Task Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University Less Lesson 9: Financial Statements Learning objectives 1. Learn what financial statements are and how these accounting tools work in their future profession 2. Be acquainted with the functions and formats of these financial statements 3. Learn some details relating to preparation of these financial statements 4. Explain important relationships among the balance sheet, income statement, and cash flow statement, and how these statements relate to each other Teaching hours Students major in accounting: 9 hours Others. 6 hours Teaching contents: Opening Story The financial statement sits imposingly in front of you, a stream of numbers rolling endlessly down the page. You're a new board member, studying the numbers, hoping to decipher their meaning. Then you're hit with the accounting jargon: balance sheets and income statements; cash basis and accrual basi You think you hear the financial statements quietly laugh at you, and you begin to wonder if the board ould hire a psychiatrist instead of an accountant Dont despair. Financial statements may seem confusing initially, but they're not as difficult as you think. heres a look at the basics “ Show me the money!” Cuba Gooding Jr. uttered an immortal line in the movie Jerry Maguire, "Show me the money! " Well, that is what financial statements do. They show you the money The questions are: Do they show you where a companys money came from? Do they show you where it went, and where it is now. How accountants make all these ends satisfied? What Are the Financial Statements? Organizations report their accounting information to internal and external users in the form of financial statements. Statements reveal an organization's financial health and performance. The financial statement is a picture of the company in financial terms. Each financial statement relates to a specific date or covers a particular period
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Lesson notes Lesson 9: Financial Statements Learning objectives 1. Learn what financial statements are and how these accounting tools work in their future profession 2. Be acquainted with the functions and formats of these financial statements 3. Learn some details relating to preparation of these financial statements. 4. Explain important relationships among the balance sheet, income statement, and cash flow statement, and how these statements relate to each other Teaching hours Students major in accounting: 9 hours Others: 6 hours Teaching contents: Opening Story The financial statement sits imposingly in front of you, a stream of numbers rolling endlessly down the page. You’re a new board member, studying the numbers, hoping to decipher their meaning. Then you’re hit with the accounting jargon: balance sheets and income statements; cash basis and accrual basis. You think you hear the financial statements quietly laugh at you, and you begin to wonder if the board should hire a psychiatrist instead of an accountant. Don’t despair. Financial statements may seem confusing initially, but they’re not as difficult as you think. Here’s a look at the basics. “Show me the money!” Cuba Gooding Jr. uttered an immortal line in the movie Jerry Maguire, “Show me the money!” Well, that is what financial statements do. They show you the money. The questions are: * Do they show you where a company’s money came from? * Do they show you where it went, and where it is now. * How accountants make all these ends satisfied? What Are the Financial Statements? Organizations report their accounting information to internal and external users in the form of financial statements. Statements reveal an organization’s financial health and performance. The financial statement is a picture of the company in financial terms. Each financial statement relates to a specific date or covers a particular period
ask Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University Stock resoures and obligations at a point in time: Balance sheet Flow/activity over a period of time: Income statement, Statement of cash flows The instructor might facilitate some discussion on the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements How Are Financial Statements Prepared? The first step in understanding financial statements is to determine whether they were prepared on a cash, accrual, or modified cash accounting basis. Why? Financial statements vary greatly depending on the accounting method. The reader must know which accounting method was used in order to accurately read the statement The three methods are defined as follows. Cash Basis. Cash basis accounting is similar to a personal checkbook. Financial records track when cash is received or paid out. Income is recorded when a deposit is made to the bank. Expenses are recorded when a check is written to pay a bill Cash basis financial statements are easy to understand and to prepare. The disadvantage, however, is they don't give a full picture of the financial condition. The records omit information on unpaid bills or uncollected as Accrual basis accounting tracks any and all transactions, even if cash is not received or paid out. For example, income is recorded when the dues are assessed, not necessarily when they are collected. The same is true for expenses. Expenses are recorded when they are incurred. For example, if the association buys new equipment, the purchase is recorded even if the bill has not been paid. Because it tracks all income and expenses, accrual basis accounting more accurately records the financial activity of a particular time period Modified Cash Basis. Most associations use modified cash basis accounting for their record keeping It is a compromise between the cash basis and accrual basis. With this method, most transactions are recorded on the cash basis, but some are logged on an accrual basis. For example, accounts receivable (amounts owners owe the association) and income commonly are recorded as they are billed (accrual basis Expenses are recorded as the bills are paid(cash basis). Other accrual adjustments, such as prepaid expenses and income tax accruals, are not mad Modified cash basis is less complex than accrual basis financial statements. During the annual review audit, however, a Cpa often must convert the financial statements to accrual basis What Are the functions of Financial Statements Accounting information is conveyed through a standardized set of reports. The four fundamental financial statements are the income statement, statement of retained earnings, balance sheet, and statement Useful for imvestment decisions. (All financial statements) Comprehensible. (Allfinancial statements) About economic resources and claims on resoures Balance Sheet
