Class 2 - INTRODUCTION TO FINANCIAL STATEMENTS

Types of financial statements

• Income Statement or P&L (Profit & Loss)

• Owner’s Equity

• Balance Sheet

• Cash Flow

Purpose of financial statements

Shows the performance of the company
Better decision-making by external users
Assesses the company’s future income and cash flow

Types of financial statements

• Income Statement or P&L (Profit & Loss)

• Owner’s Equity

• Balance Sheet

• Cash Flow

Purpose of financial statements

Shows the performance of the company
Better decision-making by external users
Assesses the company’s future income and cash flow

What are Accounting Journals

Business Activities / Transactions

What is the process of the Accounting Journals Flow that make the Financial Statements

Accurate Business Data → Recordable Transactions → Accounting Journals → Financial Statements

What is the income statement

The income statement shows the organization’s financial performance for a given period of time.

Components of the income statement

Revenue
Expenses
Net Income (Net Loss)

Revenue (Definition)

The value of goods and services the organization sold or provided to customers

Expenses (Definition)

A cost associated with providing goods or services to customers

Net Income Formula

Revenue - Expenses

When do you have net income

Revenue > Expenses

Net Loss

Revenue < Expenses

Gains and Loses (Net Income)

+ Gains

- Loses

- Expenses

= Net Income

Example of Gains (Gains and Loses)

Result from interest received from Bank Deposits

Example of Loses (Gains and Loses)

Result from selling Apple Stocks at loss

Gross Margin Formula

Sales Revenue - Cost of Goods

EBITDA Formula

(Earnings Before Interest Taxes Depreciation and Amortization)

Gross Margin - Operationing Expenses

EBIT Formula

(Earnings Before Interest and Taxes)

EBITDA - (Depreciation and Amortization)

Taxable Income Formula

EBIT - Interest payment

How to calculate net income

Taxable Income - Taxes

Income Statement Overall with Formulas

Sales Revenue

- Cost of goods sold

= Gross margin

- Operating expenses

= EBITDA (Earnings before interest, taxes, depreciation and amortization)

- Depreciation & Amortization

= EBIT (Operating income)

- Interest payment

= Taxable income

- Taxes

= Net Income

Statement of Owner’s Equity definition

The owner’s equity statement shows how the organization’s equity (or value) has changed over time.

Statement of Owner’s Equity (Example)

Net Income is added to the beginning balance

Possible Changes to the Statement of Owner’s Equity

• Investments by owners (capital or stock)

• Distributions to owners (or Dividends)

• Net Income for every new accounting period

Balance Sheet (Definition)

A statement that lists what the organization owns (assets), what it owes (liabilities), and what it is worth (equity) on a specific date.

Components of the Balance Sheet

Assets
Liabilities
Equity

Balance Sheet

Assets (Definition)

Resources used to generate revenue

Balance Sheet

Liabilities (Definition)

Amounts owed to others (called creditors or vendors)

Balance Sheet

Equity (Definition)

Book value or Net worth (ending balance of the Statement of Owner’s Equity)

Current vs noncurrent Assets / Liabilities (definition for both)

Asset / Liability consumed in one year or less = current

Asset / Liability consumed over one year or more = noncurrent

Cash Flow Statement (Definition)

A cash flow statement tracks the inflow and outflow of cash over a period of time

What are Financial Ratios used for

To assess the financial health of the organization

Financial Ratios

Liquidity (Definition)

Ability to convert assets into cash without hurting its market price

Financial Ratios

Working Capital (Definition)

Working capital = current assets - current liabilities

Financial Ratios
Current Ratio (Formula)

Current Ratio = Current Assets ÷ Current Liabilities

Asset (Formula)

Assets = Liabilities + Owner’s Equity