The document provides an overview of key financial statements including the balance sheet, income statement, statement of cash flows, statement of comprehensive income, and statement of changes in equity. It describes the purpose and components of each statement, as well as their limitations, in 3 sentences or less per statement.
The document provides an overview of key financial statements including the balance sheet, income statement, statement of cash flows, statement of comprehensive income, and statement of changes in equity. It describes the purpose and components of each statement, as well as their limitations, in 3 sentences or less per statement.
The document provides an overview of key financial statements including the balance sheet, income statement, statement of cash flows, statement of comprehensive income, and statement of changes in equity. It describes the purpose and components of each statement, as well as their limitations, in 3 sentences or less per statement.
The document provides an overview of key financial statements including the balance sheet, income statement, statement of cash flows, statement of comprehensive income, and statement of changes in equity. It describes the purpose and components of each statement, as well as their limitations, in 3 sentences or less per statement.
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The Balance Sheet
The Balance Sheet
Picture in time. Assets and liabilities presented in Proprietary Theory. Balance sheet accounts are permanent accounts. Elements of the Balance Sheet Assets Liabilities Equity Current vs. Noncurrent Current is 12 months or operating cycle, whichever is longer. Current Assets Cash Cash equivalents Receivables Inventory Short-term investments Prepaid expenses Current deferred tax assets Noncurrent Assets Long-term investments Property, plant and equipment Intangible assets Long-term receivables, restricted cash, long-term prepayments, long-term deferred tax assets Current Liabilities Accounts payable Dividends payable Unearned revenues Collections for other parties Short term notes Current portion of long term debt Current deferred tax liabilities Noncurrent Liabilities Long term notes or bonds payable Long-term portion of long-term debt and liabilities for capital leases. Warranty obligations Long-term deferred revenue Long-term deferred tax liabilities Equity Capital stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock Non-controlling interests Uses of Balance Sheet Allows assessment of: • Liquidity • Solvency • Financial flexibility • Risk Limitations of Balance Sheet Many assets not reported on the balance sheet. Many assets measured at historical cost. Judgments and estimates used. The Income Statement The Income Statement Gives results for a period of time.
Income statement accounts are temporary
accounts. Multi-Step Income Statement Sales or service revenues − Cost of goods sold (COGS) = Gross profit − Selling, general, and administrative expenses = Operating income + Interest and dividend income − Interest expense +/− Non-operating gains/(losses) = Income from continuing operations before provision for income tax − Provision for income taxes on continuing operations = Income from continuing operations +/− Gain/(loss) from operations of discontinued Component X including gain/(loss) on disposal of $XXXX +/− Income tax benefit or (income tax expense) on discontinued Component X = Net income Elements of Income Statement Revenues Expenses Gains Losses Revenues and Expenses Inflows or outflows as a result of delivering goods or providing services that are the entity’s main or central operations. Gains and Losses Increases or decreases in equity as a result of transactions that are not part of the company’s main or central operations and that do not result from revenues or expenses by the owners of the entity. Other Income Items 1. Discontinued operations 2. Unusual gains and losses 3. Intra-period tax allocation 1. Discontinued Operations A disposal of a 1. Component or group of components, 2. That represents a strategic shift that has or will have a major effect on the entity’s operations and financial results. Accounting for Discontinued Operations All gains or losses that are incurred by the discontinued segment are reported in the period in which the gain or loss occurred. • In current period all operations of the discontinued component will be reported as discontinued (even if decision was made December 30). • Any gains or losses that will occur in the future from either operations or the actual sale of the assets will be reported in that future period in which they occur. Discontinued on Income Statement Two lines on the Income Statement 1. Gain/Loss from operations of discontinued component 2. Income tax benefit or loss from discontinued component 2. Unusual Gains and Losses Gains and losses that the firm shows separately.
Are ordinary gains and losses and they are
part of income from operations. 3. Intra-period Tax Allocation The reporting of income taxes within one period on the income statement.
Taxes must be allocated between income
from continuing operations and discontinued operations. Uses of Income Statement Helps users evaluate the company’s past performance and to compare it to the performance of its competitors. Provides a basis for predicting future performance. Helps users assess the risk or uncertainty of achieving future cash flows. Limitations of Income Statement Assumptions and judgment are used. Income is impacted by the accounting methods used. Items that cannot be measured reliably are not reported in the income statement. The income statement is limited to reporting events that produce reportable revenues and expenses. Statement of Cash Flows Statement of Cash Flows Shows the sources and uses of cash for the company. Categories of Activities Operating activities Investing activities Financing activities Uses of Statement of Cash Flows Helps users assess: • The ability of the company to generate positive future cash flows. • The reasons for differences between net income and net cash in/out flows. • The effect of investing and financing transactions on the company’s financial position. • The company’s need for external financing. Limitations of Statement of Cash Flows Only shows what cash flows were, and not how they happened.
Indirect method does not show clearly the
sources and uses of cash. Statement of Comprehensive Income Statement of Comprehensive Income Comprehensive income includes all transactions of the company except for those transactions that are made with the owners of the company. Comprehensive income includes everything on the income statement plus some things that do not appear on the income statement. Forms of Statement of CI May be presented as: 1. A single statement with the income statement, or 2. As two separate, but consecutive statements. A Single Statement Must be presented in two sections, net income and other comprehensive income. It must present: • total net income along with the components that make up net income; and • a total amount for the other comprehensive income along with the components that make up other comprehensive income. Two Consecutive Statements It must present • Total net income and the components of net income in the statement of net income; and • Total other comprehensive income and the components of other comprehensive income in a statement of other comprehensive income that immediately follows the statement of net income. Tax Effects The items above may be shown as either 1. Net of tax, or 2. Before related tax effects with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income. Other Comprehensive on BS Accumulated other comprehensive income is a line in the equity section of the balance sheet that includes these items that are not reflected on the income statement. Other Comprehensive Income Items Foreign currency translation adjustments. Unrealized holding gains and losses on available-for-sale securities. Subsequent decreases or increases in the fair value of available-for-sale debt securities previously written down as impaired. Other Comprehensive Income Items The effective portion of gains and losses on derivative instruments that are designated as, and qualify as, cash flow hedges. The effective portion of gains and losses on foreign currency transactions that are designated as economic hedges of a net investment in a foreign entity. Other Comprehensive Income Items Gains or losses associated with pension or other postretirement benefits. Prior service costs or credits associated with pension or other postretirement benefits. Transition assets or obligations associated with pension or other postretirement benefits. If No OCI Items Company is not required to prepare a statement of other comprehensive income. Statement of Changes in Owners’ Equity Statement of Changes in Equity Reports the changes in each account in the stockholders’ equity section of the balance sheet and in total stockholders’ equity during the year.
Also reconciles the beginning balance in
each account with the ending balance. Limitations of Financial Statements Limitations of Financial Statements Measurements are made only in terms of money. Information supplied by financial reporting involves estimation, classification, summarization, judgment, and allocation. Financial statements primarily reflect transactions that have already occurred; consequently, many aspects of them are based on historical cost. Limitations of Financial Statements Only transactions involving an entity being reported upon are reflected in that entity’s financial reports. Financial statements are based on the going-concern assumption.
"The Language of Business: How Accounting Tells Your Story" "A Comprehensive Guide to Understanding, Interpreting, and Leveraging Financial Statements for Personal and Professional Success"