How to read a Balance Sheet - Introduction to Financial Statements

Lesson 5: Introduction to Financial Statements

© KayOne Education, 2015

What are financial statements?

•  They are financial reports made from the accounting records of the business.

•  They contain a summary of the business’ performance for a period (usually a year) and position as of the date of the report.


Introduction to Financial Statements

Accounting is a language



Your Business Your Neighbor

How many eggs do we have?

Are the eggs increasing or decreasing?


Introduction to Financial Statements How many eggs do we have? Where did

they come from? How many are borrowed?

How many are owned?

100 30

70

An egg is laid

+1

+1

Two eggs are broken

- 2

- 2

99 99

10 eggs are laid

+ 10

+ 10

109 109

2 eggs are paid off to the neighbor

- 2

- 2



107 28

79

As of now

100 30

70

As on beginning


Introduction to Financial Statements How did the business do between these two dates?

Number of eggs laid

Number of eggs broken

An egg is laid

Two eggs are broken

(+) 9

(+) 1

(-) 2

(+) 10

70 79

10 eggs are laid


Imagine a movie

Freeze Freeze Freeze

Flow of Events Flow of Events


Imagine a movie

Balance Sheet Balance Sheet Balance Sheet

Income Statement

Income Statement


What is a Balance Sheet?

•  A balance sheet is a summary statement of: •  What a business owns;

•  What a business owes; and

•  What it is worth today

•  It is a snapshot at a given point in time

•  It is thus called the ‘Statement of Position’



•  What does a business own? •  Land •  Buildings •  Equipment •  Inventory (stock of goods) •  Cash and Bank

•  These are called “Assets”

•  Assets are also rights that you own, that have a monetary value. For eg: Right to collect cash from a customers who owe you money (Debtors/Receivables)



•  What does a business owe? •  Amounts payable for purchasing materials

•  Salaries payable to its employees

•  Amounts borrowed from the bank

•  These are called “Liabilities”



•  The amount that is left over in the business after paying off the liabilities, is the worth of the business.

•  Accountants call this “Equity”. This belongs to the owners of the business.


What is an Income Statement?

•  An income statement shows the revenues, costs and expenses of a business over a period of time (usually a month, a quarter, six months or a year).

•  This records all the events during this period (similar to the movie effect we saw earlier).

•  It shows the performance of the business during the period, and is hence called the ‘Statement of Performance’.

•  Revenues, expenses and costs are recorded on an ‘Accrual’ basis.


What is a Cash Flow Statement?

•  Shows a summary of all cash inflows and outflows during a period.

•  While the Income Statement records transactions on an ‘Accrual’ basis, the Cash Flow Statement records transactions as and when cash is received or paid.


The Accounting Process Transactions

Involves cash Does not involve cash

Cash Book Journal Book

General Ledger

Trial Balance

Balance Sheet Income Statement

Cash Flow Statement


The Three Financial Statements •  Balance Sheet

•  Assets (what you own) •  Liabilities (what you owe) •  Equity (how much you are worth)

•  Income Statement •  Revenues (what you earn) •  Expenses and costs (what you spend) •  Profit (what is left over)

•  Cash flow statement •  Cash inflows (How much cash came in) •  Cash outflows (How much cash went out)

•  Cash balance (How much cash is left)

Summary


•  There are three main financial statements: •  Balance sheet •  Income Statement •  Cash flow statement

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Date post:	15-Jul-2015
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