Understanding The Balance Sheet And Income Statement


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Understanding The Balance Sheet And Income Statement

  1. 1. Understanding the Balance Sheet Nayyar R. Kazmi
  2. 2. <ul><li>Every transaction that a company or organization makes, involves either INFLOW or OUTFLOW of Cash. </li></ul><ul><li>Inflows </li></ul><ul><ul><li>Sales, Loans, Sales of Stock </li></ul></ul><ul><li>Outflows </li></ul><ul><ul><li>Expenses: Purchases, salaries, interest on a loan etc. </li></ul></ul>
  3. 3. <ul><li>Everything that an organization owns is called an Asset. </li></ul><ul><ul><li>Furniture, inventory, building equipment, Cash. </li></ul></ul><ul><li>Assets have one thing in common: They all generate cash, unless they are cash and even cash can be invested. </li></ul><ul><li>Assets also include Accounts Receivable: money owed by customers to organization, who have purchased goods or services on credit. </li></ul>
  4. 4. <ul><li>Liability is amount of money owed by the company to an individual or another organiozation. Liabilities must be paid on some specific date for specific reason. </li></ul><ul><li>Liabilities arise from transactions that took place in the past. </li></ul>
  5. 5. <ul><li>Equity is the net left after subtracting Liabilities from Assets. </li></ul><ul><li>Equity = Assets – Liabilities </li></ul><ul><li>Represents the actual stake of the owners in the company and the actual value of the company. Also called the Net Worth. </li></ul>
  6. 6. <ul><li>Balance Sheet shows the assets, liabilities and Equity at a certain time, usually at the end of a fiscal quarter or year. </li></ul><ul><li>Balance sheet presents assets on left hand side and equity and liabilities on the right hand side. Some use Assets at the top and Equity and Liabilities at the bottom of the page but the concept is the same. </li></ul>
  7. 7. <ul><li>Assets are financed by liabilities and owners Equity. Liabilities and Equity exist to finance assets. Assets exist to generate cash to pay off liabilities with enough left over to give owners a profit. </li></ul>
  8. 8. How Money Flows through a Business <ul><li>Owners invest money in the company and suppliers extend it credit. That creates owner Equity and Liabilities. Management uses that money to buy assets. Assets generate cash that flows back to the right hand side of balance sheet to pay off liabilities with money left over for owners (Which is profit or income) </li></ul>
  9. 9. <ul><li>Balance Sheet is described as a snapshot of a company </li></ul><ul><li>But that sometimes leads people to forget the dynamic relationship between assets, liabilities and equity. </li></ul>
  10. 12. <ul><li>What is the difference between an Investor and a Creditor. </li></ul>
  11. 14. Income Statement <ul><li>Sales – Expenses = Income </li></ul>