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Understanding Financial

Statements

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Users of Financial Information

Internal Users Managers plan, organize and run a

business

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External Users Investors Creditors Others

Taxing authorities Regulatory agencies Customers Labour unions Economic planners

Users of Financial Information

Primary users

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Provide the most useful financial information for decision making

This is accomplishedthrough the developmentof financial statements.

Objective of Financial Reporting

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How much is Joe Student Worth?

HE HAS - cash $19.22 - beer can empties $45.38 - CDs $345.12

(new) - ’97 beater $1200.00 (market)

TOTAL $1609.72

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How much is Joe Student Worth?

HE OWES Back Rent $400 (current) Std Loan* $1000 (long term)

TOTAL $1400

HE IS WORTH 1609.72 – 1400 = $209.72

Accounting Equation

Assets = Liabilities + Shareholders’ Equity

Assets = Liabilities + net worth

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Basic Terms Assets - resources owned by a

business Liabilities - obligations of the

business Shareholders’ equity

Share capital - representing the primary ownership interest in a corporation

Retained earnings – accumulated earnings of corporation that have not been distributed to shareholders

CSU CORPORATION Balance Sheet

December 31, 2006

Balance Sheet

Head up the statementname of companyname of statementdate (as at a specific point in time)

CSU CORPORATION Balance Sheet

December 31, 2006

AssetsCash $ 2,000Accounts receivable 4,000Inventory 1,800Equipment 16,000Total assets $23,800

List the assets and total

Note the order of listing

CSU CORPORATION Balance Sheet

December 31, 2006

AssetsCash $ 2,000Accounts receivable 4,000Supplies 1,800Equipment 16,000Total assets $23,800

Liabilities and Shareholders’ EquityLiabilities Accounts payable $ 2,000

Notes payable 5,000 Total liabilities 7,000

List the liabilities and subtotalHmm .. Same order for liabilities

CSU CORPORATION Balance Sheet

December 31, 2006

List shareholders’ equity.SubtotalAdd to liabilities, total

CSU CORPORATION Balance Sheet

December 31, 2006

AssetsCash $ 2,000Accounts receivable 4,000Supplies 1,800Equipment 16,000

Total assets $23,800Liabilities and Shareholders’ Equity

Liabilities Accounts payable $ 2,000

Notes payable 5,000 Total liabilities 7,000Shareholders’ equity

Common shares $10,000Retained earnings 6,800

Total shareholders’ equity 16,800Total liabilities and shareholders’ equity $23,800

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Classified Balance Sheet

Assets Current assets Long-term

investments Capital assets

Liabilities Current liabilities Long-term

liabilitiesShareholders’

Equity Share capital Retained earnings

Generally contains the following standard classifications:

Stop and Check

Total assets must equal total liabilities and shareholders’ equity

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Yeah, but I have a job now. I’ll have money

coming in.

Money coming in (for October) - wages $1800

Money going out Rent $400 Food $400 Entertainment $800

IMPROVED NET WORTH $200

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Revenues arise from sale of a product or service

Revenues result in an inflow of assets

Revenues (money coming in)

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Expenses are the costs of assets consumed or services used to generate revenues

Examples Cost of sales Store operating expenses General and administrative

expenses Interest expense

Expenses

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Revenue $10,000Less: Expenses 3,000Net earnings $ 7,000

(Net loss is the excess of expenses over revenues)

Net Earnings

Net earnings are the excess of revenue over expenses

CSU CORPORATIONStatement of Earnings

For the Year Ended December 31, 2006

Statement of Earnings

Head up the statementname of companyname of statementperiod of time covered

Revenues Service revenue

$22,200

CSU CORPORATIONStatement of Earnings

For the Year Ended December 31, 2001

List the revenues

Revenues Service revenue

$22,200 ExpensesRent expense $9,000

Insurance expense 1,000Supplies expense 200Total expenses 10,200

Earnings before income tax 12,000Income tax expense 5,200

CSU CORPORATIONStatement of Earnings

For the Year Ended December 31, 2006

List and total the expenses. Note that income tax is shown separately from other expenses

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Revenues Service revenue

$22,200 ExpensesRent expense $9,000

Insurance expense 1,000Supplies expense 200Total expenses 10,200

Earnings before income tax 12,000Income tax expense 5,200Net earnings $ 6,800Subtract expenses from revenues to

obtain net earnings (loss)

CSU CORPORATIONStatement of Earnings

For the Year Ended December 31, 2006

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Joe Student’s Worth Now?

He was worth $209.72 He has since cleared

$200.00

His current Net Worth $409.72At end of October

CSU CORPORATIONStatement of Retained Earnings

For the Year Ended December 31, 2006

Statement of Retained Earnings

Head up the statementname of companyname of statementperiod of time covered (same period as statement of earnings)

CSU CORPORATIONStatement of Retained Earnings

For the Year Ended December 31, 2006

Retained earnings, January 1 $ 0

Start with beginning retained earnings (same as ending retained earnings of prior period)

CSU CORPORATIONStatement of Retained Earnings

For the Year Ended December 31, 2001

Retained earnings, January 1 $ 0Add: Net earnings 6,800 6,800

Add net earnings (subtract loss) from the current year (see Statement of Earnings)Subtotal

CSU CORPORATION Statement of Retained Earnings

For the Year Ended December 31, 2006

Retained earnings, January 1 $ 0Add: Net earnings 6,800 6,800Less: Dividends 0Retained earnings, December 31 $ 6,800

Subtract current year’s dividends (if any) and total

In what order are financial statements prepared?

Presented?

WHY?

CSU CORPORATION Statement of Earnings

For the Year Ended December 31, 2006

Net earnings is needed for theStatement of Retained Earnings

Revenues Service revenue

$22,200 ExpensesRent expense $9,000

Insurance expense 1,000Supplies expense 20Total expenses 10,200

Earnings before income tax 12,000Income tax expense 5,200Net earnings $ 6,800

CSU CORPORATION Statement of Retained Earnings

For the Year Ended December 31, 2006

Retained earnings, January 1 $ 0Add: Net earnings 6,800 6,800Less: Dividends 0Retained earnings, December 31 $ 6,800

Ending retained earnings is neededfor the Balance Sheet

CSU CORPORATION Balance Sheet

December 31, 2006

AssetsCash $ 2,000Accounts receivable 4,000Supplies 1,800Equipment 16,000

Total assets $23,800Liabilities and Shareholders’ Equity

Liabilities Accounts payable $ 2,000

Notes payable 5,000 Total liabilities 7,000Shareholders’ equity

Common shares $10,000Retained earnings 6,800

Total shareholders’ equity 16,800Total liabilities and shareholders’ equity $23,800

Remember …

Remaining liquid and solvent is as important as making a profit because...

A company can survive without earnings, but it can’t survive very long without cash“B u r n R a t e”

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Financial Accounting Statements

Statement of Earnings Reports the results of operations for a specific

period of time Statement of Retained Earnings

Reports the changes in retained earnings for a specific period of time

Balance Sheet Reports the assets, liabilities, and shareholders’

equity as at a specific point in time Statement of Cash Flows

Reports the cash receipts and payments for a specific period of time

Management Discussion and Analysis

Auditor's Report Financial Statements

Statement of Earnings Statement of Retained Earnings Balance Sheet Statement of Cash Flows

Notes to Financial Statements

Elements of an