Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Ya !

sen Uni"e#si $

Lesson notes Lesson 9: Financial Statements

Learning objectives %& Lea#n 'ha financial s a emen s a#e an( ho' hese accoun in) ools 'o#k in hei# fu u#e *#ofession +& Be ac,uain e( 'i h he func ions an( fo#ma s of hese financial s a emen s -& Lea#n some (e ails #ela in) o *#e*a#a ion of hese financial s a emen s& .& E/*lain im*o# an #ela ionshi*s amon) he 0alance shee , income s a emen , an( cash flo' s a emen , an( ho' hese s a emen s #ela e o each o he# Teaching hours S u(en s ma1o# in accoun in)2 3 hou#s O he#s2 4 hou#s

Teaching contents:

Opening Story The financial s a emen si s im*osin)l$ in f#on of $ou, a s #eam of num0e#s #ollin) en(lessl$ (o'n he *a)e& You5#e a ne' 0oa#( mem0e#, s u($in) he num0e#s, ho*in) o (eci*he# hei# meanin)& Then $ou5#e hi 'i h he accoun in) 1a#)on2 0alance shee s an( income s a emen s6 cash 0asis an( acc#ual 0asis& You hink $ou hea# he financial s a emen s ,uie l$ lau)h a $ou, an( $ou 0e)in o 'on(e# if he 0oa#( shoul( hi#e a *s$chia #is ins ea( of an accoun an & Don5 (es*ai#& Financial s a emen s ma$ seem confusin) ini iall$, 0u he$5#e no as (ifficul as $ou hink& 7e#e5s a look a he 0asics& Show me the money! Cu0a Goo(in) 8#& u e#e( an immo# al line in he mo"ie 8e##$ Ma)ui#e, 9Sho' me he mone$:; <ell, ha is 'ha financial s a emen s (o& The$ sho' $ou he mone$& The ,ues ions a#e2 = Do he$ sho' $ou 'he#e a com*an$5s mone$ came f#om> = Do he$ sho' $ou 'he#e i 'en , an( 'he#e i is no'& = 7o' accoun an s make all hese en(s sa isfie(>

hat !re the Financial Statements" O#)ani?a ions #e*o# hei# accoun in) info#ma ion o in e#nal an( e/ e#nal use#s in he fo#m of financial s a emen s& S a emen s #e"eal an o#)ani?a ion5s financial heal h an( *e#fo#mance& The financial s a emen is a *ic u#e of he com*an$ in financial e#ms& Each financial s a emen #ela es o a s*ecific (a e

Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Ya !sen Uni"e#si $

o# co"e#s a *a# icula# *e#io(& Stock/ resources and obligations at a point in time: Balance sheet. Flow/activity over a period of time: Income statement, Statement of cash flows.

The ins #uc o# mi)h facili a e some (iscussion on he im*o# ance of financial s a emen s o a com*an$ an( i s in"es o#s an( c#e(i o#s an( 'h$ mana)emen ma$ ake s e*s o im*#o"e he a**ea#ance of he com*an$ in i s financial s a emen s&