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Stock/ resources and obligations at a point in time: Balance sheet. Flow/activity over a period of time: Income statement, Statement of cash flows. The instructor might facilitate some discussion on the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements. How Are Financial Statements Prepared? The first step in understanding financial statements is to determine whether they were prepared on a cash, accrual, or modified cash accounting basis. Why? Financial statements vary greatly depending on the accounting method. The reader must know which accounting method was used in order to accurately read the statement. The three methods are defined as follows: Cash Basis. Cash basis accounting is similar to a personal checkbook. Financial records track when cash is received or paid out. Income is recorded when a deposit is made to the bank. Expenses are recorded when a check is written to pay a bill. Cash basis financial statements are easy to understand and to prepare. The disadvantage, however, is they don’t give a full picture of the financial condition. The records omit information on unpaid bills or uncollected assessments. Accrual Basis. Accrual basis accounting tracks any and all transactions, even if cash is not received or paid out. For example, income is recorded when the dues are assessed, not necessarily when they are collected. The same is true for expenses. Expenses are recorded when they are incurred. For example, if the association buys new equipment, the purchase is recorded even if the bill has not been paid. Because it tracks all income and expenses, accrual basis accounting more accurately records the financial activity of a particular time period. Modified Cash Basis. Most associations use modified cash basis accounting for their record keeping. It is a compromise between the cash basis and accrual basis. With this method, most transactions are recorded on the cash basis, but some are logged on an accrual basis. For example, accounts receivable (amounts owners owe the association) and income commonly are recorded as they are billed (accrual basis). Expenses are recorded as the bills are paid (cash basis). Other accrual adjustments, such as prepaid expenses and income tax accruals, are not made. Modified cash basis is less complex than accrual basis financial statements. During the annual review or audit, however, a CPA often must convert the financial statements to accrual basis. What Are the Functions of Financial Statements? Accounting information is conveyed through a standardized set of reports. The four fundamental financial statements are the income statement, statement of retained earnings, balance sheet, and statement of cash flows. Useful for investment decisions. (All financial statements) Comprehensible. (All financial statements) About economic resources and claims on resources (Balance Sheet)
ask Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University About financial performance during a period(Income Statement) About cash flows(Statement of Cash Flows The financial statements can help you to better understand the performance and position of a business, so that the students can be directed to participate in the in-class discussion on the following topics How well did the company perform (or operate)during the period? 2. Why did the company's retained earnings change during the period? 3. What is the company's financial position at the end of the period? 4. How much cash did the company generate and spend during the period? What Financial Statements Are Required by the GAaPs This section will explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles First of all, to make it clear to the students that some financial statements are required by the regulators, we review the concept of GAAP here. The rules that make acceptable accounting practices are referred to as Generally Accepted Accounting Principles(GAAP). Information presented using these principles is considered to be relevant, reliable, consistent and comparable INCOME STATEMENT A summary of an entity's results of operation for a specified period of time is revealed in the income tatement, as it provides information about revenues generated and expenses incurred. The differences between the revenues and expenses are identified as the net income or net loss This financial statement is use to explain how the income statement reports an enterprises financial performance for a period of time in terms of the relationship of revenues and expenses BALANCE SHEET The balance sheet focuses on the accounting equation by revealing the economic resources owned by an entity and the claims against those resources(liabilities and owners equity). The balance sheet is prepared as of a specific date, whereas the income statement and statement of retained earnings cover a period of time This financial statement demonstrates how certain business transactions affect the elements of the accounting equation: Assets= Liabilities+ Shareholders(Owners) Equity. After learning this, students are supposed to understand how the balance sheet is an expansion of the basic accounting equation Assets: properties or economic resources owned by the business. Common characteristic is the abil to provide probable future economic benefits to the business Liabilities: debts or obligations of a business or claims against assets. A common characteristic is capacity to reduce future assets or to require future services or product Equity: is the owner's claim to the assets or the residual interest in the assets of an entity after deducting liabilities. also called net assets STATEMENT OF CASH FLOWS This financial statement is a bit more complex, detailing an enterprises cash flows, broken down
