Understanding Financial Statements Gerald P. Weinstein, PHD, CPA KPMG Professor of Accountancy John...
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Transcript of Understanding Financial Statements Gerald P. Weinstein, PHD, CPA KPMG Professor of Accountancy John...
Understanding Financial Statements
Gerald P. Weinstein, PHD, CPAKPMG Professor of AccountancyJohn and Mary Jo Boler School of
Business John Carroll University
Hudson Library and Historical Society’s MBA Lite mini-seriesFebruary 23, 2015
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Forms of Business Forms of Business OrganizationOrganization
Sole proprietorshipSole proprietorship
PartnershipPartnership
CorporationCorporation
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Types of Business ActivityTypes of Business Activity
FinancingFinancing
InvestingInvesting
OperatingOperating
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Financing ActivitiesFinancing Activities Borrowing createsBorrowing creates
liabilitiesliabilities Bank loansBank loans Debt securitiesDebt securities Goods on credit or Goods on credit or
payablespayables
Selling stockSelling stock creates creates stockholders’ stockholders’ equityequity
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Investing ActivitiesInvesting Activities
Obtaining Obtaining resources or resources or assets to operate assets to operate the businessthe business LandLand BuildingsBuildings VehiclesVehicles ComputersComputers FurnitureFurniture EquipmentEquipment
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Operating ActivitiesOperating Activities Primary activity of Primary activity of
business business Selling goodsSelling goods Providing servicesProviding services ManufacturingManufacturing Cost of SalesCost of Sales AdvertisingAdvertising Paying employeesPaying employees Paying utilitiesPaying utilities
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Operating ActivitiesOperating Activities RevenuesRevenues are the increases in are the increases in
assets resulting from the sale of a assets resulting from the sale of a product or serviceproduct or service
ExpensesExpenses are the cost of assets are the cost of assets consumed or services used in consumed or services used in generating revenue.generating revenue.
If revenue If revenue >> expense expense == Net Net IncomeIncome
If revenue If revenue << expense expense == Net Loss!Net Loss!
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Four Financial StatementsFour Financial Statements
Income StatementIncome Statement
Retained Earnings StatementRetained Earnings Statement
Balance SheetBalance Sheet
Statement of Cash FlowsStatement of Cash Flows
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Income StatementIncome Statement
Reports operating success or failure Reports operating success or failure
for a period.for a period.
Summarizes revenues and expenses Summarizes revenues and expenses
for period: for period: month, quarter, year.month, quarter, year.
If revenue If revenue >> expense expense == Net Net
Income.Income.
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Income StatementIncome Statement
Do this statement first!Do this statement first!
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Retained Earnings Retained Earnings StatementStatement
Shows changes in retained earnings Shows changes in retained earnings
for period: for period: month, quarter, yearmonth, quarter, year
Beginning balanceBeginning balance
AddAdd Net Income from income Net Income from income
statement.statement.
Deduct DividendsDeduct Dividends
Ending balanceEnding balance
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Retained Earnings Retained Earnings StatementStatement
Do this statement second!Do this statement second!
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Balance SheetBalance Sheet Reports Reports assetsassets and claims to assets.and claims to assets.
Claims of creditors, Claims of creditors, liabilities.liabilities.
Claims of owners, Claims of owners, stockholders’ equity.stockholders’ equity.
Assets = Liabilities + Stockholders’ Assets = Liabilities + Stockholders’
EquityEquity
Specific date – Specific date – one point in time!one point in time!
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Balance SheetBalance Sheet
From From Retained Retained Earnings Earnings StatementStatement
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Statement of Cash Statement of Cash FlowsFlows
Provides information about cash Provides information about cash
receipts and cash paymentsreceipts and cash payments
Summarizes for period: Summarizes for period: month, month,
quarter, year.quarter, year.
Cash effects of operating, Cash effects of operating,
investing, and financing investing, and financing
activities.activities.
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Statement of Cash Statement of Cash FlowsFlows
Where did the cash come from?Where did the cash come from?
How was cash used during the How was cash used during the
period?period?
What was the change in the cash What was the change in the cash
balance during the period?balance during the period?
A company cannot survive without A company cannot survive without
cash!cash!
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Statement of Cash Flows..Statement of Cash Flows..
Agrees Agrees
withwith Balance Balance SheetSheet
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AssetsAssets Resources owned by Resources owned by
the businessthe business CashCash Accounts Accounts
receivablereceivable InventoriesInventories Furniture and Furniture and
fixturesfixtures EquipmentEquipment SuppliesSupplies
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LiabilitiesLiabilities
Obligations or debts of businessObligations or debts of business Notes payableNotes payable Accounts payableAccounts payable Interest payableInterest payable Salaries payableSalaries payable Unearned revenueUnearned revenue
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Stockholders’ EquityStockholders’ Equity Ownership claims on assetsOwnership claims on assets
Paid-in capitalPaid-in capital Common stockCommon stock
Retained earningsRetained earnings
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Basic Accounting Basic Accounting EquationEquation
Assets = Assets =
Liabilities + Stockholders’ EquityLiabilities + Stockholders’ Equity
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Supplements to the Financial Supplements to the Financial Statements in an Annual Statements in an Annual ReportReport
Management Discussion and Management Discussion and AnalysisAnalysis
Notes to Financial StatementsNotes to Financial Statements
Auditor’s reportAuditor’s report
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Management’s Discussion Management’s Discussion and Analysis covers three and Analysis covers three items:items:
1.1. LiquidityLiquidity
2.2. Capital resourcesCapital resources
3.3. Results of Results of
operationsoperations
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Management’s Discussion Management’s Discussion and Analysisand Analysis
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Notes to Financial Notes to Financial StatementsStatements
Explanatory notes and Explanatory notes and supplementary schedulessupplementary schedules
Clarifies information in financial Clarifies information in financial statementsstatements
Expands with additional detailExpands with additional detail Describes accounting policiesDescribes accounting policies Explains uncertainties and Explains uncertainties and
contingenciescontingencies
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Notes to Financial Notes to Financial StatementsStatements
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Auditor’s ReportAuditor’s Report
Certified Public Accountant – CPACertified Public Accountant – CPA Auditor (CPA) conducts independent Auditor (CPA) conducts independent
examination of financial statementsexamination of financial statements Fair representation?Fair representation? Follow Follow generally accepted generally accepted
accounting principles (GAAP)?accounting principles (GAAP)? Unqualified opinionUnqualified opinion
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Auditor’s ReportAuditor’s Report