The document discusses key financial statements including the balance sheet, income statement, statement of retained earnings, and statement of cash flows. It provides examples of the components and format of each statement. The balance sheet presents a company's assets, liabilities, and equity on a given date. The income statement summarizes revenues and expenses over a period of time to arrive at net income. The statement of retained earnings tracks the changes in a company's retained earnings balance. Finally, the statement of cash flows provides information on a company's cash inflows and outflows.

1. PROF. DR. BENGÜ VURAN
FUNDAMENTAL
FINANCIAL STATEMENTS

2. Learning Objectives
Every corporation has many and varied
uses for the standardized records and
reports of its financial activities.
They are prepared and issued for the
use of regulators, creditors, owners and
management.

3. Users of Financial Statements
> Regulators ( government, securities Exchange
commission) enforce the proper and accurate disclosure
of corporate financial data.
> Creditors use financial data to evaluate the firm’s ability
to meet scheduled debt payments.
> Owners use corporate financial data in assessing the
firm’s financial condition and in deciding whether to buy,
sell or hold its stock.
> Management is concerned with regulatory compliance,
satisfying creditors and owners, and monitoring the firm’s
performance.

4. What are the fundamental financial
statements?
>Balance Sheet
>Income Statement
>Statement of Retained Earnings
>Statement of Cash Flow
>www.kap.gov.tr

5. BALANCE SHEET
>Balance Sheet represents the
financial position of a firm at a
given point in time.
>It indicates the investments made
by the firm in the form of assets
and the means by which the
assets were financed.

6. Balance Sheet
ASSETS LIABILITIES
Current Assets Short-term Liabilities
Long-term Liabilities
Total Current Assets
Total Liabilities
Fixed Assets
EQUITY
TOTAL ASSETS TOTAL LIABILITIES AND EQUITY

7. Balance Sheet
ASSETS LIABILITIES
Current Assets Short-term Liabilities
Cash Accounts Payable
Marketable Securities Accrued Expenses
Accounts Receivable Notes Payable
Inventories Short-term Debt
Prepaid Expenses Long-Term Liabilities
Fixed Assets Long Term Debt
Tangible Fixed Assets
Gross Tangible Fixed Assets EQUITY
(less accumulated depreciation) Common Stock
Net Fixed Assets Additional Paid-in Capital
Intangible Fixed Assets Retained Earnings
TOTAL ASSETS TOTAL LIABILITIES AND EQUITY

8. Balance Sheet Identity
Total Assets = Total Liabilities + Shareholder’s Equity

9. ASSETS
Current Assets: Short-term assets that can be
converted into cash within one year.
oCash
oMarketable Securities
oAccounts Receivable
oInventories
oPrepaid Expenses

10. Balance Sheet: Current Asset
Cash: The most liquid asset, it is the money on hand.
Marketable Securities : are assets that can be liquidated to
cash quickly. These are securities such as Certificates of
Deposits(CDs), Treasury bills, notes and bonds etc.
Accounts Receivable (A/R): When a company sells its
products on credit, it is shown on the balance sheet as
accounts receivable (until they are paid).

11. Inventory
Inventory: Inventories consist of raw material, work-in-process and
finished goods which are held by a business in ordinary course of
business, either for sale or for the purpose of using them in the process
of producing goods and services. Manufacturing companies have these
sub-accounts under inventory. But merchindising companies only have
finished goods in their inventory.
End of Year Inventory =
+ Beginning of Year Inventory
+ Purchases
- Cost Of Goods Sold (CGS)

12. Prepaid Expenses: Prepaid expenses are future
expenses that are paid in advance. On the balance
sheet, prepaid expenses are first recorded as an
asset. After the benefits of the assets are realized
over time, the amount is then recorded as an
expense.

13. ASSETS
Fixed Assets: Fixed assets refer to long-term
assets that are used in the operations of a
business which are subject to depreciation &
amortization and have a useful life of more than
one year.
The word fixed indicates that these assets will
not be used up, consumed, or sold in the current
accounting year.

14. ASSETS
Tangible Fixed Assets: They have a physical
existence.
oVehicles
oEquipments
oFurniture & Fixtures
oLand
oMachinery
oBuildings

15. ASSETS
Intangible Fixed Assets: Fixed assets to be
used over the long term period, but they lack
physical existence. They have a monetary
value since they represent potential revenue.
o Goodwill
o Copyrights
o Trademarks
o Patents

16. Liability LIABILITIES
Current Liabilities: Short-term liabilities expected to be paid within
one year or less.
o Notes Payable
Short term borrowing: bank loan, “line of credit”
o Accounts Payable (A/P)
Purchases made by the company from suppliers, on credit (the flip side of
accounts receivable)
o Accrued Expenses (Accruals)
Operating costs that the company has expensed on its income statement
which have not been paid at the close of the reporting period (utilities, rent,
salaries, taxes etc.)
o Current Portion of Long-Term Debt
The principal portion of long term debt due over the next twelve months

17. Long-TLIABILITIESerm Debt
Long-Term Liabilities
Debt & obligations with maturities in excess of one year
Total Liabilities =
Current Liabilities + Long Term Debt

