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    1. 1. FORMAL FINANCIAL STATEMENTS <ul><li>Income statement </li></ul><ul><li>Statement of stockholders’ equity </li></ul><ul><ul><li>Retained earnings </li></ul></ul><ul><li>Balance sheet </li></ul><ul><li>Statement of cash flows </li></ul>
    2. 2. INCOME STATEMENT Statement of Earnings <ul><li>Report on the operations of the entity </li></ul><ul><li>Listing of Revenues, Gains, Expenses, & Losses </li></ul><ul><li>Covers a period of time </li></ul>
    3. 3. STATEMENT OF STOCKHOLDERS’ EQUITY “Retained earnings” <ul><li>Report on the changes in Retained Earnings </li></ul><ul><li>Covers a period of time </li></ul><ul><li>Link between the Balance Sheet & Income Statement </li></ul>
    4. 4. STATEMENT OF FINANCIAL POSITION Balance Sheet <ul><li>Report on the financial position of the entity </li></ul><ul><li>Listing of Assets, Liabilities, & Owners’ Equity items </li></ul><ul><li>A specific point in time </li></ul>
    5. 5. STATEMENT OF CASH FLOWS <ul><li>Report on financial activities of the entity </li></ul><ul><li>Shows the changes in cash (and cash equivalents) </li></ul><ul><li>Covers a period of time </li></ul>
    6. 6. “FINANCIAL STATEMENT PACKAGE” <ul><li>Formal financial statements </li></ul><ul><li>Footnotes </li></ul><ul><li>Supplementary information </li></ul><ul><li>Attestation reports </li></ul>
    7. 7. OTHER INFORMATION <ul><li>Footnotes </li></ul><ul><ul><li>Refers to a specific item or section </li></ul></ul><ul><li>Supplementary information </li></ul><ul><ul><li>All additional disclosures </li></ul></ul>
    8. 8. ATTESTATION REPORTS <ul><li>Management report </li></ul><ul><li>Report of the audit committee </li></ul><ul><li>Report of the independent auditor (CPA) </li></ul>
    9. 9. BASIC ACCOUNTING EQUATION [Corporation] Assets = Liabilities + Stockholders’ Equity Net Income (+) Dividends (-) Revenues & Gains (+) Expenses & Losses (-) Contributed (Paid-in) Capital Retained Earnings
    10. 10. RELATIONSHIP OF FINANCIAL STATEMENTS Assets Liabilities Owners’ equity Assets Liabilities Owners’ equity Revenues - Expenses = Net Income (or Loss) Balance 1-1-x2 (+/-) Net income or loss - Dividends = Balance 12-31-x2 Income Statement For Year 2 Statement of Retained Earnings For Year 2 Balance Sheet 12-31-x1 Balance Sheet 12-31-x2
    11. 11. IMPLEMENTATION PRINCIPLES <ul><li>Cost/Exchange Transactions </li></ul><ul><li>Revenue Realization </li></ul><ul><li>Matching </li></ul><ul><li>Full Disclosure </li></ul>
    12. 12. The Quick Corporation Retained Earnings Statement Total stockholders' equity Accounts payable The Quick Corporation Balance Sheet January 1, 2003 Assets Liabilities Cash $15,000 $84,000 Accounts receivable 4,000 Notes payable Inventories 86,000 Total liabilities Land 2,000 Stockholders' equity Plant and Equipment 100,000 Capital stock $85,000 Retained earnings $18,000 103,000 Total liabilities and Total assets $207,000 stockholders' equity The Quick Corporation Income Statement For the Year Ended 12/ 31/03 Revenues Fees earned $541,000 Expenses Cost of goods sold $215,000 Salary expense 85,000 Rent expense 45,000 Supplies expense 15,200 Utilities expense 75,000 Insurance expense 1,200 Interest expense 3,000 Total expenses 439,400 Income before taxes 101,600 Income taxes 40,640 Net Income $ 60,960 For the Year Ended December 31, 2003 Retained Earnings, January 1, Add: Net Income for the year Subtotal Less: Dividends paid