1. University of 6th of October, Egypt
Prepared by
Dr.Hassan Sweillam
University of 6th of October, Egypt

2. 4 Accounting in Action Learning Objectives
After studying this chapter, you should be able to:
[1] Understand the four financial statements and how they are prepared.
Balance Sheet
Owner’s Equity Statement
Income Statement
Statement of Cash Flows

3. Financial Statements
Definition: 
Financial statements are a collection of reports about an organization's financial results, financial condition ,cash flows performance and liquidity of a company.
Financial Statements reflect the financial effects of business transactions and events on the entity
They are useful for the following reasons:
1-To determine the ability of a business to generate cash, and the sources and uses of that cash.

4. Financial Statements
2-To determine whether a business has the capability to pay back its debts.
3-To track financial results on a trend line to spot any looming profitability issues.
4-To derive financial ratios from the statements that can indicate the condition of the business.
5-To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements.

5. Financial Statements Companies prepare four financial statements :
Balance Sheet
Owner’s Equity Statement
Income Statement
Statement of Cash Flows

6. It is comprised of the following three elements:
Financial Statements
1- Balance Sheet or Statement of Financial Position
Statement of Financial Position, also known as the Balance Sheet, presents the financial position of an entity at a given date.
It is comprised of the following three elements:
Assets: Something a business owns or controls (e.g. cash, inventory, plant and machinery, etc)

7. Financial Statements
Balance Sheet or Statement of Financial Position
Liabilities: Something a business owes to someone (e.g. creditors, bank loans, etc)
Equity: What the business owes to its owners. This represents the amount of capital that remains in the business after its assets are used to pay off its outstanding liabilities. Equity therefore represents the difference between the assets and liabilities.

8. Financial Statements 1- Balance Sheet
Reports the assets, liabilities, and owner’s equity at a specific date.
Lists assets at the top, followed by liabilities and owner’s equity.
Total assets must equal total liabilities and owner’s equity.
Is a snapshot of the company’s financial condition at a specific moment in time (usually the month-end or year- end).

9. Financial Statements 2- Owner’s Equity Statement
Statement of Changes in Equity, also known as the Statement of Retained Earnings, details the movement in owners' equity over a period.
Reports the changes in owner’s equity for a specific period of time.
The time period is the same as that covered by the income statement.

10. Financial Statements 2- Owner’s Equity Statement
The movement in owners' equity is derived from the following components:
-Net Profit or loss during the period as reported in the Income Statement
-Share capital issued or repaid during the period
- Dividend payments
- Gains or losses recognized directly in equity

11. Financial Statements 3- Income Statement
Income Statement, also known as the Profit and Loss Statement, reports the company's financial performance in terms of net profit or loss over a specified period.
Income Statement is composed of the following two elements :
Income: What the business has earned over a period
(e.g. sales revenue, dividend income, etc)
Expense: The cost incurred by the business over a period (e.g. salaries and wages, depreciation, rental charges, etc)

12. Financial Statements 3- Income Statement
Reports the revenues and expenses for a specific period of time.
Lists revenues first, followed by expenses.
Shows net income (or net loss).
Net profit or loss is arrived by deducting
expenses from income.

13. Financial Statements 15000 Investments 8050 Cash
Accounting information in $ for SOFTBYTE Company on September 30,2014:
Liabilities & Owner’s equity
Assets
15000
Investments
8050
Cash
Owner’s capital Sept.1
1400
Accounts receivable
4700
Service revenue
1600
Supplies
900
Salaries and wages expense
7000
Equipment
600
Rent expense
250
Advertising expense
200
Utilities expense
1300
Drawing

14. Financial Statements

15. Financial Statements
Net income is needed to determine the ending balance in owner’s equity.
Illustration 1-9
Financial statements and
their interrelationships
LO 8

16. Financial Statements 4- Statement of Cash Flows
Cash Flow Statement, presents the movement in cash and bank balances over a period.
The movement in cash flows is classified into the following segments:
1-Operating Activities: Represents the cash flow from primary activities of a business, Include the cash inflows and outflows that relate directly to revenues and expenses reported on the income statement.