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University About financial performance during a period (Income Statement). About cash flows (Statement of Cash Flows). The financial statements can help you to better understand the performance and position of a business, so that the students can be directed to participate in the in-class discussion on the following topics: 1. How well did the company perform (or operate) during the period? 2. Why did the company’s retained earnings change during the period? 3. What is the company’s financial position at the end of the period? 4. How much cash did the company generate and spend during the period? What Financial Statements Are Required by the GAAPs? This section will explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles. First of all, to make it clear to the students that some financial statements are required by the regulators, we review the concept of GAAP here. The rules that make acceptable accounting practices are referred to as Generally Accepted Accounting Principles (GAAP). Information presented using these principles is considered to be relevant, reliable, consistent and comparable. INCOME STATEMENT A summary of an entity's results of operation for a specified period of time is revealed in the income statement, as it provides information about revenues generated and expenses incurred. The differences between the revenues and expenses are identified as the net income or net loss. This financial statement is use to explain how the income statement reports an enterprise's financial performance for a period of time in terms of the relationship of revenues and expenses. BALANCE SHEET The balance sheet focuses on the accounting equation by revealing the economic resources owned by an entity and the claims against those resources (liabilities and owners' equity). The balance sheet is prepared as of a specific date, whereas the income statement and statement of retained earnings cover a period of time. This financial statement demonstrates how certain business transactions affect the elements of the accounting equation: Assets = Liabilities + Shareholders' (Owners') Equity. After learning this, students are supposed to understand how the balance sheet is an expansion of the basic accounting equation. Assets: properties or economic resources owned by the business. Common characteristic is the ability to provide probable future economic benefits to the business. Liabilities: debts or obligations of a business or claims against assets. A common characteristic is capacity to reduce future assets or to require future services or products. Equity: is the owner’s claim to the assets or the residual interest in the assets of an entity after deducting liabilities; also called net assets. STATEMENT OF CASH FLOWS This financial statement is a bit more complex, detailing an enterprises cash flows, broken down
ask Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University according to operating, investing, and financing sources. Its coverage is best deferred until you have had a chance to progress further in your study of accounting a period of time in terms of the company's operating, investing, and financing activities ILLUSTRATIVE STATEMENTS The following portrays sample final statements for Beauty Photo Store Beauty photo store e January 31, 2005 Assets Liabilities Cas h s 8,400 Accounts payable S200 3, 600 Notes payable 6.000 26.000 Total liabilities S6,200 Owner’ s equity Wang Fang, capital 31800 Total liabilities and Total assets 38,000 owners equity S38,000 Beauty photo store Income State ment For Month Ended January 31. 2005 Revenues Sales revenue S3,800 Rental revenue Total S4,100 Operating Expenses: Rent S1.000 Salaries expense Total ope rating expenses 1,700 Net income S2,400
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University according to operating, investing, and financing sources. Its coverage is best deferred until you have had a chance to progress further in your study of accounting. This financial statement is used to explain how the cash flow statement presents the change in cash for a period of time in terms of the company's operating, investing, and financing activities. ILLUSTRATIVE STATEMENTS The following portrays sample final statements for Beauty Photo Store. Cash $ 8,400 Accounts payable $ 200 Supplies 3,600 Notes payable 6,000 Equipment 26,000 Total liabilities $ 6,200 Wang Fang, capital 31,800 Total assets $ 38,000 Total liabilities and owner's equity $ 38,000 Assets Owner's Equity Liabilities Beauty Photo Store Balance Sheet January 31,2005 Revenues: Sales revenue $ 3,800 Rental revenue 300 Total revenues $ 4,100 Operating Expenses: Rent expense $ 1,000 Salaries expense 700 Total operating expenses 1,700 Net income $ 2,400 Beauty Photo Store Income Statement For Month Ended January 31, 2005
