Understanding Financial Statements

1. Understanding Financial Statements

2. Users of Financial Information • Internal Users • Managers plan, organize and run a business

3. Primary users Users of Financial Information • External Users • Investors • Creditors • Others • Taxing authorities • Regulatory agencies • Customers • Labour unions • Economic planners

4. Objective of Financial Reporting • Provide the most useful financial information for decision making • This is accomplished through the development of financial statements.

5. How much is Joe Student Worth? • HE HAS • - cash $19.22 • - beer can empties $45.38 • - CDs $345.12 (new) • - ’97 beater $1200.00 (market) • TOTAL $1609.72

6. How much is Joe Student Worth? • HE OWES • Back Rent $400 (current) • Std Loan* $1000 (long term) • TOTAL $1400 • HE IS WORTH 1609.72 – 1400 = $209.72

7. Accounting Equation Assets = Liabilities + Shareholders’ Equity Assets = Liabilities + net worth

8. Basic Terms • Assets - resources owned by a business • Liabilities - obligations of the business • Shareholders’ equity • Share capital - representing the primary ownership interest in a corporation • Retained earnings – accumulated earnings of corporation that have not been distributed to shareholders

9. CSU CORPORATIONBalance Sheet December 31, 2006 • Balance Sheet • Head up the statement • name of company • name of statement • date (as at a specific point in time)

10. CSU CORPORATIONBalance Sheet December 31, 2006 Assets Cash $ 2,000 Accounts receivable 4,000 Inventory 1,800 Equipment 16,000 Total assets $23,800 • List the assets and total Note the order of listing

11. CSU CORPORATIONBalance Sheet December 31, 2006 Assets Cash $ 2,000 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,800 Liabilities and Shareholders’ Equity Liabilities Accounts payable $ 2,000 Notes payable 5,000 Total liabilities 7,000 • List the liabilities and subtotal Hmm .. Same order for liabilities

12. CSU CORPORATIONBalance Sheet December 31, 2006 • List shareholders’ equity. • Subtotal • Add to liabilities, total

13. CSU CORPORATIONBalance Sheet December 31, 2006 Assets Cash $ 2,000 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,800 Liabilities and Shareholders’ Equity Liabilities Accounts payable $ 2,000 Notes payable 5,000 Total liabilities 7,000 Shareholders’ equity Common shares $10,000 Retained earnings 6,800 Total shareholders’ equity 16,800 Total liabilities and shareholders’ equity $23,800

14. Assets Current assets Long-term investments Capital assets Liabilities Current liabilities Long-term liabilities Shareholders’ Equity Share capital Retained earnings Classified Balance Sheet Generally contains the following standard classifications:

15. Stop and Check • Total assets must equal total liabilities and shareholders’ equity

16. Yeah, but I have a job now. I’ll have money coming in. • Money coming in (for October) • - wages $1800 • Money going out • Rent $400 • Food $400 • Entertainment $800 • IMPROVED NET WORTH $200

17. Revenues (money coming in) • Revenues arise from sale of a product or service • Revenues result in an inflow of assets

18. Expenses • Expenses are the costs of assets consumed or services used to generate revenues • Examples • Cost of sales • Store operating expenses • General and administrative expenses • Interest expense

19. Net Earnings • Net earnings are the excess of revenue over expenses Revenue $10,000 Less: Expenses 3,000 Net earnings $ 7,000 (Net loss is the excess of expenses over revenues)

20. CSU CORPORATIONStatement of EarningsFor the Year Ended December 31, 2006 • Statement of Earnings • Head up the statement • name of company • name of statement • period of time covered

21. CSU CORPORATIONStatement of EarningsFor the Year Ended December 31, 2001 Revenues Service revenue $22,200 • List the revenues

22. CSU CORPORATIONStatement of EarningsFor the Year Ended December 31, 2006 Revenues Service revenue $22,200 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 Total expenses 10,200 Earnings before income tax 12,000 Income tax expense 5,200 • List and total the expenses. Note that income tax is shown separately from other expenses

23. CSU CORPORATIONStatement of EarningsFor the Year Ended December 31, 2006 Revenues Service revenue $22,200 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 Total expenses 10,200 Earnings before income tax 12,000 Income tax expense 5,200 Net earnings $ 6,800 • Subtract expenses from revenues to obtain net earnings (loss)

24. Joe Student’s Worth Now? • He was worth $209.72 • He has since cleared $200.00 • His current Net Worth $409.72 At end of October

25. CSU CORPORATIONStatement of Retained EarningsFor the Year Ended December 31, 2006 • Statement of Retained Earnings • Head up the statement • name of company • name of statement • period of time covered (same period as statement of earnings)

26. CSU CORPORATIONStatement of Retained EarningsFor the Year Ended December 31, 2006 Retained earnings, January 1 $ 0 • Start with beginning retained earnings (same as ending retained earnings of prior period)

27. CSU CORPORATIONStatement of Retained EarningsFor the Year Ended December 31, 2001 Retained earnings, January 1 $ 0 Add: Net earnings 6,800 6,800 • Add net earnings (subtract loss) from the current year (see Statement of Earnings) • Subtotal

28. CSU CORPORATIONStatement of Retained EarningsFor the Year Ended December 31, 2006 Retained earnings, January 1 $ 0 Add: Net earnings 6,800 6,800 Less: Dividends 0 Retained earnings, December 31 $ 6,800 • Subtract current year’s dividends (if any) and total

29. In what order are financial statements prepared? Presented? WHY?

30. CSU CORPORATIONStatement of EarningsFor the Year Ended December 31, 2006 Revenues Service revenue $22,200 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 20 Total expenses 10,200 Earnings before income tax 12,000 Income tax expense 5,200 Net earnings $ 6,800 Net earnings is needed for the Statement of Retained Earnings

31. CSU CORPORATIONStatement of Retained EarningsFor the Year Ended December 31, 2006 Retained earnings, January 1 $ 0 Add: Net earnings 6,800 6,800 Less: Dividends 0 Retained earnings, December 31 $ 6,800 Ending retained earnings is needed for the Balance Sheet

32. CSU CORPORATIONBalance Sheet December 31, 2006 Assets Cash $ 2,000 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,800 Liabilities and Shareholders’ Equity Liabilities Accounts payable $ 2,000 Notes payable 5,000 Total liabilities 7,000 Shareholders’ equity Common shares $10,000 Retained earnings 6,800 Total shareholders’ equity 16,800 Total liabilities and shareholders’ equity $23,800

33. Remember … • Remaining liquid and solvent is as important as making a profit because... • A company can survive without earnings, but it can’t survive very long without cash “B u r n R a t e”

34. Financial Accounting Statements • Statement of Earnings • Reports the results of operations for a specific period of time • Statement of Retained Earnings • Reports the changes in retained earnings for a specific period of time • Balance Sheet • Reports the assets, liabilities, and shareholders’ equity as at a specific point in time • Statement of Cash Flows • Reports the cash receipts and payments for a specific period of time

35. Elements of an • Management Discussion and Analysis • Auditor's Report • Financial Statements • Statement of Earnings • Statement of Retained Earnings • Balance Sheet • Statement of Cash Flows • Notes to Financial Statements