Retained earnings, December 31, 2003 The Quick Corporation Statement of Cash Flows For the Year Ended December31, 2003 Cash flows from operating activities Cash revenues 535,000 $ Less: Cash expenses 485,000 Net cash provided by operating activities 50,000 $ Cash flows from investing activities Purchase of land (30,000) Sale of equipment 10,000 Net cash used by investing activities (20,000) Cash flows from financing activities Issuance of capital stock 10,000 Less: Issuance of dividends (15,000) Net cash used by financing activities (5,000) Cash balance January 1, 2003 $15,000 Cash balance December 31, $40,000 The Quick Corporation Balance Sheet December 31, 2003 Assets $40,000 Liabilities Cash Accounts payable $80,000 Accounts receivable 5,000 Notes payable 20,000 Inventories 90,000 Total liabilities $100,000 Land 10,000 Stockholders' equity Plant and Equipment 125,000 Capital stock $145,000 Retained earnings $25,000 Total stockholders' equity 170,000 Total liabilities and Total assets $270,000 stockholders' equity $270,000 ARTICULATION $18,000 $60,960 $78,960 (53,960) $25,000
    13. 13. ELEMENTS OF FINANCIAL STATEMENTS <ul><li>Assets </li></ul><ul><li>Liabilities </li></ul><ul><li>Equity (Owners’) </li></ul><ul><ul><li>Investments by Owners </li></ul></ul><ul><ul><li>Distributions to Owners </li></ul></ul><ul><li>Revenues </li></ul><ul><li>Expenses </li></ul><ul><li>Gains </li></ul><ul><li>Losses </li></ul><ul><li>Comprehensive Income </li></ul>
    14. 14. BALANCE SHEET Resources (Assets) Claims against resources (Liabilities) Remaining claims accruing to owners (Owner’s Equity)
    15. 15. BALANCE SHEET ELEMENTS <ul><li>Assets </li></ul><ul><ul><li>Economic resources with probable future value </li></ul></ul><ul><ul><li>Controlled by management </li></ul></ul><ul><ul><li>Resulting from past transactions </li></ul></ul><ul><li>Liabilities </li></ul><ul><ul><li>Probable future sacrifices of economic benefits (debts/obligations) </li></ul></ul><ul><ul><li>Require transfer of assets </li></ul></ul><ul><ul><li>Terms of obligations are specified </li></ul></ul><ul><ul><li>Result from past transactions </li></ul></ul><ul><li>Equity </li></ul><ul><ul><li>Residual interest in the assets of the entity </li></ul></ul><ul><ul><li>“ Net assets” </li></ul></ul><ul><ul><li>Represents the “investment” by owners </li></ul></ul>
    16. 16. BALANCE SHEET CLASSIFICATIONS <ul><li>Assets </li></ul><ul><ul><li>Current Assets </li></ul></ul><ul><ul><li>Long-term Investments </li></ul></ul><ul><ul><li>Property, Plant, and Equipment </li></ul></ul><ul><ul><li>Intangible Assets </li></ul></ul><ul><ul><li>Other Assets </li></ul></ul><ul><li>Liabilities </li></ul><ul><ul><li>Current Liabilities </li></ul></ul><ul><ul><li>Long-term Liabilities </li></ul></ul><ul><li>Stockholders’ Equity </li></ul><ul><ul><li>Contributed Capital </li></ul></ul><ul><ul><li>Retained Earnings </li></ul></ul><ul><ul><li>Other Items </li></ul></ul>
    17. 17. BALANCE SHEET <ul><li>Liquidity - length of time until assets are </li></ul><ul><li>converted to cash or until a </li></ul><ul><li>liability must be paid </li></ul><ul><li>Solvency – the ability of a firm to meet its </li></ul><ul><li>debts as they come due </li></ul><ul><li>Financial flexibility - ability of company to </li></ul><ul><li>manage its cash flows (deal with </li></ul><ul><li>emergencies or take advantage of </li></ul><ul><li>unexpected opportunities) </li></ul>
