Here the speaker describes the roots of financial statements, how to interpret the financial statements and the different types along with practical examples.

1. Understanding Financial Statements.
ITT Project Report
Prepared & presented by : Ms. Lekshmi Pillai
Guided by : Prof. Amrutha A. Dudhalkar
Registration No. FRO0493229
Submitted on - 02 January 2020

2. This presentation contains:
➔ The Accounting Cycle.
➔ What are Financial Statements.
➔ Who uses Financial Statements.
➔ The three primary Financial Statements.
➔ Practical Examples.
➔ Types of Financial Statement.
➔ The roots of Financial Statements
➔ The communication tool.
➔ Understanding how companies use
Financial statements.
➔ Decoding a new language.
➔ Interpreting the entries in financial
stmt.
➔ The two kinds.

3. The Accounting Cycle
Transaction Record
Summarize
Financial Reports
Registration No. FRO0493229

4. What are Financial statements?
Financial Statements are the end product of the bookkeeping process (Transaction-
record-summarize), which reveals:
➔The financial details of a company for a specified period. (eg. Annual)
➔The financial position of a company at a given time. I.e, to identify if the company is
in profit or loss at a given point in time.
In other words, Financial statements are a communication tool used by businesses
to understand and inform others how their business is functioning.
Registration No. FRO0493229

5. Who uses these Financial Statements?
1) Financial Accountants prepares financial statements directed towards outside the
business. I.e, for money lenders and investors.
Suppliers, customers, employees, competitors, Government agencies, politicians and the
press are among the other external sources who may look into the financial statements.
Lenders- Will the loan be repaid? Investors- Why should I invest in this company?
Company’s current income Business profitability now
Existing obligations Potential business profitability
Existing assets
Registration No. FRO0493229

6. 2) Managerial Accountants prepares financial statements for internal company members.
The idea is to slice and dice the over all information to identify loopholes and develop new
areas of improvement. Eg. Managers of various dept.
Financial statements help managerial accountants with product costing, analyzing break-even
and in setting budgets and targets.
Manager - Sales Manager - Accounts Receivable
Breaks down overall sales of the company by
the region, product, store, country, product
category etc.
Breaks down the over all aged debt of the company
by age of overdue invoice, region, sales rep,
credit controllers etc.
They try to identify the reason for sale patterns.
Why did sales reduce in a certain place? What
kind of product sells faster.
They try to target the oldest invoices, the large
figures and try understanding major reasons of
non-payment.
Financial statements are broken down to analyze
areas of improvement, to set targets, to
identify low performing areas and products,
place new ad campaigns etc.
This breakdown is done to implement new follow
up strategies and to reduce the aged debt of the
company.
Registration No. FRO0493229

7. The Three Primary Financial Statements
Balance Sheet
★The most fundamental
statement.
★Lists all the assets
(resources, cash) and
liabilities of the company.
★Reports the status as of a
specific date.
Income Statement
★ Shows the money made for
a specific period.
★ Income = Revenue -
Expenses
Cash Flow Statement
★Shows the report of cash that
came in and went out for a
specific period of time.
★Reports operating, investing
and financing details.
★We can identify if a
company generates enough
wealth to be self sufficient.

8. BALANCE SHEETLIQUIDITY
Liabilities & Equity
Accounts Payable
Accrued Expenses
Short term debt
Income Taxes Payable
Current Liabilities
Long-term debt
Capital Stock
Retained Earnings
Shareholder’s Equity
Total Liabilities & Equity
Assets
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Current Assets
Fixed Asset at cost
Accumulated Depreciation
Other Assets
Net Fixed Assets
Total Assets

9. BALANCE SHEET
Investment of 10 lakhs
Liabilities & Equity
Accounts Payable
Accrued Expenses
Short term debt
Income Taxes Payable
Current Liabilities
Long-term debt
Capital Stock 10,00,000
Retained Earnings
Shareholder’s Equity 10,00,000
Total Liabilities & Equity 10,00,000
Assets
Cash 10,00,000
Accounts Receivable
Inventory
Prepaid Expenses
Current Assets 10,00,000
Fixed Asset at cost
Accumulated Depreciation
Other Assets
Net Fixed Assets 0
Total Assets 10,00,000

