LO1-3 Communicating through Financial Statements Part 1

What are financial statements?

Periodic reports that communicate a company’s business activities to people outside the company.

What are the four primary financial statements?

1. Income statement

2. Statement of stockholders’ equity

3. Balance sheet

4. Statement of cash flow

What decisions do financial statements help with?

• Should I buy the company’s stock

• Should I lend money

• Is the company profitable

• Is management effective

What does the income statement report?

Revenues and expenses over an interval of time.

What does the income statement show?

Whether the company generated enough revenue to cover expenses.

What is the formula for net income?

Revenues - Expenses = Net Income

What happens if expenses exceed revenues?

The company reports a net loss.

What are alternative names for the income statement?

• Statement of operations

• Statement of income

• Profit and loss statement (P&L

What period does Eagle Soccer Academy’s income statement cover?

December 1 to December 31, 2027.

How much revenue did Eagle Soccer Academy earn in December?

$72,000

How much were Eagle’s total expenses in December?

$58,000

What was Eagle’s net income for December?

$14,000

What does a single underline mean in a financial statement?

A subtotal.

What does a double underline mean in a financial statement?

A final total.

What is the key point of the income statement?

It compares revenues and expenses to assess the company’s ability to generate profit from operations.

What do Decision Maker’s Perspective sections show?

How accounting information is used to make real‑world business decisions.

How can you determine a company’s ability to be profitable and grow?

Look at net income from the income statement

What does it mean if revenues exceed expenses?

The company is profitable and more likely to grow operations.

What happened to Netflix vs. Cinemark’s net income?

Netflix’s net income increased; Cinemark reported net losses from 2020–2022.

What is stockholders’ equity?

Owners’ claims to the company’s resources

What are the two sources of stockholders’ equity?

1. Common stock (external)

2. Retained earnings (internal)

Formula for stockholders’ equity?

Stockholders’ Equity = Common Stock + Retained Earnings

What is common stock?

Amounts invested by owners when they purchase shares.

Formula for ending common stock?

Beginning Common Stock + New Issuances = Ending Common Stock

What are retained earnings?

All net income minus all dividends over the life of the company.

Formula for ending retained earnings?

Beginning RE + Net Income - Dividends = Ending RE

Why do retained earnings increase?

When the company earns net income.

Why do retained earnings decrease?

when the company is not keeping profits.

There are only two ways this can happen:

Paying dividends

Net loss

What was Eagle’s beginning common stock?

$0 — because it was the first month of operations.

How much common stock did Eagle issue?

10,000 shares × $20 = $200,000

What was Eagle’s beginning retained earnings?

$0 — new company, no prior profits.

How did Eagle’s retained earnings change?

• Net income: $14,000
  – Dividends: $4,000
  = Ending RE: $10,000

What was Eagle’s total stockholders’ equity?

$200,000 (common stock) + $10,000 (retained earnings) = $210,000

Are dividends an expense?

No. They are distributions to owners, not business expenses.

What is the key point of the statement of stockholders’ equity?

It reports changes in common stock and retained earnings each period.

What is another name for retained earnings?

Reinvested earnings or accumulated deficit (if negative).