2 - Financial Statements

Income Statement

Income Statement

- statement showing the results of the business operations for a certain period

- shows the income received by the business and the costs and expenses incurred in realizing the income

Balance Sheet

- statement that gives information on the financial condition of a business as of a given date

- shows the assets, liabilities, and the investments or equity of the owner of the business

Statement of Financial Position

- new name for balance sheet

Assets

- things owned by the business

Liabilities

- debts owed by the business

Statement of Charges in Equity

- statement that gives information on the changes or movements in Owner’s Equity during the period

Statement of Cash Flows

- statement that provides information on the sources and uses utilization of cash during the period

Notes to Financial Statements

- statements that provides narrative disclosures and other information required by the standards but were not presented in the other financial statements

Single-Step

- form of income statement where all expenses are deducted from the total income

- applicable to service businesses

• Total Income 1,000,000

  Total Expense 400,000

  Net Income 250,000

Multi-Step

- form of income statement that shows the different sections of the statements like total sales, cost of sales, and operating expenses

- applicable to merchandising business

• Sales 100,000,000

  Cost of Sales 400,000

  Gross Profit 600,000

  Expenses 350,000

  Net Income 250,000

Service Income

- earnings derived from services rendered

- service fees, professional fees

Sales

- income derived from the sales of goods

Commission Income

- income account to designate earnings received from selling anything on a commission basis

Other Income

- income account to designate earnings received from sources other than the main source of income

Taxes and Licenses

- payments made by the business to the government for its business operations

Salaries Expense

- cost of services rendered by the employees or workers of the business

Supplies Expense

- cost of office items like bond paper, carbon paper, ball pens, and the likes

Delivery Expense

- cost of transportation in delivering goods or services to customers

Bad Debts Expense

- the portion of accounts receivable which may not be collected

Depreciation Expense

- the portion of the fixed asset which have been charged to income during the period

• Cost

  Useful life

• 20,000,000

  20 years

  = 1,000,000 depreciation expense annually

Insurance Expense

- insurance premium paid by the business

Rent Expense

- payment of the space occupied by the business

Interest Expense

- amount charged for use of money

Advertising Expense

- includes promotional expenses in the selling of the products

Utilities Expense

- payment for cost of light and water consumed by the business

Repairs and Maintenance

- expense for repairing or servicing the building, machinery, or equipment of the business

Cash on Hand

- cash and other cash items which are not deposited in the bankC

Cash in Bank

- money deposited in the bank

Marketable Securities

- refer to company securities, usually stocks that are sold for cash

Accounts Receivable

- claims of the business from anyone for sales made or services rendered on account

Notes Receivable

- claims of the business from anyone evidenced by a note

Interest Receivable

- is interest earned on an interest-bearing note not yet collected

Account Form

- form of Balance Sheet when the assets are placed at the left side and the liabilities and the owner’s equity at the right side of the statement

Report Form

- form of Balance Sheet where the arrangement will be from top to bottom

- the assets are listed first, followed by the liabilities and the owner’s equity

Land

- land space owned by the business

Building

- the building/edifice constructed, owned, and intended for use by the business

Furniture and Fixture

- pieces of furniture used in the business

- tables, chairs, cabinets, etc.

Delivery Equipment

- transportation vehicles owned by the business

- cars, jeeps, trucks, vans, etc.

Intangible Assets

- assets that do not have physical existence owned by the business

- goodwill, patents

Tools

- small items of equipment like pliers, hammers, screwdrivers, etc.

Current Liabilities

- debts of the business paid during the accounting period through current assets or the creation of another asset

Long-term Liabilities

- liabilities payable beyond one year

Accounts Payable

- current liability which refers to debts or obligations that arise from the purchase of goods/services on account

Notes Payable

- current liability if the note is payable within a year

Interest Payable

- interest due to an interest bearing note

Accrued Interest Expense

- synonymous term with interest payable

Taxes Payable

- taxes due for the government not yet paid by the business

Salaries Payable

- salaries not yet paid by the business to its employees/workers

Owner’s Equity

- refers to the vested interest of the owner in the business

• Assets - Liabilities

Owner’s Drawing

- shows the withdrawal of cash or other items from the business by the owner

- deducted from the income earned by the business

Income and Expense Summary

- temporary account opened at the end of teh accounting period to absorb income and expense accounts before finally closing it to capital

- relieves the capital account of hte many debits and credits

Internal Users

- user of financial information who are directly involved in managing the business

- business owners, board of directors, managerial personnel

External Users

- user of financial information who are not directly involved in managing the business

- investors, customers, employees, creditors, government, public

Business Owners/Board of Directors/Managerial Employees

- to determine the activities of the enterprise for planning, organizing, leading, and controlling

Investors

- external user who assess the ability of the investee to pay dividends and pay returns to investors

Customers

- external user who determines the ability of the enterprise to be a continuing source of supply and the ability of the company to exist over a long period of time

Employees

- external user who determines the stability and profitability of the employers and the ability of the employer to pay salaries and fringe benefits

Creditors/Suppliers

- external user who know whether to approve the loan or grant credit and the ability of the borrowers to be on time in paying the loans granted

Government

- external user who determines the capacity of the business to pay taxes and its tax compliance, and serves as a base for monitoring and regulating the activities of the enterprise

Public

- external user who determines the activities of the enterprise and its contribution to the economy in the form of number of employees, ownership of assets, prices of their products, patronage of local supplies, and patronage by customers