#ow !re Financial Statements $repare%" The fi#s s e* in un(e#s an(in) financial s a emen s is o (e e#mine 'he he# he$ 'e#e *#e*a#e( on a cash, acc#ual, o# mo(ifie( cash accoun in) 0asis& <h$> Financial s a emen s "a#$ )#ea l$ (e*en(in) on he accoun in) me ho(& The #ea(e# mus kno' 'hich accoun in) me ho( 'as use( in o#(e# o accu#a el$ #ea( he s a emen & The h#ee me ho(s a#e (efine( as follo's2 Cash Basis& Cash 0asis accoun in) is simila# o a *e#sonal check0ook& Financial #eco#(s #ack 'hen cash is #ecei"e( o# *ai( ou & Income is #eco#(e( 'hen a (e*osi is ma(e o he 0ank& E/*enses a#e #eco#(e( 'hen a check is '#i en o *a$ a 0ill& Cash 0asis financial s a emen s a#e eas$ o un(e#s an( an( o *#e*a#e& The (isa("an a)e, ho'e"e#, is he$ (on5 )i"e a full *ic u#e of he financial con(i ion& The #eco#(s omi info#ma ion on un*ai( 0ills o# uncollec e( assessmen s& Acc#ual Basis& Acc#ual 0asis accoun in) #acks an$ an( all #ansac ions, e"en if cash is no #ecei"e( o# *ai( ou & Fo# e/am*le, income is #eco#(e( 'hen he (ues a#e assesse(, no necessa#il$ 'hen he$ a#e collec e(& The same is #ue fo# e/*enses& E/*enses a#e #eco#(e( 'hen he$ a#e incu##e(& Fo# e/am*le, if he associa ion 0u$s ne' e,ui*men , he *u#chase is #eco#(e( e"en if he 0ill has no 0een *ai(& Because i #acks all income an( e/*enses, acc#ual 0asis accoun in) mo#e accu#a el$ #eco#(s he financial ac i"i $ of a *a# icula# ime *e#io(& Mo(ifie( Cash Basis& Mos associa ions use mo(ifie( cash 0asis accoun in) fo# hei# #eco#( kee*in)& I is a com*#omise 0e 'een he cash 0asis an( acc#ual 0asis& <i h his me ho(, mos #ansac ions a#e #eco#(e( on he cash 0asis, 0u some a#e lo))e( on an acc#ual 0asis& Fo# e/am*le, accoun s #ecei"a0le @amoun s o'ne#s o'e he associa ionA an( income commonl$ a#e #eco#(e( as he$ a#e 0ille( @acc#ual 0asisA& E/*enses a#e #eco#(e( as he 0ills a#e *ai( @cash 0asisA& O he# acc#ual a(1us men s, such as *#e*ai( e/*enses an( income a/ acc#uals, a#e no ma(e& Mo(ifie( cash 0asis is less com*le/ han acc#ual 0asis financial s a emen s& Du#in) he annual #e"ie' o# au(i , ho'e"e#, a CBA of en mus con"e# he financial s a emen s o acc#ual 0asis& hat !re the Functions o& Financial Statements" Accoun in) info#ma ion is con"e$e( h#ou)h a s an(a#(i?e( se of #e*o# s& The fou# fun(amen al financial s a emen s a#e he income s a emen , s a emen of #e aine( ea#nin)s, 0alance shee , an( s a emen of cash flo's& seful for investment decisions. !"ll financial statements#

Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Ya !sen Uni"e#si $

$omprehensible. !"ll financial statements# "bout economic resources and claims on resources !Balance Sheet#. "bout financial performance during a period !Income Statement#. "bout cash flows !Statement of $ash Flows#. The financial s a emen s can hel* $ou o 0e e# un(e#s an( he *e#fo#mance an( *osi ion of a 0usiness, so ha he s u(en s can 0e (i#ec e( o *a# ici*a e in he in!class (iscussion on he follo'in) o*ics2 %& 7o' 'ell (i( he com*an$ *e#fo#m @o# o*e#a eA (u#in) he *e#io(> +& <h$ (i( he com*an$5s #e aine( ea#nin)s chan)e (u#in) he *e#io(> -& <ha is he com*an$5s financial *osi ion a he en( of he *e#io(> .& 7o' much cash (i( he com*an$ )ene#a e an( s*en( (u#in) he *e#io(> hat Financial Statements !re 'e(uire% by the )!!$s" This sec ion 'ill e/*lain ce# ain accoun in) *#inci*les ha a#e im*o# an fo# an un(e#s an(in) of financial s a emen s an( ho' *#ofessional 1u()men 0$ accoun an s ma$ affec he a**lica ion of hose *#inci*les& Fi#s of all, o make i clea# o he s u(en s ha some financial s a emen s a#e #e,ui#e( 0$ he #e)ula o#s, 'e #e"ie' he conce* of GAAB he#e& The #ules ha make acce* a0le accoun in) *#ac ices a#e #efe##e( o as Gene#all$ Acce* e( Accoun in) B#inci*les @GAABA& Info#ma ion *#esen e( usin) hese *#inci*les is consi(e#e( o 0e #ele"an , #elia0le, consis en an( com*a#a0le& INCOME STATEMENT A summa#$ of an en i $Cs #esul s of o*e#a ion fo# a s*ecifie( *e#io( of ime is #e"eale( in he income s a emen , as i *#o"i(es info#ma ion a0ou #e"enues )ene#a e( an( e/*enses incu##e(& The (iffe#ences 0e 'een he #e"enues an( e/*enses a#e i(en ifie( as he ne income o# ne loss& This financial s a emen is use o e/*lain ho' he income s a emen #e*o# s an en e#*#iseCs financial *e#fo#mance fo# a *e#io( of ime in e#ms of he #ela ionshi* of #e"enues an( e/*enses& BALANCE S7EET The 0alance shee focuses on he accoun in) e,ua ion 0$ #e"ealin) he economic #esou#ces o'ne( 0$ an en i $ an( he claims a)ains hose #esou#ces @lia0ili ies an( o'ne#sC e,ui $A& The 0alance shee is *#e*a#e( as of a s*ecific (a e, 'he#eas he income s a emen an( s a emen of #e aine( ea#nin)s co"e# a *e#io( of ime& This financial s a emen (emons #a es ho' ce# ain 0usiness #ansac ions affec he elemen s of he accoun in) e,ua ion2 Asse s D Lia0ili ies E Sha#ehol(e#sC @O'ne#sCA E,ui $& Af e# lea#nin) his, s u(en s a#e su**ose( o un(e#s an( ho' he 0alance shee is an e/*ansion of he 0asic accoun in) e,ua ion& Asse s2 *#o*e# ies o# economic #esou#ces o'ne( 0$ he 0usiness& Common cha#ac e#is ic is he a0ili $ o *#o"i(e *#o0a0le fu u#e economic 0enefi s o he 0usiness& Lia0ili ies2 (e0 s o# o0li)a ions of a 0usiness o# claims a)ains asse s& A common cha#ac e#is ic is ca*aci $ o #e(uce fu u#e asse s o# o #e,ui#e fu u#e se#"ices o# *#o(uc s& E,ui $2 is he o'ne#5s claim o he asse s o# he #esi(ual in e#es in he asse s of an en i $ af e# (e(uc in) lia0ili ies6 also calle( ne asse s&

Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Ya !sen Uni"e#si $

STATEMENT OF CAS7 FLO<S This financial s a emen is a 0i mo#e com*le/, (e ailin) an en e#*#ises cash flo's, 0#oken (o'n acco#(in) o o*e#a in), in"es in), an( financin) sou#ces& I s co"e#a)e is 0es (efe##e( un il $ou ha"e ha( a chance o *#o)#ess fu# he# in $ou# s u($ of accoun in)& This financial s a emen is use( o e/*lain ho' he cash flo' s a emen *#esen s he chan)e in cash fo# a *e#io( of ime in e#ms of he com*an$Cs o*e#a in), in"es in), an( financin) ac i"i ies&

ILLUSTFATIGE STATEMENTS The follo'in) *o# #a$s sam*le final s a emen s fo# Beau $ Bho o S o#e&

7eauty $hoto Store 7alance Sheet 8anuary 15,0..9 !ssets

Liabilities
!ccounts payable 3otes payable Total liabilities ang Fang, capital Total liabilities an% owner6s e(uity / / 0.. 2,... 2,0.. 15,+.. / 1+,...

Owner6s 4(uity
Total assets / 1+,...

7eauty $hoto S tore <ncome S tatement For =onth 4n%e% 8anuary 15, 0..9 'evenues: S ales revenue 'ental revenue Total revenues Operating 4:penses: 'ent e:pense / 5,... S alaries e:pense ;.. Total operating e:penses 3et income / 1,+.. 1.. / -,5..

5,;.. / 0,-..

Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Ya !sen Uni"e#si $

7eauty $hoto Store Statement o& Owner6s 4(uity For month en%e% 8anuary 15,0..9 wang Fang, capital, 8anuary 5 !%%: <nvestment by owner / 3et income Total Less: ith%rawal by owner ang Fang, capital, 8anuary 15 / 1.,... 0,-.. >

10,-.. 10,-.. 2.. 15,+..