10. BALANCE SHEET
Liabilities & Equity
Accounts Payable
Accrued Expenses
Short term debt 2,00,000
Income Taxes Payable
Current Liabilities 2,00,000
Long-term debt 8,00,000
Capital Stock 10,00,000
Retained Earnings
Shareholder’s Equity 18,00,000
Total Liabilities & Equity 20,00,000
Assets
Cash 20,00,000
Accounts Receivable
Inventory
Prepaid Expenses
Current Assets 20,00,000
Fixed Asset at cost
Accumulated Depreciation
Other Assets
Net Fixed Assets 0
Total Assets 20,00,000
Loan of 10 lakhs from Bank payable in 5 years.

11. BALANCE SHEET
Liabilities & Equity
Accounts Payable
Accrued Expenses
Short term debt 2,00,000
Income Taxes Payable
Current Liabilities 2,00,000
Long-term debt 8,00,000
Capital Stock 10,00,000
Retained Earnings
Shareholder’s Equity 18,00,000
Total Liabilities & Equity 20,00,000
Assets
Cash 17,00,000
Accounts Receivable
Inventory
Prepaid Expenses
Current Assets 17,00,000
Fixed Asset at cost 3,00,000
Accumulated Depreciation
Other Assets
Net Fixed Assets 3,00,000
Total Assets 20,00,000
Purchase of Machinery worth 3 lakhs.

12. BALANCE SHEET
Liabilities & Equity
Accounts Payable
Accrued Expenses
Short term debt 2,00,000
Income Taxes Payable
Current Liabilities 2,00,000
Long-term debt 8,00,000
Capital Stock 10,00,000
Retained Earnings
Shareholder’s Equity 18,00,000
Total Liabilities & Equity 20,00,000
Assets
Cash 16,90,000
Accounts Receivable
Inventory 10,000
Prepaid Expenses
Current Assets 17,00,000
Fixed Asset at cost 3,00,000
Accumulated Depreciation
Other Assets
Net Fixed Assets 3,00,000
Total Assets 20,00,000
Purchase of raw materials worth 10k

13. BALANCE SHEET
Liabilities & Equity
Accounts Payable
Accrued Expenses
Short term debt 2,00,000
Income Taxes Payable
Current Liabilities 2,00,000
Long-term debt 8,00,000
Capital Stock 10,00,000
Retained Earnings 5,000
Shareholder’s Equity 18,05,000
Total Liabilities & Equity 20,05,000
Assets
Cash 16,90,000
Accounts Receivable 15,000
Inventory
Prepaid Expenses
Current Assets 17,05,000
Fixed Asset at cost 3,00,000
Accumulated Depreciation
Other Assets
Net Fixed Assets 3,00,000
Total Assets 20,05,000
Sold inventory items for 15k on credit basis.

14. BALANCE SHEET
Liabilities & Equity
Accounts Payable 20,000
Accrued Expenses
Short term debt 2,00,000
Income Taxes Payable
Current Liabilities 2,20,000
Long-term debt 8,00,000
Capital Stock 10,00,000
Retained Earnings 5,000
Shareholder’s Equity 18,05,000
Total Liabilities & Equity 20,25,000
Assets
Cash 16,90,000
Accounts Receivable 15,000
Inventory 20,000
Prepaid Expenses
Current Assets 17,25,000
Fixed Asset at cost 3,00,000
Accumulated Depreciation
Other Assets
Net Fixed Assets 3,00,000
Total Assets 20,25,000
Brought additional inventory worth 20k on credit terms on 30 days.

15. INCOME STATEMENT
Revenue
Cost of Goods Sold (COGS)
Gross Margin
Operating Expenses
Operating Income
Non-operating income & expenses
Net Income
Operating expenses involves:
marketing, advertising,
promotions, administrative
expenses, depreciation,
Amortization and interest.

