BUS - A100 The Basic Financial Statements Notes

Class 2 note:
 According to the GAAP and the IFRS, every company must present four financial statements,
first three are intertwined
o Balance sheet- “snapshot” of business at point in time, ending balance sheet of one
period becomes the beginning sheet of the next period
 Cash +anything turned into cash +anything used up in one year
 Assets=liabilities + stockholders’ equity
 Assets-what we own
o Current assets: cash, accounts receivable, inventory, short-term
investments, prepaid(rent, insurance, etc)
 Cash-most liquid so always listed at top of balance sheet
 Accounts receivable-if you made a sale but customers
have not yet paid you
 Inventory-what you bought intending to resell
 Inventory (on the balance sheet) is reduced
and the “cost of goods sold” (on the income
sheet) is increased
 Every time a company sells its inventory it must
make two balancing entries
o Record the sales by increasing revenue
and increasing either cash or accounts
receivable
o Transfer the cost of the inventory sold
from the balance sheet to the income
statement
 Short term investments-
 Prepaid-pay ahead of time and then expire
o Long term investments: stock, bond investments, etc
 Not planning on converting into cash within the year
 Stock-company bought stock of another company
o Fixed assets: equipment, buildings, land
 Bought it to use in your business, can resell at some
point
 You expect it will last longer than one year
o Intangible assets, patents, copyrights, trademarks, goodwill
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 Liabilities-what we owe
o Current liabilities: accounts payable, wages payable, utilities
payable, short term notes payable
 Have to pay within Next year from day on balance sheet
 Accounts payable-purchases of inventory
 Wages payable-anything companies owe employees
 Utilities-piped into business like electricity, gas, water

,  Note payable-loan from the bank
o Long term liabilities: notes and bonds payable
 Bonds-issue a bond to make your debt available to the
general public, usually sold in $1000 segments
 There are bond exchanges like stock exchanges
 Stockholders' equity-what we’re worth
o Common stock-every corporation has to have this, can also have
variety of preferred stock if they wish
 Amount of money received when they originally
received the stock
o Retained earnings – net income, add up all net incomes from all
years company has been in business
 All net incomes-dividends payed=retained earnings
 Assets-liabilities=stockholders’ equity
o Income statement –covers a period of time, which is different than the balance sheet
 Revenue-expenses=net income
 Revenue-what we earn
 Expenses –what we use up
 Net income
 Difference to balance sheet
 Covers period of time where balance sheet is “snapshot”
 Once you start the next period you start with clean slate, balance
sheet ending roles over to starting of next period
 Inventory (on the balance sheet) is reduced and the “cost of goods
sold” (on the income sheet) is increased
 Revenue-(operating expenses/net income from operations) +/- gain or loss on
sales of other assets=net income

o Statement of retained earnings
 Beginning retained earnings + net income – dividends paid=ending retained
earnings
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o Statement of cash flows-only analyzes the cash account
 Financing-transactions with stockholders’ and bankers(except interest)
 Investing-buying and selling land, buildings, and equipment
 Operating-everything else
 Beginning cash +/- cash flows from operations +/- cash flows from investing +/-
cash flows from financing = ending cash
 Only include cash transactions the company made during period
o If no cash was received or paid, the transaction doesn’t go on this
statement