Use of

Financial
Statements

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 Financial Statements
Companies prepare 4 financial statements from the
summarized accounting data:

Retained Earnings
Statement
Statement
of Financial Statement
Income (Owner’s Equity
Position of Cash
Statement Statement for
(or Balance Flows
proprietorship &
Sheet)
partnership)

Tell how the business is performing and where it stands.

1. Heading:
• Name of the entity
• Title
• Date or period covered
2. Body 2-2
 Assets = Liabilities + Equity
Retained Earning
Accounts A/C Share
Cash + Receivable + Supplies + Equipment = Payable + Capital + Rev. - Exp. - Div.

(1) +15,000 = +15,000

(2) -7,000 +7,000 =

(3) +1,600 = +1,600

(4) +1,200 = +1,200

(5) = +250 - 250

(6) +1,500 +2,000 = +3,500

(7) -1,700 = - 600

= - 900
Income Statement data
= - 200

(8) -250 = -250

(9) +600 -600 =

Retained Earnings Statement data
(10) -1,300 = - 1,300

Bal $8,050 + $1,400 + $1,600 + $7,000 = $1,600 + 15,000 + $4,700 - $1,950 - $1,300

Statement of Cash Flows data

Statement of Financial Position data 2-3

 Financial Statements

Review Question
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.

Revenues Expenses

- = Net
Income

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Financial Statements Income Statement

SOFTBYTE INC.
Income Statement
Income Statement
reports the revenues
For the Month Ended Sept. 30, 20X1
and expenses for a
Revenues: specific period of
Service revenue $ 4,700 time.
Expenses: Revenues > Expenses
Salary expense 900  Net income
Rent expense 600
Revenues < Expenses
Advertising expense 250
 Net Loss
Utilities expense 200
Total expenses 1,950
Net income $ 2,750
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 Financial Statements

SOFTBYTE INC. SOFTBYTE INC.

Income Statement Retained Earnings Statement
For the Month Ended Sept. 30, 20X1 For the Month Ended Sept. 30, 20X1

Revenues: Retained earnings, 1 Sept. $ -

Service revenue $ 4,700 Add: Net income 2,750

Expenses: Less: Dividends 1,300

Salary expense 900 Retained earnings, 30 Sept. $ 1,450

Rent expense 600

Advertising expense 250
Utilities expense 200
Net income is needed to
Total expenses 1,950
determine the ending
Net income $ 2,750
balance in equity.

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Financial Statements Retained Earnings Statement

SOFTBYTE INC.
Retained Earnings Statement
For the Month Ended Sept. 30, 20X1

Retained earnings, Sept. 1 $ -

Add: Net income 2,750
Less: Dividends 1,300
Retained earnings, Sept. 30 $ 1,450

Retained Earnings Statement indicates the reasons why

retained earnings have  or  during the period, i.e. for the
month ended Sept 30, 20X1.
The retained earnings of Softbyte have  from $0 to $1,450
in September 20X1.
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 Financial Statements
SOFTBYTE INC.
SOFTBYTE INC.
Statement of Financial Position
Retained Earnings Statement
Septmber 30, 20X1
For the Month Ended Sept. 30, 20X1
Assets
Equipment $ 7,000 Retained earnings, Sept. 1 $ -

Supplies 1,600 Add: Net income 2,750

Accounts receivable 1,400 Less: Dividends 1,300

Cash 8,050 Retained earnings, Sept. 30 $ 1,450

Total assets $18,050

Equity and Liabilities
Equity The ending balance in
Share capital-ordinary $15,000
the retained earnings is
Retained earnings 1,450 $16,450
Liabilities
needed in preparing the
Accounts payable 1,600 Statement of Financial
Total equity and liabilities $18,050 Position.

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Financial Statements Statement of Financial Position
SOFTBYTE INC.
Statement of Financial Position
Septmber 30, 20X1
Assets
Equipment $ 7,000
Supplies 1,600
Accounts receivable 1,400
Cash 8,050
Total assets $18,050
Equity and Liabilities
Equity
Share capital-ordinary $15,000
R etained earnings 1,450 $16,450
Liabilities
Accounts payable 1,600
Total equity and liabilities $18,050

