an important expense that is typically disclosed separately in the income statement immediately following revenues.
Gross—refers to an amount before subtracting subtotal
Gross profit—sales or revenues [cost of goods sold]
Cost of goods sold—cost of products including labor, materials, and overhead.
Statement of stockholder’s equity “statement of equity”
- Reports changes in equity accounts over a period of TIME.
- Dividends reported in the statement of equity.
Dividends
- (Reported in the statement of equity.)
- Dividends are the sum of money divided among a number of people, such as the part of a company’s profits paid to its shareholders or winnings from a football pool.
- Contributed capital (includes common stock and additional paid-in capital)
- Retained earnings (includes cumulative net income or loss and deducts dividends)
- Other stockholder’s equity
Retained earnings
-Represents the income, “earned capital”, a company has earned.
=the amount of income retained
-Represents income the company has earned since its inception, minus dividends it has paid to its shareholders.
Statement of cash flows
-Reports net cash flows from operating, investing, and financing activities over a period of time.
- *Cash is critical to operations because it is necessary for purchasing resources and paying bills.
- Cash is king.
!! Both cash flow and net income are important for making business decisions.
-They each capture different aspects of the firm’s performance and together help financial statement users better understand and assess a company’s past, present, and future business activities.
Information beyond financial statements:
- Management Discussion and Analysis (MD&A)
- Independent Auditor Report
- Financial Statement footnotes
- Regulatory filings, including proxy statements and other SEC (U.S. Securities and Exchange Commission)
Summary:
- Introduce the 4 key financial statements including the balance sheet, income statement, and statement of stockholder’s equity, and statement of cash flows.
- The 4 basic financial statements used to periodically report the company’s progress are the balance sheet, the income statement, the statement of stockholder’s equity, and the statement of cash flows.
- The statements articulate with one another.
- The balance sheet: reports the company’s financial position at a point in time. It lists the company’s asset, liability, and equity items and it typically aggregates similar items.
- The income statement reports the firm’s operating activities to determine income earned and thereby the firm’s performance over a period of time.
- The stockholder’s equity statement reports the changes in key equity accounts over a period of time.
- The statement of cash flows reports the cash flows into and out of the firm from its operating, investing, and financing sources over a period of time.
