Lecture# 2

Introduction to Financial
Statements

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Financial Statement

Financial statements are written records that

convey the business activities and the
financial performance of a company.
Financial statements are often audited by
government agencies, accountants, firms, etc. to
ensure accuracy and for tax, financing, or
investing purposes.

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Cont:

The statement of financial position , or balance

sheet , is a financial statement that describes where the
enterprise stands at a specific date.

Equation:
Assists = Liability + Owner Equity
Owner Equity = Assists - Liability

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Income statement

An income statement is an activity statement that shows

the revenues and expenses for a designated period of time.
• Revenues already have resulted in positive cash flows,
or are expected to do so in the near future, as a result of
transactions with customers.
• Expenses result in negative cash flows —either past,
present, or future

Equation:
Revenue – Expenses = Net Income

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The income statement has The third line shows that the report covers
a three-line heading operations over a period of time

Wells’ Consulting Services

Income Statement
Month Ended December 31, 2013
Revenue
Fees Income $47,000.00

Expenses
Salaries Expense $8,000.00
Utilities Expense 650.00
Total Expenses 8,650.00

Net Income $ 38,350.00

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Statement of cash flows

• The statement of cash flows is particularly important in

understanding an enterprise for purposes of investment and
credit decisions.
—the cash received from revenues and other
transactions as well as the cash paid for certain expenses and
other acquisitions during the period.

Equation:
Cash Flow = Cash from operating activities +(-) Cash from
investing activities +(-) Cash from financing activities + Beginning
cash balance

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The Concept of the Business
Entity

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 Assets, Liabilities, and
Owner’s Equity
What are assets?
ANSWER:

Assets are property owned by a business.

e.g cash ,land , building, equipment.

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The Cost Principle

Assets such as land, buildings, merchandise, and

equipment are typical of the many economic resources that
are required in producing revenue for the business. The
prevailing accounting view is that such assets should be
presented at their cost.

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 What are liabilities?
ANSWER: Liabilities are debts or obligations of a
business

What is owner’s equity?

ANSWER:
Owner’s equity is the term used by sole
proprietorships. It is the financial interest of
an owner of a business. It is also called
proprietorship or net worth .

Therefore, owners’ equity is always equal

to total assets minus total liabilities.

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• Increases in Owners’ Equity : The owners’ equity in a
business comes from two primary sources.

• 1. Investments of cash or other assets by owners.

• 2. Earnings from profitable operation of the business.

• Decreases in Owners’ Equity: Decreases in owners’ equity

also are caused in two ways.

• 1. Payments of cash or transfers of other assets to owners.

• 2. Losses from unprofitable operation of the business.

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 A Statement of Owner’s Equity
Wells’ Consulting Services
Statement of Owner’s Equity
Month Ended December 31, 2013

Carolyn Wells, Capital, December 1, 2013 $100,000.00

Net Income for December $38,350.00
Less Withdrawals for December 5,000.00
Increase in Capital 33,350.00
Carolyn Wells, Capital, December 31, 2013 $133,350.00
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 The Fundamental Accounting Equation
In accounting terms the firm’s assets must equal the total of
its liabilities and owner’s equity.
This equality can be expressed in equation form as:

Assets = Liabilities + Owner’s Equity

 The entire accounting process of analyzing,

recording and reporting business transactions is
based on the fundamental accounting equation
 If any two parts of the equation are known, the third
part can be determined.
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 Assets – the amount and types of property owned by the business
 Liabilities – the amount owed to the creditors
 Equity – the owner’s interest

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 What is revenue?
ANSWER: A revenue is an inflow of money or
other assets that results from the
sales of goods or services or from
the use of money or property. It is
also called income.

What is an expense?

ANSWER: An expense is an outflow of cash,

use of other assets, or incurring of a
liability.
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 Wells’ Consulting Services
Balance Sheet
December 31, 2013

Assets Liabilities

Cash 111,350.00 Accounts Payable 3,500.00

Accounts Receivable 5,000.00
Supplies 1,500.00
Owner’s Equity
Prepaid Rent 8,000.00 Carolyn Wells, Capital 133,350.00
Equipment 11,000.00 Total Liabilities and Owner’s Equity 136, 850.00
Total Assets 136,850.00

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Lets Practice Example

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