7e auty $hoto Store State me nt o& *ash Flows For =onth 4n%e % 8anuary 15, 0..9
*ash &lows &rom operating activities: *ash receive% &rom clients *ash pai% &or supplies *ash pai% &or rent *ash pai% to employee 3et cash use% by operating acitivities *ash &lows &rom investing activities: $urchase o& e(uipment 3et cash use% by investing activities *ash &lows &rom &inancing activities: <nvestment by owner $artial repayment o& note ith%rawal by owner 3et cash provi%e% by &inancing activities 3et increase in cash *ash balance, 8anuary 5 *ash balance, 8anuary 15 / -,5.. ?0,9..@ ?5,...@ ?;..@ / / ?0.,...@ ?0.,...@ / 1.,... ?9..@ ?2..@ / / 0+,9.. +,-.. > +,-.. ?5..@

A((i ional e/am*les @if he#e is some e/ #a imeA2 The follo'in) a#e h#ee financial s a emen s of Ton$ Blo' Co#*o#a ion& Blease ake ime o #e"ie' hese s a emen s, no in) ca#efull$ ho' he ne income on he income s a emen flo's h#ou)h o he s a emen of #e aine( ea#nin)s, an( ho' he en(in) #e aine( ea#nin)s flo's h#ou)h o he 0alance shee & Ton$ Blo' Co#*o#a ion Income S a emen Fo# he $ea# en(in) Decem0e# -%, +HI'evenues Se#"ices o cus ome#s JKLH,HHH In e#es income %L,HHH To al #e"enues JK4L,HHH 4:penses

Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Ya !sen Uni"e#si $

Sala#ies Fen O he# o*e#a in) e/*enses To al e/*enses Ne income

J+-L,HHH %%L,HHH -HH,HHH 4LH,HHH J%%L,HHH

Mua# ? Co#*o#a ion S a emen of Fe aine( Ea#nin)s Fo# he $ea# en(in) Decem0e# -%, +HIBe)innin) #e aine( ea#nin)s J.HH,HHH Blus2 Ne income %%L,HHH JL%L,HHH Less2 Di"i(en(s -L,HHH En(in) #e aine( ea#nin)s J.NH,HHH Mua# ? Co#*o#a ion Balance Shee Decem0e# -%, +HILiabilities Sala#ies *a$a0le Accoun s *a$a0le To al lia0ili ies StocAhol%ers6 e(uity Ca*i al s ock Fe aine( ea#nin)s To al s ockhol(e#sC e,ui $ To al Lia0ili ies an( e,ui $

!ssets Cash J%3+,HHH Accoun s #ecei"a0le +.N,HHH Lan( .LH,HHH O he# asse s %H,HHH

J -.,HHH %44,HHH J+HH,HHH J++H,HHH .NH,HHH KHH,HHH J3HH,HHH

To al asse s

J3HH,HHH

Summary The#e a#e 'o ma1o# $*es of financial s a emen s!s ock #e*o# s an( flo' #e*o# s6 Financial s a emen can se#"e as an im*o# an (e"ice o (isclose info#ma ion o in"es o#s in o#(e# fo# hem o make 0e e# (ecisions6 Fou# ma1o# financial s a emen s a#e com*a#e(, e/*laine( an( illus #a e( in his lesson6 In his sec ion, he fo#me# case of The Beau $ Bho o S o#e is *icke( u* a)ain he#e, an( i s fou# ma1o# financial s a emen s a#e illus #a e( o sho' i s *e#fo#mance an( financial *osi ions& *ase &or Open Biscussion You5#e a ne' 0oa#( mem0e#, s u($in) he num0e#s, ho*in) o (eci*he# hei# meanin)& Then $ou5#e hi 'i h he accoun in) 1a#)on2 0alance shee s an( income s a emen s6 cash 0asis an( acc#ual 0asis& You hink $ou hea# he financial s a emen s ,uie l$ lau)h a $ou, an( $ou 0e)in o 'on(e# if he 0oa#( shoul( hi#e a *s$chia #is ins ea( of an accoun an & Su))es e( Mues ions2

Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Ya !sen Uni"e#si $

%A 7o' a#e financial s a emen s *#e*a#e(> +A Do he$ make hin)s sim*le#> -A <ha info#ma ion can 'e infe# f#om hese s a emen s> .A 7o' can 'e make use of hem>