CMA P1U1M2

Financial Statements Part 1

Users of the Balance Sheet

Lenders, investors, company management, and competitors

Uses of the Balance Sheet

Understand company’s financial position at a point in time, determine composition of assets & liabilities, evaluate liquidity and long term solvency

Main components of the Balance Sheet

Assets, Liabilities, Owner’s Equity

Limitations of the Balance Sheet

Does not equal market value of the entity

How do financial transactions affect the elements of the Balance Sheet?

Every transaction must be “double” entered and effect at least two accounts in order to maintain the accounting equation and keep the balance sheet level.

How does the Balance Sheet relate to other financial statements?

The statement of cash flows and the statement of stockholder’s equity are both built with the previous period’s balance sheet and then feed ending cash balance and retained earnings balance into the new balance sheet.

How is a Balance Sheet prepared?

Close all temporary accounts with adjusting journal entries, then calculate ending balance of cash and retained earnings from statement of cash flows and statement of retained earnings. List out assets and their balances as debits, liabilities and their balances as credits, and stockholder’s equity accounts and their balances as credits.