16. INCOME STATEMENT Goods worth RS. 8000 has been sold for Rs.
10,000 INR
Revenue 10,000
Cost of Goods Sold (COGS) 8,000
Gross Margin 2,000
Operating Expenses 0
Operating Income 2,000
Non-operating income & expenses 0
Net Income 2,000

17. BALANCE SHEET
Liabilities & Equity
Accounts Payable
Accrued Expenses
Short term debt
Income Taxes Payable
Current Liabilities
Long-term debt
Capital Stock
Retained Earnings 2,000
Shareholder’s Equity 2,000
Total Liabilities & Equity 2,000
Assets
Cash 10,000
Accounts Receivable
Inventory -8000
Prepaid Expenses
Current Assets 2,000
Fixed Asset at cost
Accumulated Depreciation
Other Assets
Net Fixed Assets 0
Total Assets 2,000
Goods worth RS. 8000 has been sold for Rs. 10,000 INR

18. INCOME STATEMENT General Expense of Rs. 500
Revenue 10,000
Cost of Goods Sold (COGS) 8,000
Gross Margin 2,000
Operating Expenses 500
Operating Income 1,500
Non-operating income & expenses
Net Income 1,500

19. BALANCE SHEET
Liabilities & Equity
Accounts Payable
Accrued Expenses
Short term debt
Income Taxes Payable
Current Liabilities
Long-term debt
Capital Stock
Retained Earnings 1,500
Shareholder’s Equity 1,500
Total Liabilities & Equity 1,500
Assets
Cash 9,500
Accounts Receivable
Inventory -8000
Prepaid Expenses
Current Assets 1,500
Fixed Asset at cost
Accumulated Depreciation
Other Assets
Net Fixed Assets 0
Total Assets 1,500
General Expense of Rs. 500

20. INCOME STATEMENT Purchase of fixed asset worth Rs. 2000, take
depreciation of Rs. 400 into account
Revenue 10,000
Cost of Goods Sold (COGS) 8,000
Gross Margin 2,000
Operating Expenses 900
Operating Income 1,100
Non-operating income & expenses
Net Income 1,100

21. BALANCE SHEET
Liabilities & Equity
Accounts Payable
Accrued Expenses
Short term debt
Income Taxes Payable
Current Liabilities
Long-term debt
Capital Stock
Retained Earnings 1,100
Shareholder’s Equity 1,100
Total Liabilities & Equity 1,100
Assets
Cash 7,500
Accounts Receivable
Inventory -8000
Prepaid Expenses
Current Assets -500
Fixed Asset at cost 2,000
Accumulated Depreciation -400
Other Assets
Net Fixed Assets 1,600
Total Assets 1,100
Purchase of fixed asset worth Rs. 2000 take depreciation of Rs. 400
Into account.

22. CASH FLOW STATEMENT
Reports inflow and outflow of cash
by category.

23. CASH FLOW STATEMENT
Beginning Cash Balance
Cash Receipts
Cash Paid
Income taxes paid
Cash from Operations
Fixed asset purchases
Net borrowings
Sale of Stock
Ending cash balance
OPERATING ACTIVITIES
INVESTING ACTIVITIES
FINANCING ACTIVITIES

24. NEGATIVE CASH FLOWS……..
COST FROM INVESTING = +VE
COST FROM OPERATING EXPENSE = -VE

25. Consolidated and standalone financial statements:
PARENT
COMPANY

26. Each of the subsidiaries and Franchises are considered separate
entity from the parent company and they prepare their own financial
statements known as standalone financial statements.
This however, may provide an incomplete picture to the potential
investors since each of the subsidiary cannot tell the overall position
of the company and hence annual consolidated financial
statements are prepared.

27. “Revenue is Vanity...Margin is
sanity...and Cash is reality.” - Unknown
____________Thank You___________