Financial Statements

Subject: Introduction to Financial Management

Financial Statements
• The financial position and performance will be determined

• The three important financial statements

1) Balance Sheet
2) Income Statement
3) Cash Flow Statement
Balance Sheet
Balance Sheet
• Asset
• Assets are economic resources that are owned and controlled by an entity
that aids to enhance the value of the firm
• Ex. Building, machinery

• Liability
• Liabilities are obligations to transfer assets or provide services to outside
parties arising from events that have already happened
• Ex. Loan, advances taken and service is yet to be made
Balance Sheet
Shareholders Equity

The owners’ equity section of the balance sheet shows the amount the owners
have invested in the entity, it is also labelled as shareholders’ equity or
stockholders’ equity.
Balance Sheet
Classification of Assets
• Current Assets
Assets that can be converted into cash within one year/ or in a business cycle (either
sold/ consumed)
Examples : Cash, Inventory, marketable securities, Accounts receivables etc.,

• Non-Current Assets
• Fixed Assets
• Intangible Assets
• Long term investments
Balance Sheet
• Fixed Assets
Refer to long- term tangible assets and intended to have useful life of more than an
year
Example: Land, Building, Machinery etc.,

• Intangible Assets
Non Physical Asset or non-monetary assets
Example: Patent, trademarks etc.,

• Long term investments

Investments that company intend to hold for more than an year
Example: Insurance, held to maturity investments etc.,
Balance Sheet
Classification of Liabilities
• Current Liabilities
Short term financial obligations that needs to be paid with an year or in one
business cycle.
Example: Accounts payable, Income taxes payable, wages, Accrued interst

• Long-Term Debt
Financial obligations that needs to be paid in the future (more than an year)
Example: Loans, Bonds etc.,
Balance Sheet
• Basic concepts related to B/S
1. Money measurement
• A record of any transaction will be made on the B/S on when it can be expressed in
monetary terms.
• Truck –value of it has to be on B/S.
• If you have tell about the value of a company it would be easy if all the assets and
liabilities can be expressed in monetary terms.

1. Entity
• Accounts are kept for entity not for the persons who own the entity
• Owners expenses are different from the company’s expense
Balance Sheet
3. Going concern
• We assume that it will continue to operate for an indefinitely long period in the future

3. Cost
• Asset is entered initially in the accounting records at the price paid to acquire it—at its
cost
• Fair market value is different from the cost at which the asset was acquired
• Rationale??

3. Dual aspect
• Assets of the entity are sourced either through liabilities or through owner’s equity
• At any point of time the value of assets is equal to sum of liabilities and owner’s equity
Balance Sheet
Balance Sheet Equation
At any point of time the following equation holds

Assets Liabilities Shareholder’s

Equity
Balance Sheet

• A snapshot of the companies accounting value

• It tells us the soundness of the business.

• A balance sheet is a statement with a view to measure exact financial

position of a business at a particular date.
Balance Sheet
• Example of a balance sheet: Priniting Press
• On 21 august 2020 : I started the company with capital of 5 lakhs
• What does my balance sheet look like on 21 Aug,2020
• Assets: Cash- 5Lakh; Liabilities: zero (0); Owners equity : 5Lakh.
• On 22 Aug, I bought 4 L worth machinery and 1 L worth raw material
required
Question:
• Post an year the company had profits of around 2L (sold 100 books at
Rs.3000)
• Are transactions happened in cash.
• Now what will be value of the firm?
• Cash -3 L; Machinery – 4 L; OE - 5 L Balanced?
 Balance sheet of ………………………… as on ………………………….
Assets Amount Liabilities and Capital Amount
(Current Assets) (Current Liabilities)
Cash in hand Accounts payable/ Creditors
Cash at bank Taxes payable
Marketable securities Accrued expenses
Accounts receivable / Debtors Deferred revenue
Prepaid expenses Bank Overdraft
Outstanding incomes Current portion of long-term-debt
Inventories (Long term Liabilities)
(Fixed Assets) Debentures
Land & Buildings Bank loans
Plants & Machinery Mortgage loan
Leasehold premises Loans from other long-term sources
(Other Assets) (Shareholder’s Equity)
Long-term Investments Paid-in-capital
Intangible Assets (Patents, Trade Marks, Retained earnings
Copyrights & Goodwill)

Total Assets Total Liabilities & Equity