Financial Accounting/Financial Statements

Required readings

Read the following Wikipedia articles. Don't get too bogged down in the details at this time. Some of the concepts will be out of the scope of this session. They will be covered in detail in later sessions and courses.

• Financial Statements
• Balance Sheet
• Income Statement
• Cash Flow Statement
• Investopedia

Summary

• Financial statements are the final product of financial accounting. All of the effort that is done over the course of a year is compiled into these. In later courses, we will explore these statements in greater detail.
• The balance sheet looks at company at a specific point in time. This is an important distinction from the income statement which is discussed below. It displays the assets that are owned by the company, the liabilities owed by the company and the equity (the residual interest of the owners) in the company. This statement is important to analyze the overall "health" of a company.
• The income statement displays the performance of a company over a period of time (e.g. a year). It displays how much revenue (not necessarily cash!) that was earned in the period and how many expenses (not necessarily cash!) were realized in the period. The difference becomes the profit. Profit can be reinvested (i.e. buy new assets or pay off debt) or can be paid out to owners (dividends). This statement is important to analyze how profitable a company is.
• The cash flow statement displays cash adjustments made to the income statement to arrive at the cash balance on the balance sheet. This statement is necessary because accrual accounting does not equate to movements in cash as discussed in a prior section. This statement often causes beginners confusion and frustrations as it can be difficult to produce on more complicated statements. There are two types of cash flow statements: the direct and indirect statements. The indirect is the more common of the two. The cash flow statement is important to ensure that an organization is taking in enough cash to pay for their current obligations.
• Financial statements contain foot notes after the statements themselves. These footnotes give additional details that are useful to users of the statements. For example, what types of property, plant and equipment make up the balance.

Examples

The following are some examples of financial statements of public companies. You can view the statements of any public entity. Keep in mind that these organizations are multi-billion dollar operations and have very complex statements. Small businesses have much simpler statements meaning there are fewer line items that make up each statement and far fewer and shorter note disclosures. Skim through these to get an idea of how the statements come together.

• Apple 2013
• Tesla 2013
• ExxonMobil 2013

Problems

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Solutions

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Resources

• Elements
• Objectives
• Qualitative Characteristics
• Underlying Assumptions