18. Balanced Sheet:EQUITY
Shareholders’ equity =
+ Common Stock at Par
+ Additional Paid-in Capital
+ Retained Earnings

19. EQUITY
o Common Stock at Par
Arbitrary value assigned to the stock when issued
Use this information to calculate the number of shares outstanding
o Additional Paid-in Capital
Additional money, over and above par value, generated when the
company sold the stock

20. Balanced EQUITYEquity
Retained Earnings
Cumulative total of all net income that was not distributed as dividends,
but rather reinvested in the company.
Retained earnings are profits held by a company in reserve in order to
invest in future projects rather than distribute as dividends to shareholders.
Note that this is a historical figure and does NOT represent income
available to shareholders
Annual Addition to Retained Earnings =
Net Income (Earnings) – Dividend Payout
Year End Retained Earnings =
+ Beginning Retained Earnings
+ Annual Addition to Retained Earnings

21. Income INCOME STATEMENTStatement
Income Statement is also called Profit and Loss
Statement, presents the results of business operations
during a specified period of time.
The statement summurizes the the revenues generated
and the expenses incurred by the firm during the
accounting period.

22. Income State The Basic Structure of Income
Statementment
Gross Sales
-Returns &Allowances
-Sales Discounts
Net Sales
- Cost of Goods Sold (CGS)
= Gross Profit
- Operating Expenses
= Operating Profit (EBIT)
- Interest Expense
= Profit Before Taxes (EBT)
- Taxes
= Net Income

23. Cost of Goods Sold (COGS)
For a merchandising company,
Cost of Goods Sold = + Beginning Inventory
+ Materials Purchases
– Ending inventory

24. Operating Expenses
Operating Expenses are business-related expenses other
than Cost Of Goods Sold (CGS) that the company incurs in
the normal course of business.
Operating Expenses include:
> Management salaries
> Research and Development (R&D)/Advertising expenditures
> Lease payments/Repairs & maintenance
> General & administrative expenses (salaries to paper clips)
> Depreciation included in operating expenses for merchandising
companies.

25. Interests and Taxes
• Interest Expense:
The cost of borrowing money. Depends on the overall level of firm
debt and the firm’s interest rate.
• Income Taxes:
Taxes are paid on the earned income (on earnings before taxes) at
the federal, state and local levels.
Taxes are paid on an estimated basis throughout the year.
Taxes owed are calculated at the end of the year based on the firm’s
actual profit before taxes.

26. Net Income
Net Income (Net Profit, Earnings):
The “bottom line” of the income statement. Reports the base profit
earned by a firm in a given accounting period.
Net Profit (Earnings) ≠ Cash Flow

27. What ha EXAMPLEwe learned?
In the next slide, your are given trial balance for the end of
December 2020 for ORES COMPANY.
• Construct income statement in good form.
• Construct balance sheet in good form.

28. Account Name Debit Credit
Cash $30,000
Accounts Receivable 40,000
Inventories 1,000
Prepaid Expenses 2,000
Equipments 252,000
Accumulated Depreciation, Equipments 177,000
Accounts Payable 20,000
Accrued Wages 10,000
Long-Term Debt 20,000
Common Stock 40,000
Retained Earnings 25,000
Dividend Payment 1,000
Sales 85,000
Cost of Goods Sold 20,000
Rent Expense 4,200
Interest Expense 2,000
Salaries Expense 6,000
Depreciation Expense 7,000
Utility Expense 5,000
Corporate Tax Expense 6,800
Total $377,000 $377,000

29. SOLUTION: INCOME STATEMENT
ORES COMPANY
INCOME STATEMENT
FOR THE YEAR 2020 ($)
Sales 85,000
(-) CGS 20,000
Gross Profit 65,000
(-) Operating Expenses 22,200
Salaries Exp. 6,000
Rent Exp. 4,200
Depreciation Exp. 7,000
Utility Exp. 5,000
EBIT 42,800
(-) Interest Expense 2,000
EBT 40,800
(-) Corporate Tax 6,800
NPAT 34,000
(-) Dividend Payment 1,000
Additions to R/E 33,000

30. SOLUTION: BALANCE SHEET
ORES COMPANY BALANCE SHEET
AS OF DECEMBER 31st 2020
Current Assets Current Liabilities
Cash 30,000 A/P 20,000
A/R 40,000 Accrues Wages 10,000
Inventories 1,000
Prepaid Exp. 2,000
Long-Term Debt
Fixed Assets Long-Term Debt 20,000
Equipment 252,000
(-) Accumulated Dep. 177,000 Owners’ Equity
Equipment ( Net) 75,000 C/S 40,000
R/E 25,000+33,000
TOTAL ASSETS 148,000 TL +OE 148,000

31. STATEMENT OF RETAINED EARNINGS
> An additional financial statement that identifies changes in
retained earnings during a specific accounting period.
> Retained Earnings, beginning
> (+) Net Profit After Taxes for the period
> (-) Dividends Paid
> Retained Earnings, ending

32. EXAMPLE: ORES COMPANY
Prepare the Statement of Retained Earnings for ORES
COMPANY for the year 2020.
> Statement of Retained Earnings for the Year 2020
Retained Earnings, beginning $ 25,000
Net Profit After Taxes for 2020 34,000
(-) Dividends Paid (1,000)
Retained Earnings, ending $ 58,000