17. Financial Statements 4- Statement of Cash Flows (cont.)
2-Investing Activities: Represents cash flow from the purchase and sale of assets other than inventories
(e.g. purchase of a factory plant)
3-Financing Activities: Represents cash flow generated or spent on raising share capital and debt together with the payments of interest and dividends.

18. Cash flows from operating activities
Financial Statements
First: Cash flows from operating activities
Include the cash inflows and outflows that relate directly to revenues and expenses reported on the income statement.
Cash flows from operating activities
Inflows
Outflows
Cash received from customers:
for services provided cash
for services on account
for services not yet provided
Cash paid for:
Purchase of goods for resale
Services received or to be received
Salaries and wages
Interest on liabilities
Income taxes
Cash received from interest revenue
Cash received from dividends income

19. Cash flows from Investing activities
Financial Statements
Second: Cash flows from investing activities:
Include cash inflows and outflows related to the purchase and disposal of long-lived productive assets and investments in the securities of other companies.
Cash flows from Investing activities
Inflows
Outflows
Cash received from:
Sale of land, building, and equipment
Sale or maturities of investments in Securities
Cash paid for:
Purchase of land, building and equipment
Purchase of investments in securities
Cash received from principal of loans advanced to borrowers
Cash advanced as loans to borrowers

20. Cash Flows from Financing Activities
Financial Statements
Third: Cash Flows from Financing Activities: Include exchange of cash with creditors (debt holders) and owners (shareholders).
Cash Flows from Financing Activities
Inflows
Outflows
Cash received from:
Borrowing on notes, mortgages, and bonds from creditors
Cash paid for:
Repayment of principal to creditors (excluding interest)
Issuing shares
Repurchasing stocks from owners
Dividends to owners
For each type of activity, when the cash inflows exceed cash outflow, the difference is termed net cash provided by the type of activity. On the other hand when the cash outflows exceeds cash inflows, the difference is termed net cash used by the type of activity.

21. Financial Statements For the year ended 12/31/2009
Cairo Corporation Statement of cash flows
For the year ended 12/31/2009
Cash flows from operating activities:
Cash inflows $ 280,000
Cash outflows (190,000)
Net cash flows provided by operating activities ,000
Cash flows from investing activities:
Cash inflows ,000
Cash outflows (130,000)
Net cash used by investing activities (60,000)
Cash flows from financing activities:
Cash inflows ,000
Cash outflows (45,000)
Net cash used by financing activities (13,000)
Net increase in cash ,000
Add.: cash at the beginning ,000
Cash at end of the period ,000

22. Financial Statements Statement of Cash Flows
Information for a specific period of time.
Answers the following:
Where did cash come from?
What was cash used for?
What was the change in the cash balance?

23. Financial Statements LO 8
The balance sheet and income statement are needed to prepare statement of cash flows.
Illustration 1-9
LO 8

24. True or False Questions
Review Questions
True or False Questions
1- Balance Sheet is comprised of four elements.
Answer: False
2- Statement of Changes in Equity, also known as the Statement of Retained Earnings.
Answer: True
3- Financial Activities in statement of cash flows represents cash flow from the purchase and sale of assets.

25. Multiple Choice Questions
Review Questions
12. Quiz
Multiple Choice Questions
1-__________________, also known as the Balance Sheet, presents the financial position of an entity at a given date.
Statement of Cash Flows
Statement of Financial Position.
Income Statement.
Owner’s Equity Statement.
Answer: ____

26. Multiple Choice Questions
Review Questions
12. Quiz
Multiple Choice Questions
2- Net income will result during a time period when:
assets exceed liabilities.
assets exceed revenues.
expenses exceed revenues.
revenues exceed expenses.
Answer: ____

27. Multiple Choice Questions
Review Questions
Multiple Choice Questions
3- Which of the following financial statements is prepared as of a specific date?
Balance sheet.
Income statement.
Owner's equity statement.
Statement of cash flows.
LO 8 Understand the four financial statements and how they are prepared.

28. Brief explain Questions
12. Quiz
Review Questions
1- Briefly explain the Income statement and its component?
2- Briefly explain the classified segments of movement in the statement of cash flows?
Brief explain Questions