THE FINANCIAL STATEMENTS

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THE FINANCIAL STATEMENTS

• Chapter 3

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CHAPTER 3 OBJECTIVES

• Describe the composition and objectives of each
  of the four financial statements.
• Show how the economic entity, periodicity,
  monetary unit, stable dollar, and going concern
  assumptions, and the revenue recognition,
  matching, and historical cost principles,
  influence financial statement disclosures.

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CHAPTER 3 OBJECTIVES (CONT.)

• Distinguish between cash flow reporting and the
  accrual basis of accounting.
• Articulate the importance of cash flows from
  operating activities.
• Explain and give examples of financial statement
  articulation.

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FINANCIAL STATEMENT CONCEPTS

• Objectivesall analysts, regardless of specific
  objectives, desire knowledge about
• Cash flows
• Resources
• Claims against those resources
• Wealth and changes in it

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FINANCIAL STATEMENT CONCEPTS (CONT.)

• Corporate objectivemaximize shareholder wealth,
  which equals share price maximization

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FINANCIAL STATEMENT CONCEPTS (CONT.)

• Assumptionscharacteristics embedded in the
  financial reporting system
• Economic entitybusiness is distinct from owners
• Periodicitycompanies disclose financial
  statements at regular time intervals
• Monetary uniteconomic activity measured and
  reported in dollars
• Stable dollarfinancial statements are not
  inflation adjusted
• Nominal dollar capital maintenancesum of
  monetary unit and stable dollar assumptions

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FINANCIAL STATEMENT CONCEPTS (CONT.)

• Principlescore concepts of GAAP
• Historical costasset and liability attribute
  most commonly used to measure and report
  accounts historical exchange price
• Revenue realization principlereport revenues
  when realized (or realizable) and earned
• Usually occurs at point of sale or service
• Independent of cash receipt

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FINANCIAL STATEMENT CONCEPTS (CONT.)

• Principlescore concepts of GAAP (cont.)
• Matching principlecosts incurred in generating
  revenues
• subtracted in revenue realization period
• independent of cash outflows
• Accrual accountingsum of revenue realization and
  matching principles

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FINANCIAL STATEMENT CONCEPTS (CONT.)

• Cash accountingequates cash received for goods
  and services to revenues and cash paid to earn
  them as expenses not GAAP

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FINANCIAL STATEMENT CONCEPTS (CONT.)

• Financial statement interrelationships
• Articulationlogical relationships among
  financial statements accounts as the four
  financial statements work as an integrated
  reporting system to convey financial information

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FINANCIAL STATEMENT ORIENTATION

• eSTUFF.comhypothetical Internet retailer
  introduces students to financial statements used
  to illustrate concepts throughout the text
• eSTUFFs financial statementsExhibit 3-1 (pp.
  67-69 of the text)

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FINANCIAL STATEMENT CONCEPTS (CONT.)

• Additional financial statement disclosuresstrengt
  hen articulation
• Notes to the financial statementsamplify and
  clarify financial statements also called notes
  or footnotes
• Supplementary informationadditional disclosures
  that add insight to financial statements

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INCOME STATEMENT (CONT.)

• Measures change in wealth during a reporting
  period
• Equation revenues expense net income (loss)

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INCOME STATEMENT (CONT.)

• Revenuesasset increases from providing services
  or delivering goods
• Gainsasset increases from peripheral
  transactions
• Expensesasset decreases costs of doing
  business matched against revenues
• Lossesasset decreases from peripheral
  transactions

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INCOME STATEMENT (CONT.)

• Cost of goods solddifference between the
  historical cost and selling price of inventory
  that is sold
• Selling, general, and administrative expenses
  (S,GA expenses operating expenses)costs
  incurred in running a business matched against
  revenues
• Incomedifference between revenues (gains) and
  expenses (losses)
• Earnings per share (EPS)profit (loss) per share
  of common stock

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INCOME STATEMENT (CONT.)

• All-inclusive incomeresults from reporting all
  revenues (gains) and expenses (losses) in a
  reporting period
• Multiple step formatseparates central business
  activities revenues and expenses from peripheral
  gains and losses
• Single step formatcombines core and peripheral
  revenues and subtracts core and peripheral
  expenses from them

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STATEMENT OF SHAREHOLDERS EQUITY

• Measures change in owners wealth during the
  reporting period
• Equation Beginning shareholders equity net
  income dividends ending shareholders equity

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SHAREHOLDERS EQUITY (CONT.)

• Contributed capitalresources invested in the
  business by its owners
• Common stockmost prevalent stock type issued
  risk capital
• Preferred stockdividend preference over common
  stock less risky investment than common stock
• Par valueminimum selling price of stock

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SHAREHOLDERS EQUITY (CONT.)

• Additional paid in capitaldifference between
  stocks selling price and its par value
• Retained earningsincome kept within the business
• Dividendscash paid to shareholders as a return
  on investment

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BALANCE SHEET

• Measures wealth at one point in time (usually the
  end of the reporting period)
• Equation assets liabilities shareholders
  equity
• Remains in balance after every transaction

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BALANCE SHEET (CONT.)

• Liquiditycash or items convertible into cash
  that can be used to pay obligations in the near
  term
• Assetsfuture economic benefits, controlled by an
  entity, resulting from a past transaction

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BALANCE SHEET (CONT.)

• Current assetliquid resource usually converted
  into cash within one year
• Long-term assetilliquid resource used to
  generate revenues and cash flows includes
  long-term investments, property, plant,
  equipment, and intangible assets

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BALANCE SHEET (CONT.)

• Liabilitiesfuture economic obligations, owed by
  an entity, resulting from a past transaction
• Current liabilitiespending obligations usually
  payable within one year
• Long-term liabilitiesnon-current obligations

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STATEMENT OF CASH FLOWS

• Measures change in cash during a reporting period
• Equation cash flows from operating activities
  cash flows from investing activities cash flows
  from financing activities net change in cash

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STATEMENT OF CASH FLOWS(CONT.)

• Cash flows from operating activitiescash
  provided by or used for central business
  activities most important section of the
  statement
• Direct cash flowsmethod of disclosure for
  reporting operating cash flows reports received
  from sales and services and paid to suppliers,
  employees, and other short-term creditors
• Indirect cash flowsalternative operating cash
  flow reporting method reconciles net income to
  operating cash flow to report operating cash
  flows

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STATEMENT OF CASH FLOWS(CONT.)

• Cash flows from investing activitiescash
  provided or used by the disposal and acquisition
  of long-term assets
• Cash flows from financing activitiescash
  provided or used by issuing and retiring stocks
  and bonds and paying dividends

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