The Financial Statements Presentations for Chapter 2 by Glenn Owen

Key Points The three basic activities of a business and how they are reflected in the financial statements. The balance sheet, income statement, statement of retained earnings, and statement of cash flows and how these financial statements are used.

Fruit Tree Analogy Financing Activities Investing Activities Operating Activities Trunk/ Branches Roots Fruit

The Balance Sheet Assets Liabilities Stockholders’ equity

Assets Current assets – Cash – Short-term investments – Accounts receivable – Inventory – Prepaid expenses Long-term investments Property, plant, and equipment Intangible assets

Liabilities Current liabilities – Accounts payable – Wages payable – Interest payable – Short-term notes payable – Current maturities of long-term debt – Deferred revenues – Other payables Long-term liabilities

Stockholders’ Equity Contributed capital Retained earnings

The Income Statement Operating revenues – Sales – Fees earned – Other revenues Operating expenses – Cost of goods sold – Wage expense – Rent expense – Selling expense – Depreciation expense – Amortization expense – Other expenses

The Statement of Retained Earnings Beginning retained earnings balance Plus: Net income Less: Dividends = Ending retained earnings balance

The Statement of Cash Flows Cash flows from operating activities: – Collections from sales, rent, interest, etc. – Cash paid to suppliers and employees, and for rent, selling activities, interest, and taxes etc. Cash flow from investing activities: – Proceeds from sale of investment securities, property, etc. – Purchase of investment securities, property, etc. Cash flow from financing activities: – Proceeds from issuance of notes, debt, sale of equity, etc. – Payments on notes, debt, dividends, etc.

Relationships Among the Financial Statements Income Statement Statement of Retained Earnings Ending Balance Sheet Statement of Cash Flows Beginning Balance Sheet Cash from the Beginning Balance Sheet is included in the Statement of Cash Flows. Net income from the Income Statement is included in the Statement of Retained Earnings Retained earnings from the Beginning Balance Sheet is included in the Statement of Retained Earnings Ending cash from the Statement of Cash Flows is included in the Ending Balance Sheet. Ending retained earnings from the Statement of Retained Earnings is included in the Ending Balance Sheet.