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INFOS-11-CHAPTER-5-Lesson-Proper

This document outlines the importance of understanding financial statements for effective financial management, detailing the four basic financial statements: Income Statement, Balance Sheet, Statement of Changes in Owner's Equity, and Cash Flow Statement. Each statement serves a specific purpose in analyzing a business's financial condition, operations, and cash flow. The document also explains key concepts such as assets, liabilities, equity, and various costs associated with business operations.

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11 views

INFOS-11-CHAPTER-5-Lesson-Proper

This document outlines the importance of understanding financial statements for effective financial management, detailing the four basic financial statements: Income Statement, Balance Sheet, Statement of Changes in Owner's Equity, and Cash Flow Statement. Each statement serves a specific purpose in analyzing a business's financial condition, operations, and cash flow. The document also explains key concepts such as assets, liabilities, equity, and various costs associated with business operations.

Uploaded by

coderrex11
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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LESSON 5:

REFERENCES: UNDERSTANDING FINANCIAL STATEMENTS

Basic skills in financial management startsin the critical areas of cash management and
bookkeeping, The need to understand. Managers need to learn how to generate financial
statement to really understand the financial condition of the business

Objectives:
1. Identify the financial statements used in business.
2. Discuss the purpose of each of the financial statements.
3. Show how each of the financial statements are being prepared and used in
analyzing and making business decisions.

FINANCIAL STATEMENTS – are the product of financial accounting.


They show the results of of opeeation, financial condition, changes in owner’s equity, and
sources and uses of cash.

The Basic Financial Statements are:


1. Income Statement or Statement of Comprehensive Income;
2. Balance Sheet or the Statement of Financial Position or Statement of Financial
Condition;
3. Statement of Changes in Owner’s Equity (for a sole proprietorship) or Statement of
Changes in Partner’s Equity (for a partnership) or the Statement of Changes in
Stockholder’s Equity (for a corporation); and
4. Cash Flow Statement or Statement of Cash Flows.

INCOME STATEMENT – now called statement of comprehensive income, details the


revenues earned and the expenses incurred by a company.
 It shows the results of operation of a company.
 The “bottom line” in business parlance is the net profit or the net loss of the
business.
 It shows the profitability of the firm.
 For a service enterprise, the income statement is very simple.
 For a trading firm, the income statement is a little complicated.
 The income statement for a manufacturing company is a more complicated than
that for a trading firm because of the different costs involved (cost of goods
manufactured and the cost of goods sold) in addition to the operating expenses.
Product costs – are the cost of direct materials, direct labor, and overhead, also called
manufacturing cost.

Direct materials and direct labor are variable costs or costs that change in volume.
This means that the more products are produced (volume), the greater or higher the
cost of direct materials and direct labor is, because they are directly incorporated into
the product.
Direct Materials – are materials directly incorporated into the product like lumber for
furniture, leather for shoes etc.
Direct Labor – covers the wages paid to all direct workers, example: the workers doing
the actual production of the products manufactured by the company.
Overhead (manufacturing/factory overhead) – covers all manufacturing costs
other than direct materials and direct labor. This includes indirect materials and
manufacturing supplies, salaries of factory or plant managers and supervisors, salary
of factory staff, rent for the plant or fcatory site, among others.
Variable – means a change in volume, while fix means remains constant irrespective of
volume.
Period costs – refer to costs incurred during a particular time period and reported either
as selling or marketing expenses and administrative or general expenses.

BALANCE SHEET – or the statement of financial condition, sometimes also called


statement of financial position shows the assets, liabilities, and owners’ equity of a
business.
 It shows the financial condition or financial position of the business.
 It details the company’s resources (assets) and obligations (liabilities) and the
composition of the owners’ equity.
 The difference between assets and liabilities is equal to the owners equity.
 It shows the liquidity and solvency of the firm.
Liquidity – refers to a firm’s ability to meet its maturing obligations in the short run.
Solvency – refers to the firms’s ability to meet maturing obligations in the long run.

Current assets – are the resources that will be used for current operations (short term)
or within the current operating cycle.
Non-current assets – refers to the resources of the firm that are durable or will last
longer than a year like land, building, equipment, furniture and fixture, and long-term
investments.
Current liabilities – are obligations of the firm that will mature or need payment during
the current accounting period or accounting year.
Non-current liabilities – are the obligations of the firm that will mature or become due
within more than a year.

“Owner’s equity (for a sole proprietorship), partners’ equity (for a partnership), or


stockholders’ equity (for a corporation should equal total assets minus total liabilities”.

STATEMENT OF CHANGES IN OWNERS’ EQUITY – details the changes that occurred


in the owner(s)’ equity.
 It shows the beginning owner(s)’ equity with additonal investments for a sole
proprietorship or partnership or, for a corporation, additonal issuances of corporate
stock.
 It shows the withdrawals made by a sole proprietorship or partner(s) or declaration
of dividends of a corporation.
 It shows profit for the sole proprietorship or partnership or changes in the retained
earnings account account if a separate statement of retained earnings is not made.

CASH FLOW STATEMENT – is sometimes called the funds flow statement or the
statement of the sources and uses of funds or the statement of sources and uses of
funds.
 Cash and funds re used interchangeably. According to Bernstein (1993), feedback
received by the Financial Accounting Standards Board (FASB) on the conceptual
framework project indicated an overall consensus among users of Financial
statements that a cash flow statement would be more than useful than any other
funds flow statement.

This Statement is Divided Into Three Sections:


1. Net cash flow from operating activities
2. Net cash flow from investing activities
3. Net cash flow from financing activities

Net cash flow from investing activities – shows purchases and sales of fixed assers.
Net cash inflow from financing activities – shows sales of capital stock, payment of
dividends, and repayment of long-term liabilities.
Operating activities – are all operation-related earning activities of the company –
rendering service for a service firm, selling goods for a trading concern, and
manufacturing and selling activities for a manufacturing company. They include the
income and expense items found in the income statement and all other activities of
the enterprise related to extension of credit to customers, investment in inventories,
obtaining credit from suppliers. They concerned with the working capital accounts
(current assets and current liabilities).
Financing actvities – involve obtaing resources from owners (issuannces of capital
stock) and paying them dividends as their share in the profit of the company. They
also include obtaining resources from creditors and repaying the amounts borrowed.
Investing activities – involve all activities related to non-current assets – disposing of
them or selling them and buying them.

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