1. Accounting 11 Financial Statements COPY YELLOW TEXT

2. Financial Statements After transactions have been recorded and summarized, reports are prepared for users. The primary financial statements of a business are the income statement, the statement of owner’s equity, the balance sheet, and the statement of cash flows.

3. Income Statement A summary of the revenue and expenses for a specific period of time, such as a month or a year. The income statement reports the revenues and expenses for a period of time based on the matching concept. This concept is applied by matching the expenses with the revenue generated during a period by those expenses.

4. Income Statement The excess of the revenue over the expenses is called net income or net profit. If the expenses exceed the revenue, the excess is a net loss.

5. Income Statement Example Suzie’s Seashell Shack Income Statement For the Year Ended April 30, 2010 Fees Earned$3,500 Expenses: Salaries expense$500 Utilities expense 100 Miscellaneous expense 50 Total expenses 1,550 Net Income$1,950

6. Statement of Owner’s Equity The statement of owner’s equity reports the changes in the owner’s equity for a period of time. It is prepared after the income statement because the net income or net loss for the period must be reported in this statement.

7. Statement of Owner’s Equity There are four types of transactions that affect the owner’s equity: There are four types of transactions that affect the owner’s equity: 1) The original capital invested 2) Any additional investment made by the owner 3) The revenue and expenses that resulted in the net income or net loss 4) Any withdrawals made by the owner

8. Statement of Owner’s Equity Example Suzie’s Seashell Shack Statement of Owner’s Equity For the Year Ended April 30, 2010 Suzie Sweet, capital, May 1, 2009$3,000 Additional investment by owner during year$ 500 Net income for the year 1,950 $2,450 Less withdrawals 300 Increase in owner’s equity 2,150 Suzie Sweet, capital, April 30, 2010$ 850

9. Statement of Cash Flows The statement of cash flow consists of three sections: 1) Operating Activities 2) Investing Activities 2) Investing Activities 3) Financing Activities 3) Financing Activities

10. Statement of Cash Flows Cash Flows from Operating Activities This section reports a summary of cash receipts and cash payments from operations. Cash Flows from Investing Activities This section reports the cash transactions for the purchase and sale of relatively permanent assets (Examples: equipment, land, etc.) This section reports the cash transactions for the purchase and sale of relatively permanent assets (Examples: equipment, land, etc.)

11. Statement of Cash Flows Cash Flows from Financing Activities This section reports the cash transactions related to cash investments by the owner, borrowings, and withdrawals by the owner. This section reports the cash transactions related to cash investments by the owner, borrowings, and withdrawals by the owner. To prepare the statement of cash flows, the cash transactions of the business must be classified as operating, investing or financing activities. To prepare the statement of cash flows, the cash transactions of the business must be classified as operating, investing or financing activities.

12. Statement of Cash Flows Example Suzie’s Seashell Shack Statement of Cash Flows For the Year Ended April 30, 2010 Cash flows from operating activities: Cash received from customers $ 3,000 Deduct cash payments for expenses 1,550 Net cash flows from operating activities $1,450 Cash flows from investing activities Cash payments for purchase of shack (500) Cash flows from financing activities Cash received from owner as investment$ 500 Deduct cash withdrawals by owner 300 Net cash flows from financing activities 200 Net increase in cash during year $1,150 Cash as of May 1, 2009 2,000 Cash as of April 30, 2010 $3,150

13. How do these statements relate? The Net Income found on the Income Statement = The Net Income found on the Statement of Owner’s Equity The Capital found on the Statement of Owner’s Equity = The Capital found on the Balance Sheet The Cash found on the balance sheet = the Net cash flow on the Statement of Cash Flows