    18. 18. THE INCOME STATEMENT <ul><li>Describes a company’s operating performance for a specified period of time </li></ul>
    19. 19. INCOME STATEMENT ELEMENTS <ul><li>Revenues </li></ul><ul><ul><li>Inflows of assets (settlement of liabilities) </li></ul></ul><ul><ul><li>From delivery or production of goods or rendering of services </li></ul></ul><ul><li>Gains </li></ul><ul><ul><li>Increases to equity </li></ul></ul><ul><ul><li>From peripheral or incidental transactions </li></ul></ul><ul><li>Expenses </li></ul><ul><ul><li>Outflows of assets (incurrance of liabilities) </li></ul></ul><ul><ul><li>Consumption or expiration of assets in an attempt to generate revenue </li></ul></ul><ul><li>Losses </li></ul><ul><ul><li>Decreases in equity </li></ul></ul><ul><ul><li>From peripheral or incidental transactions </li></ul></ul><ul><li>Earnings per share </li></ul><ul><ul><li>Basic </li></ul></ul><ul><ul><li>Fully diluted </li></ul></ul>
    20. 20. INCOME STATEMENT “Multiple-Step” <ul><li>Operations section </li></ul><ul><ul><li>Gross margin (Sales - Cost of goods sold) </li></ul></ul><ul><ul><li>Operating expenses </li></ul></ul><ul><li>Other items (“nonoperating”) </li></ul><ul><li>“ Special items” </li></ul><ul><li>Net income - “the bottom line” </li></ul><ul><li>Earnings per share </li></ul>
    21. 21. INCOME STATEMENT “Multiple-Step” <ul><li>Items within “Income from continuing operations” </li></ul><ul><ul><ul><li>Unusual OR infrequent gains and losses </li></ul></ul></ul><ul><li>Below “Income from continuing operations” </li></ul><ul><ul><ul><li>Discontinued Operations </li></ul></ul></ul><ul><ul><ul><li>Extraordinary items (unusual AND infrequent) </li></ul></ul></ul><ul><ul><ul><li>Cumulative effect of “Changes in Accounting Principles” </li></ul></ul></ul>
    22. 22. Income Statement (Multiple-Step) Operations Other Special items
    23. 23. Revenue Principle <ul><li>Revenue should be recognized in the financial statements when . . </li></ul><ul><li>It is earned, and … </li></ul><ul><li>It is realized or realizable. </li></ul>
    24. 24. REVENUE RECOGNITION POINTS Design and production, construction in progress, minerals discovered Goods completed and ready for sale, contract complete Delivery of product or service Cash collected for goods or services Right of return expires Recognition before delivery Recognition after delivery Recognition at delivery Percentage-of completion method Production method Completed contract method Point of sale method Installment method Cost recovery method Right of return expiration method RELEVANCE RELIABILITY
    25. 25. Matching <ul><li>Once revenues are determined, the expenses incurred in attempting to generate the revenue should be recognized. </li></ul><ul><li>As revenues are earned, certain assets are consumed and services are used. </li></ul>
    26. 26. Expense Classification <ul><li>Direct </li></ul><ul><li>Period </li></ul><ul><li>Allocated </li></ul>
    27. 27. EXPENDITURES vs. EXPENSES Assets as of Jan. 1, 2003 Expenditures during 2003 Direct association with revenue Assets as of 12-31-03 Association with activities Association with future No No Expenses of 2003 Yes Yes Yes No Example: Cost of goods sold Example: Office expenses Example: Obsolete merchandise
    28. 28. BUSINESS CYCLE Collect cash from customer Purchase materials Convert materials into finished product Inspect product Store product in warehouse Receive order from customer Ship product & invoice customer Customer receives item