ask Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University Beauty Photo Store Statement of Owner's Equity For month ended January 31, 2005 wang Fang, capital, January 1 Add Inves tment by owner s 30,000 Net income 32,400 Total 32,400 Less: Withdrawal by owner 600 Wang Fang, capital, January 31 31,800 Beauty Photo State me nt of cash Flows For Month Ended January 31. 2005 Cas h flows from operating activities Cash received from clients S4.100 Cash paid for supplies (2,500) Cash paid for rent (1,000) Cas h paid to employee Net cash used by operating acitivities S(100) Cash flows from inves ting activities: Purchase of equipment S(20.000 Net cash used by inves ting activiti (20,000) Cash flows from financing activities Inves tment by owner S30.000 Partial re payment of note Withdrawal by owner Net cash provided by financing activities 28,500 Net increase in cas h Cash balance. January 1 Cash balance, January 31 Additional examples(if there is some extra time): The following are three financial statements of Tony Blow Corporation. Please take time to review these statements, noting carefully how the net income on the income statement flows through to the statement of retained earnings, and how the ending retained earnings flows through to the balance sheet Tony Blow Corporation For the year ending December 31, 20X3 R $750.000 Interest income 15.000 Total $765,00 Expenses $235,000
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Additional examples (if there is some extra time): The following are three financial statements of Tony Blow Corporation. Please take time to review these statements, noting carefully how the net income on the income statement flows through to the statement of retained earnings, and how the ending retained earnings flows through to the balance sheet. Tony Blow Corporation Income Statement For the year ending December 31, 20X3 Revenues Services to customers $750,000 Interest income 15,000 Total revenues $765,000 Expenses Salaries $235,000 wang Fang, capital, January 1 $ - Add: Investment by owner $ 30,000 Net income 2,400 32,400 Total 32,400 Less: Withdrawal by owner 600 Wang Fang, capital, January 31 $ 31,800 Beauty Photo Store Statement of Owner's Equity For month ended January 31,2005 Cash flows from operating activities: Cash received from clients $ 4,100 Cash paid for supplies (2,500) Cash paid for rent (1,000) Cash paid to employee (700) Net cash used by operating acitivities $ (100) Cash flows from investing activities: Purchase of equipment $ (20,000) Net cash used by investing activities (20,000) Cash flows from financing activities: Investment by owner $ 30,000 Partial repayment of note (900) Withdrawal by owner (600) Net cash provided by financing activities 28,500 Net increase in cash $ 8,400 Cash balance, January 1 - Cash balance, January 31 $ 8,400 Beauty Photo Store Statement of Cash Flows For Month Ended January 31, 2005
ask Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University Rent l15,00 Other operating expenses 300.000 Total 650.000 Net income s115,000 Quartz Corporation Statement of Retained earnings For the year ending December 31, 20X3 Beginning retained earnings $400,000 Plus: Net income 115,000 $515000 ess. Dividend 35.000 Ending retained earnings $480 Quartz Corporation Balance sheet December 31. 20X3 Liabilities Cash $192000 Salaries payable 34.000 Accounts receivable 248.000 Accounts payable 166,000 450.000 Total liabilities $200.000 Other assets 10.000 Stockholders equity Capital stock 220,000 Retained earnings 480.000 Total stockholders'equity Total asset 900.000 Total Liabilities and equity 900,000 Summary There are two major types of financial statements-stock reports and flow reports Financial statement can serve as an important device to disclose information to investors in order for them to make better decisions, Four major financial statements are compared, explained and illustrated in this lesson; In this section, the former case of The Beauty Photo Store is picked up again here, and its four major financial statements are illustrated to show its performance and financial positions Case for Open Discussion You're a new board member, studying the numbers, hoping to decipher their meaning. Then you're hit with the accounting jargon: balance sheets and income statements; cash basis and accrual basis. You think you hear the financial statements quietly at you, and you begin to wonder if the board should hire a psychiatrist instead of an accountant Suggested Qu D)How are financial statements prepared
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Rent 115,000 Other operating expenses 300,000 Total expenses 650,000 Net income $115,000 Quartz Corporation Statement of Retained Earnings For the year ending December 31, 20X3 Beginning retained earnings $400,000 Plus: Net income 115,000 $515,000 Less: Dividends 35,000 Ending retained earnings $480,000 Quartz Corporation Balance Sheet December 31, 20X3 Assets Liabilities Cash $192,000 Salaries payable $ 34,000 Accounts receivable 248,000 Accounts payable 166,000 Land 450,000 Total liabilities $200,000 Other assets 10,000 Stockholders' equity Capital stock $220,000 Retained earnings 480,000 Total stockholders' equity 700,000 Total assets $900,000 Total Liabilities and equity $900,000 Summary There are two major types of financial statements-stock reports and flow reports; Financial statement can serve as an important device to disclose information to investors in order for them to make better decisions; Four major financial statements are compared, explained and illustrated in this lesson; In this section, the former case of The Beauty Photo Store is picked up again here, and its four major financial statements are illustrated to show its performance and financial positions. Case for Open Discussion You’re a new board member, studying the numbers, hoping to decipher their meaning. Then you’re hit with the accounting jargon: balance sheets and income statements; cash basis and accrual basis. You think you hear the financial statements quietly laugh at you, and you begin to wonder if the board should hire a psychiatrist instead of an accountant. Suggested Questions: 1) How are financial statements prepared?
ask Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University 2)Do they make things simpler? 3)What information can we infer from these statements? 4) How can we make use of them
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University 2) Do they make things simpler? 3) What information can we infer from these statements? 4) How can we make use of them?