The document explains financial statements as key reports summarizing a company's accounting transactions over a fiscal period, including the balance sheet, income statement, statement of retained earnings, and statement of cash flows. It highlights the relationship between assets, liabilities, and stockholders' equity, emphasizing that common stockholders bear the risks of asset value fluctuations. The importance of a breakdown in common equity accounts is discussed for potential stockholders and creditors.

1. 1. Accounting1. Accounting
11

2. 2. Basic Question & Financial2. Basic Question & Financial
StatementsStatements
22

3. 33
FINANCIAL STATEMENTS
 Financial statements are the principal means of reporting
financial information to people outside a business
organization through a set of accounting reports.
 Financial statements are reports that summarize the
results of a company’s accounting transactions for a
fiscal period.
 A Fiscal Period is any time period for which a company
wants to report its financial activities.
 Financial statements prepared for a period of time
shorter than one year (e.g. 1 month or 3 months) are
referred to as Interim Financial Statements.

4. 44
FOUR BASIC FINANCIAL
STATEMENTS
1. Balance Sheet – provides a snapshot of a
firm’s financial position at one point in time.
2. Income Statement – summarizes a firm’s
revenues and expenses over a given period of
time.
3. Statement of Retained Earnings – shows
how much of the firm’s earnings were
retained, rather than paid out as dividends.
4. Statement of Cash Flows – reports the
impact of a firm’s activities on cash flows over
a given period of time.

5. 3. Balance Sheet3. Balance Sheet
55

6. Quadrants of Balance SheetQuadrants of Balance Sheet
Assets
=
Liabilities
Current Assets Current Liabilities
Long Term Assets Long Term Liabilities
Equity
1.Owner Contributions
2.Retained Earnings
ACCOUNTING EQUATION
66

7. AssetsAssets
77

8. LiabilitiesLiabilities
88

9. Stockholder’s equityStockholder’s equity
99
Stockholder’s equity is the liability of a company to its owners

10. 1010
BALANCE SHEET: ASSETS
Cash
A/R
Inventories
Total CA
Gross FA
Less: Dep.
Net FA
Total Assets
2002
7,282
632,160
1,287,360
1,926,802
1,202,950
263,160
939,790
2,866,592
2001
57,600
351,200
715,200
1,124,000
491,000
146,200
344,800
1,468,800

11. 1111
BALANCE SHEET:
LIABILITIES AND EQUITY
Accts payable
Notes payable
Accruals
Total CL
Long-term debt
Common stock
Retained earnings
Total Equity
Total L & E
2002
524,160
636,808
489,600
1,650,568
723,432
460,000
32,592
492,592
2,866,592
2001
145,600
200,000
136,000
481,600
323,432
460,000
203,768
663,768
1,468,800

12. 1212
THE BALANCE SHEET:
LIABILITIES VS. STOCKHOLDERS’
EQUITY
 The common stockholders’ equity, or net worth, is a
residual.
For example, at the end of 2002,
Common Stockholders’ Equity = Assets – Liabilities –
Preferred Stock
= 2,866,592 – 2,374,000
- 0
= 492,592

13. 1313
THE BALANCE SHEET:
LIABILITIES VS. STOCKHOLDERS’
EQUITY
 Suppose assets decline in value (for example, some of
the accounts receivable are written off as debts),
liabilities and preferred stock remain constant, so the
value of the common stockholders’ equity must decline.
 Therefore, the risk of asset value fluctuations is borne by
the common stockholders.
 However, if assets’ value rises (perhaps because of
inflation), these benefits will be accrued exclusively to
the common stockholders.

14. 1414
THE BALANCE SHEET:
PREFERRED VS. COMMON
STOCK
 Therefore, when the term “equity” is used in
finance, it means “common equity” unless the
word “total” is included.

15. 1515
THE BALANCE SHEET:
IMPORTANCE OF BREAKDOWN OF THE
COMMON EQUITY ACCOUNTS
The breakdown of common equity accounts is
important for two reasons:
1) A potential stockholder would want to know whether
the company actually earned the funds reported in its
equity accounts or whether the funds came mainly
from selling stock.
2) A potential creditor, on the other hand, would be more
interested in the total equity the owners have in the
firm and would be less concerned with the source of
the equity.