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Basic Financial Statements Chapter Number 2

The document discusses the three basic financial statements prepared by businesses: 1) The balance sheet shows a business's assets, liabilities, and owner's equity at a specific date. It provides a snapshot of the business's financial position. 2) The income statement shows a business's revenues and expenses over a period of time, calculating the net profit or loss. 3) The statement of cash flows reports the changes in a business's cash from operating, investing, and financing activities over a period. It tracks cash inflows and outflows.

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94 views2 pages

Basic Financial Statements Chapter Number 2

The document discusses the three basic financial statements prepared by businesses: 1) The balance sheet shows a business's assets, liabilities, and owner's equity at a specific date. It provides a snapshot of the business's financial position. 2) The income statement shows a business's revenues and expenses over a period of time, calculating the net profit or loss. 3) The statement of cash flows reports the changes in a business's cash from operating, investing, and financing activities over a period. It tracks cash inflows and outflows.

Uploaded by

Muhammad Usama
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Basic financial statements

Financial statements show the result of business in terms of monetary units in dollar or rupees the
result may be profit or loss of business financial position of the business and the position of cash in
business.

There are three basic financial statements which are prepared in business

1. Balance sheet or statement of financial position


2. Income statement or statement of profit or loss
3. Statement of cash flows

Balance sheet or statement of financial position

It is a financial statement that describes where the enterprise stands at a specific date. It is sometimes
described as snapshot of the business in financial or dollar terms.

Balance sheet talk about the assets liabilities and owner's equity. Balance sheet is prepared at a
particular date.

The balance sheet displays the company's total assets, and how these assets are financed, through
either debt or equity. ... The balance sheet is based on the fundamental equation: Assets = Liabilities +
Equity.

How to Prepare a Basic Balance Sheet

Determine the Reporting Date and Period. ...

Identify Your Assets. ...

Identify Your Liabilities. ...

Calculate Shareholders' Equity. ...

Add Total Liabilities to Total Shareholders' Equity and Compare to Assets

Format of the balance sheet is as follow


Income statement

Statement of business which is prepared to show the profit or loss of

business by matching the expenses and revenues of a particular period

income statement show us the operating performance of business

Unlike the balance sheet, the income statement calculates net income or loss over a range of time.
For example annual statements use revenues and expenses over a 12-month period, while
quarterly statements focus on revenues and expenses incurred during a 3-month period

Format of the income statement is as follow

Statement of cash flows

Statement of cash flows shows the increase and decrease in cash of business during a particular period
of time.

There are three activities due to which the cash of the business increase or decrease Which are as
follows

operating activities

These activities talks about the changes in cash due to expenses and revenues. expenses caused
negative cash flows and revenues cause positive cash flows.

Positive cash flow means cash comes in business and negative cash flow means cash goes out from
business

Investing activities

These activities talk about the changes in cash due to purchasing and selling of assets purchasing of
assets causes negative cash flows and selling of assets causes positive cash flows

Financing activities

These activities talks about the owners investment in business and obtaining loan by business from its
creditors

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