1. Understanding Financial Statements

2. Users of Financial Information
Internal Users
Managers plan, organize and run a business

3. Users of Financial Information
External Users
Investors
Creditors
Others
Taxing authorities
Regulatory agencies
Customers
Labour unions
Economic planners
Primary users

4. Objective of Financial Reporting
Provide the most useful financial information for decision making
This is accomplished
through the development
of financial statements. 4

5. How much is Joe Student Worth?
HE HAS
- cash $19.22
- beer can empties $45.38
- CDs $ (new)
- ’97 beater $ (market)
TOTAL $

6. How much is Joe Student Worth?
HE OWES
Back Rent $400 (current)
Std Loan* $1000 (long term)
TOTAL $1400
HE IS WORTH – 1400 = $209.72

7. Assets = Liabilities + net worth
Accounting Equation
Assets = Liabilities + Shareholders’ Equity
Assets = Liabilities + net worth

8. Basic Terms Assets - resources owned by a business
Liabilities - obligations of the business
Shareholders’ equity
Share capital - representing the primary ownership interest in a corporation
Retained earnings – accumulated earnings of corporation that have not been distributed to shareholders

9. CSU CORPORATION Balance Sheet December 31, 2006
Head up the statement
name of company
name of statement
date (as at a specific point in time)

10. CSU CORPORATION Balance Sheet December 31, 2006
Assets
Cash $ 2,000
Accounts receivable 4,000
Inventory 1,800
Equipment 16,000
Total assets $23,800
List the assets and total
Note the order of listing

11. CSU CORPORATION Balance Sheet December 31, 2006
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000
List the liabilities and subtotal
Hmm .. Same order for liabilities

12. CSU CORPORATION Balance Sheet December 31, 2006
List shareholders’ equity.
Subtotal
Add to liabilities, total

13. CSU CORPORATION Balance Sheet December 31, 2006
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000
Shareholders’ equity
Common shares $10,000
Retained earnings ,800
Total shareholders’ equity 16,800
Total liabilities and shareholders’ equity $23,800

14. Classified Balance Sheet
Generally contains the following standard classifications:
Assets
Current assets
Long-term investments
Capital assets
Liabilities
Current liabilities
Long-term liabilities
Shareholders’ Equity
Share capital
Retained earnings 21

15. Stop and Check
Total assets must equal total liabilities and shareholders’ equity

16. Yeah, but I have a job now. I’ll have money coming in.
Money coming in (for October)
- wages $1800
Money going out
Rent $400
Food $400
Entertainment $800
IMPROVED NET WORTH $200

17. Revenues (money coming in)
Revenues arise from sale of a product or service
Revenues result in an inflow of assets

18. Expenses
Expenses are the costs of assets consumed or services used to generate revenues
Examples
Cost of sales
Store operating expenses
General and administrative expenses
Interest expense

19. (Net loss is the excess of expenses over revenues)
Net Earnings
Net earnings are the excess of revenue over expenses
Revenue $10,000 Less: Expenses 3,000 Net earnings $ 7,000
(Net loss is the excess of expenses over revenues)

20. Statement of Earnings Head up the statement
CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006
Statement of Earnings
Head up the statement
name of company
name of statement
period of time covered

21. CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2001
Revenues Service revenue $22,200
List the revenues

22. CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006
Revenues Service revenue $22,200 Expenses Rent expense $9,000
Insurance expense 1,000
Supplies expense
Total expenses 10,200
Earnings before income tax 12,000
Income tax expense 5,200
List and total the expenses. Note that income tax is shown separately from other expenses

23. Subtract expenses from revenues to obtain net earnings (loss)
CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006
Revenues Service revenue $22,200 Expenses Rent expense $9,000
Insurance expense 1,000
Supplies expense
Total expenses 10,200
Earnings before income tax 12,000
Income tax expense 5,200
Net earnings $ 6,800
Subtract expenses from revenues to obtain net earnings (loss)

24. Joe Student’s Worth Now?
He was worth $209.72
He has since cleared $200.00
His current Net Worth $409.72
At end of October

25. Statement of Retained Earnings Head up the statement
CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006
Statement of Retained Earnings
Head up the statement
name of company
name of statement
period of time covered (same period as statement of earnings)

26. CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006
Retained earnings, January 1 $
Start with beginning retained earnings (same as ending retained earnings of prior period)

27. CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2001
Retained earnings, January 1 $
Add: Net earnings 6,800
6,800
Add net earnings (subtract loss) from the current year (see Statement of Earnings)
Subtotal

28. Subtract current year’s dividends (if any) and total
CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006
Retained earnings, January 1 $
Add: Net earnings 6,800
6,800
Less: Dividends
Retained earnings, December 31 $ 6,800
Subtract current year’s dividends (if any) and total

29. In what order are financial statements prepared? Presented?
WHY?

30. Net earnings is needed for the Statement of Retained Earnings
CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006
Revenues Service revenue $22,200 Expenses Rent expense $9,000
Insurance expense 1,000
Supplies expense
Total expenses 10,200
Earnings before income tax 12,000
Income tax expense 5,200
Net earnings $ 6,800
Net earnings is needed for the
Statement of Retained Earnings

31. Ending retained earnings is needed for the Balance Sheet
CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006
Retained earnings, January 1 $
Add: Net earnings 6,800
6,800
Less: Dividends
Retained earnings, December 31 $ 6,800
Ending retained earnings is needed
for the Balance Sheet

32. CSU CORPORATION Balance Sheet December 31, 2006
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000
Shareholders’ equity
Common shares $10,000
Retained earnings ,800
Total shareholders’ equity 16,800
Total liabilities and shareholders’ equity $23,800

33. Remember …
Remaining liquid and solvent is as important as making a profit because...
A company can survive without earnings, but it can’t survive very long without cash
“B u r n R a t e”

34. Financial Accounting Statements
Statement of Earnings
Reports the results of operations for a specific period of time
Statement of Retained Earnings
Reports the changes in retained earnings for a specific period of time
Balance Sheet
Reports the assets, liabilities, and shareholders’ equity as at a specific point in time
Statement of Cash Flows
Reports the cash receipts and payments for a specific period of time

35. Management Discussion and Analysis Auditor's Report
Elements of an
Management Discussion and Analysis
Auditor's Report
Financial Statements
Statement of Earnings
Statement of Retained Earnings
Balance Sheet
Statement of Cash Flows
Notes to Financial Statements