LO1-3 Communicating through Financial Statements Part `1

Why do companies publish financial statements?

To communicate business activities to external users and help them make decisions about profitability, liquidity, and management effectiveness

What are the four primary financial statements?

• Income Statement

• Statement of Stockholders’ Equity

• Balance Sheet

• Statement of Cash Flows

What decisions do financial statements help users make?

• Should I buy the company’s stock

• Should I lend money to the company

• Is the company profitable

• Is management effectiv

What does the income statement report?

Revenues and expenses over a period of time to show whether the company generated a profit or loss

What is the formula for net income?

Revenues − Expenses = Net Income

What are other names for the income statement?

Statement of operations, statement of income, profit and loss statement, P&L.

When does a company report net income?

When revenues exceed expenses.

When does it report a net loss?

When expenses exceed revenues

How much revenue did Eagle Soccer Academy earn in December 2027?

$72,000 in service revenue

What were Eagle’s total expenses in December 2027?

$58,000

What was Eagle’s net income for December 2027?

$14,000.

What three items appear in the heading of an income statement?

Company name, statement title, and time period covered.

What does a single underline represent?

A subtotal.

What does a double underline represent?

A final total

What is the main purpose of the income statement?

To compare revenues and expenses to assess profitability from operations.

What accounting information helps determine a company’s ability to grow?

Net income from the income statement.

Why did Netflix’s net income rise while Cinemark’s fell?

Consumer behavior shifted toward streaming, benefiting Netflix and hurting traditional theaters like Cinemark.

What did Cinemark report from 2020–2022?

Net losses (expenses exceeded revenues).

What does the statement of stockholders’ equity report?

Changes in stockholders’ equity (common stock + retained earnings) over a period of time.

What are the two primary sources of stockholders’ equity?

Common stock (external) and retained earnings (internal).

What is the basic equation for stockholders’ equity?

Stockholders’ Equity = Common Stock + Retained Earnings

What does common stock represent?

Amounts invested by owners when they purchase shares.

How do you calculate ending common stock?

Beginning Common Stock + New Issuances = Ending Common Stock

What do retained earnings represent?

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

How do you calculate ending retained earnings?

Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings

Why do companies track retained earnings?

To measure how much profit has been kept in the business rather than paid out to owners.

How much common stock did Eagle issue in December 2027?

$200,000 (10,000 shares × $20 per share).

How did Eagle’s retained earnings change in December 2027?

Increased by $14,000 net income and decreased by $4,000 dividends → ending balance $10,000.

What was Eagle’s total stockholders’ equity at December 31, 2027?

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

What appears in the heading of the statement of stockholders’ equity?

Company name, statement title, and time period covered.

Why are dividends NOT an expense?

Because they are distributions to owners, not costs of running the business.

What drives changes in retained earnings?

Net income increases it; dividends decrease it.

Why is retained earnings often shown inside the statement of stockholders’ equity?

Companies rarely issue a separate statement; retained earnings is simply one column within equity.

What are other names for retained earnings?

Reinvested earnings, profits reinvested in the business, or (if negative) accumulated deficit

How do you tell whether equity increased from internal or external sources?

Compare changes in common stock (external) vs. retained earnings (internal).

What drove most of Zoom’s $3B+ equity increase in 2020?

Issuance of new common stock, not retained earnings.

How much of Zoom’s 2020 equity increase came from profits?

$672 million (retained earnings).

What does the balance sheet report?

A company’s financial position (assets, liabilities, and stockholders’ equity) at a specific point in time

What is another name for the balance sheet?

Statement of financial position.

What is the accounting equation shown on the balance sheet?

Assets = Liabilities + Stockholders’ Equity

What are assets?

Resources owned by the company that provide future economic benefits.

What are common examples of assets?

Cash, accounts receivable, supplies, equipment.

What are liabilities?

Amounts owed to creditors.

What are common examples of liabilities?

Accounts payable, salaries payable, utilities payable, interest payable, notes payable.

What is stockholders’ equity?

Owners’ claims to the company’s resources after liabilities are paid.

What two items make up stockholders’ equity?

Common stock and retained earnings.

How does the timing of the balance sheet differ from the income statement?

The balance sheet reports at a point in time; the income statement reports over a period of time.

What were Eagle’s total assets at December 31, 2027?

$350,000

What were Eagle’s total liabilities at December 31, 2027?

$140,000

What was Eagle’s total stockholders’ equity at December 31, 2027?

$210,000

Why must the balance sheet “balance”?

Because resources (assets) must equal claims on those resources (liabilities + equity).

Why do creditors care about the balance sheet?

Assets will be used to generate cash to pay liabilities when due.

What is the key point of the balance sheet?

It shows how a company’s resources are financed—by creditors or by owners.

What does a high proportion of liabilities indicate?

The company relies more on creditors (debt financing).

Which companies tend to rely more on equity financing?

Younger companies

What does the statement of cash flows report?

Cash receipts and cash payments over a period of time, classified into operating, investing, and financing activities

What are the three categories of cash flows?

Operating, investing, financing

What are operating cash flows?

Cash transactions related to revenue and expense activities (the cash effects of the income statement).

What are examples of operating cash flows?

Cash received from customers, cash paid for salaries, rent, utilities, and other operating expenses.

What are investing cash flows?

Cash transactions involving long‑term assets and investments.

What are examples of investing cash flows?

Buying or selling equipment, buildings, land, or investments.

What are financing cash flows?

Cash transactions with lenders and stockholders (borrowing, repaying debt, issuing stock, paying dividends).

What are examples of financing cash flows?

Borrowing money, repaying loans, issuing stock, paying dividends.

What is the key point of the statement of cash flows?

It explains how cash changed during the period by separating operating, investing, and financing activities

What is the formula for change in cash?

Operating + Investing + Financing

How does the statement of cash flows connect to the balance sheet?

Ending cash from the cash flow statement equals the cash balance on the balance sheet.

What indicates a company can sustain operations long‑term?

Operating cash flows consistently greater than net income and ongoing investment in long‑term assets.

What did Shake Shack’s operating cash flows show?

They consistently exceeded net income — a positive sign for sustainability.

What did increasingly negative investing cash flows indicate?

The company was expanding by investing more in long‑term assets.

Why did Shake Shack’s financing cash flows increase in 2020–2021?

Issuing stock and debt to support operations during COVID‑19 and fund increased investing activities.