Statement of Financial Position shows assets, liabilities & equity

(the accounting equation) at a specific date, i.e. on 30 Sept., 20X1.
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 Company’s Statement of Personal Statement of
Financial Position Financial Position
Assets ☺ Assets ☺
Intangible assets A property, Laptop, iPhone
Property, plant, and equipment HSBC shares
Long-term investments RW CDs, Ink boxes
Current assets Cash
Liabilities 
Liabilities 
Mortgage with bank
Long-term liabilities
Government loan
Current liabilities
Credit card debt
Equity ☺ Or 
Net Worth
Share capital ☺ Or 
Retained earnings
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 Financial Statements
SOFTBYTE INC. SOFTBYTE INC.
Statement of Financial Position Statement of Cash Flows
Septmber 30, 20X1 For the Month Ended Sept. 30, 20X1
Assets Cash flow from Operations
Equipment $ 7,000 Cash receipts from customers $ 3,300
Supplies 1,600 Cash paid for expenses (1,950)
Cash provided by operations 1,350
Accounts receivable 1,400
Cash flow from Investing
Cash 8,050
Purchase of equipment (7,000)
Total assets $18,050
Cash flow from Financing
Equity and Liabilities Investment by owners $ 15,000
Equity Payment of cash dividend (1,300) 13,700
Share capital-ordinary $15,000 Net increase in cash 8,050
Retained earnings 1,450 $16,450 Cash balance, Sept 1 -
Liabilities Cash balance, Sept 30 $ 8,050
Accounts payable 1,600
Total equity and liabilities $18,050

The Statement of Cash Flows

is then prepared.
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 Financial Statements
Statement of Cash Flows (Lecture 13)
Cash receipts and payments of operating, investing and
financing activities for a specific period of time.
SOFTBYTE INC.
Statement of Cash Flows
For the Month Ended Sept 30, 20X1
Cash flow from operating activities
Cash receipts from customers $ 3,300
Cash payment for expenses (1,950)
Cash provided by operating activities 1,350
Cash flow from investing activities
Purchase of equipment (7,000)
Cash flow from financing activities
Sale of ordinary shares $ 15,000
Payment of cash dividends (1,300) 13,700
Net increase in cash 8,050
Cash balance, Sept 1 -
Cash balance, Sept 30 $ 8,050
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 SOFTBYTE INC.
Statement of Cash Flows
Financial Statements For the Month Ended Sept 30, 20X1
Cash flow from operating activities
Cash receipts from customers $ 3,300
SOFTBYTE INC. Cash payment for expenses (1,950)
Income Statement
 Cash provided by operating activities 1,350


Cash flow from investing activities
For the Month Ended Sept. 30, 20X1
Purchase of equipment (7,000)
Cash flow from financing activities
Revenues:
Sale of ordinary shares $ 15,000
Service revenue $ 4,700 Payment of cash dividends (1,300) 13,700
Expenses: Net increase in cash 8,050
Cash balance, Sept 1 -
Salary expense 900
Cash balance, Sept 30 $ 8,050
Rent expense 600
Advertising expense 250
SOFTBYTE INC.
Utilities expense 200
Statement of Financial Position
Total expenses 1,950
Septmber 30, 20X1
Net income $ 2,750 Assets

 Equipment
Supplies
$ 7,000
1,600
SOFTBYTE INC.
Retained Earnings Statement
For the Month Ended Sept. 30, 20X1
Accounts receivable
Cash
Total assets
1,400
8,050
$18,050

Equity and Liabilities
Retained earnings, Sept. 1 $ - Equity
Share capital-ordinary $15,000
Add: Net income 2,750
Retained earnings 1,450 $16,450
Less: Dividends 1,300 Liabilities
Retained earnings, Sept. 30 $ 1,450 Accounts payable 1,600
Total equity and liabilities $18,050 2-13
 Financial Statements

Flow of Events Flow of Events

•Income Statement •Income Statement
•Retained Earnings •Retained Earnings
Statement Statement
•Statement of Cash •Statement of Cash
Snapshot Flows Snapshot Flows Snapshot
Statement of Statement of Statement of
Financial Position Financial Position Financial Position

• The events never stop.

• But accountants prepare financial statements periodically, at
the end of a month, a quarter or a year.
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 Financial Statements
Financial
Info Calculation
Statement
What do we own (Assets)?
Statement of
How are we financing what Assets
Financial
we own (Liabilities or = Liabilities + Equity
Position (B/S)
Equity)?
Retained Beginning R/E + Net
Earnings Why did the balance in
Income – Dividends =
Statement retained earnings change?
Ending R/E
Income
Statement How did the company Revenue – Expenses =
(I/S) perform this period? Net Income

Beginning Cash +
Where did the cash come
Statement of Operating + Investing
from?
Cash Flows + Financing = Ending
Where did it go to?
Cash
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 Notes

Describe accounting rules applied or changed.

Present additional details about items on
financial statements.
Provide additional information about items
not on the statements. Examples:
➢ Board of Directors
➢ Major Shareholdings and Subsidiaries
➢ Segment Disclosures
➢ Roles and functions of Audit and
Remuneration Committees 2-16
 Financial Statements

Review Question
Which of the following financial statements are
prepared as of a specific date?
a. Statement of financial position.
b. Income statement.
c. Statement of retained earnings
d. Statement of cash flows.

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