The Four Basic

Financial Statements

1) Income Statement
2) Statement of Financial Position
(Balance Sheet)
3) Statement of Cash Flows
4) Statement of Changes in Owners’
Equity (or Statement of Changes in
Retained Earnings)
The Income Statement
The Income Statement
Purpose: to present information concerning the profitability of an
organization for a defined period of time.
Presentation Formula:
+ Revenues (amounts generated by the sale of goods or services)
- Expenses (costs incurred in doing business)
----------------------------------------------------------------
= Net Income (Loss)
====================================
The Income Statement
 REVENUES- also known as income consists of assets
received by an entity arising from the sale of goods or the
performance of services to the customers.

 2 Classification of Revenues
 1. Operating Revenues result form the primary activities
of the business ( sale of goods or rendering of the usual
services by the company)
 2. Non- Operating Revenues result from incidental
activities and from irregular and non –recurring
transactions of the business( interest earned on excess cash,
deposited in a money market placement , rent earned from
tenants occupying space owned by the company.
EXPENSE
An expense represents cost incurred by a
business in the process of generating revenue.
Supplies expense
Salaries and wages
Advertising expense
Depreciation expense
Rent expense
Utilities expense
 Statement of Changes in
Owners’ Equity (or Retained Earnings)
Purpose: provide information about changes in the two owners’ equity elements for a defined period
of time.
Presentation formula: Stockholders’ Equity =
Contributed Capital + Retained Earnings
Beginning Cont. Capital Beginning Retained Earnings
+ Contributions by stkholders + Net Income ( or - Net Loss)
----------------------------- - Dividends to stockholders
= Ending Contributed Capital _____________________
====================== Ending Retained Earnings
======================
CASH FLOW STATEMENT
 Statement of Financial Position
(also known as the Balance Sheet)
Purpose: provide information about all of the
organization’s resources and the claims against those
resources at a point in time.
Presentation formula:
Assets = Liabilities + Owners’ Equity
(resources of (claims against the assets)
value providing (by creditors) (by owners)
future benefit)
 Statement of Cash Flows
Purpose: provide information about the sources and uses
of cash due to operating, investing, and financing
activities for a defined period of time.
Presentation Formula:
Net cash provided (used) by operating activities
+ Net cash provided (used) by investing activities
+ Net cash provided (used) by financing activities
---------------------------------------------------------------
Net increase in Cash
====================================
Statement of Changes in
Owners’ Equity (or Retained Earnings)
Purpose: provide information about changes in the two owners’ equity
elements for a defined period of time.

Presentation formula: Stockholders’ Equity =

Contributed Capital + Retained Earnings

Beginning Cont. Capital Beginning Retained Earnings
+ Contributions by stkholders + Net Income ( or - Net Loss)
----------------------------- - Dividends to stockholders
= Ending Contributed Capital _____________________
====================== Ending Retained Earnings
======================
 The Statement of Financial Position
The Statement of Financial Position (Balance Sheet):

Assets = Liabilities + Owners’ Equity

(resources of (claims against the assets)
value providing (by creditors) (by owners)
future benefit)

This formula can also be stated as:

Assets – Liabilities = Owners’ Equity
(resources of (creditor claims (residual owners’
value providing against assets) claims against
future benefit assets)
 Relationships between the 4
basic financial statements

The Statement of Financial Position (Balance Sheet):

Assets = Liabilities + Owners’ Equity

Statement of Changes in Owners’ Equity:

Cash Flow Statement:
Net Cash generated by Contributed Capital + Retained Earnings
Operating + Investing + Changes to Previously Undistributed
Financing Activities
Owners’ Invest- Income ments
+ Net Income - Distributions

The Income Statement:

Revenues – Expenses = Net Income
Users of Accounting Information
and their Decisions

Internal Users: External Users:

Owners (passive) Regulators
Owners/managers
Decide future Restrict profit
Allocate resources Select management Set rates or
prices
Choose products & services
Creditors Establish operating
Arrange financing Set lending practices restrictions
Set collection practices Taxing Authorities
Employees
Vendors (Suppliers) Assess taxes
Assess employment prospects Sell products & services Establish
compliance
Negotiate wages and benefits Extend credit
Internal Control is Important

“60% of all frauds are a result of poor internal control”

(KPMG, 1998 Fraud Survey).

Internal controls: all policies and procedures designed

to ensure that the goals of the organization will be
achieved, such as:
- safeguarding resources
- complying with applicable laws
- reporting financial information fairly.
Who wants to be a millionaire
(or at least account for millions)?

General Accountant
Cost Accountant
Tax Accountant
Independent Auditor
Internal Auditor
Academic Accountant
Consultant
 CPA
Professional Accounting
Certifications

CPA CMA CIA

Governing body States Institute Institute
of Management of Internal
Accountants Auditors
Approximate # of
certifications 430,000 21,000 25,000
Approximate # annually
taking exam 125,000 10,000 5,000
Education required Varies by state Bachelor’s Bachelor’s
Experience required 0-3 years 2 years 2 years
Website www.aicpa.org www.imanet.org www.theiia.org
The Role of Auditors

Financial Auditing--gathering information about an entity

to form an opinion on the fairness of its financial
statements.

Audit Reports--upon completing a financial audit

(including an assessment of internal control and relying on
the work of internal auditors as necessary), a report is
issued indicating the auditor’s responsibility and expressing
an opinion about the fairness of financial statements.
Opinion types are:
unqualified qualified adverse disclaimer.
The Standard Setting Organizations
 Securities and Exchange Commission (SEC)
 oversees the issuance and trading of securities of publicly held
companies and establishes reporting and disclosure requirements for
those companies
 Financial Accounting Standards Board (FASB)
 issues pronouncements that dictate the way in which financial
accounting and reporting is performed
 Internal Revenue Service (IRS)
 administers and audits to ensure compliance with tax laws and
regulations
 International Accounting Standards Committee (IASC)
 developing international accounting standards for worldwide
standardization
Statement of
Financial Position
Who is wealthier?

Ian Mitchell
Income - $30,000 Income - $85,000

Net Worth - $50,000 Net Worth - $35,000

Let’s learn more to answer this question!

 Net Worth Wealth
Indicates the monetary
The measure of value of all possessions
financial wealth that a person or
household owns, minus
the total amounts owed
to others
Net Worth vs. Income

Net Worth Income

Depends on how a Money received such as
person manages their wages earned from
income working for pay

A person may have high income and low net worth or vice
versa
How do you determine What your
net Worth is?
Statement of Financial Position - A
financial statement that describes an
individual or family’s financial condition
on a specified date by showing assets,
liabilities, and net worth

Shows a person’s net worth

Similar to a net worth statement or

balance sheet
Three components

1. Assets
2. Liabilities
3. Net Worth
 What is an asset?

Cash
Asset -
Everything a
person owns
with monetary
value Value of
personal
possessions
Monetary Assets

Cash

Monetary
assets - Can
Money in
be quickly and checking and
easily savings accounts
converted
into cash
 Tangible Assets

Tangible assets - Homes

Personal
property that
was purchased Automobiles
to create a
lifestyle or
improve your life Electronics
(also known as
use or lifestyle
assets)
 How do you determine the value of tangible
assets?

Where can you find the

Market value Websites Example a car
What you could marketavailable
value? to Derek purchased
estimate the value of for $12,000 two years
realistically sell that
automobiles ago
asset for today, not
what you originally
paid The current market
Research the place
Listed on the you would sell the value = $8,500
Statement of Financial item to determine He records $8,500 on
Position what similar items are his Statement of
selling for Financial Position
Investment Assets

Investment Value of
assets – retirement
Financial assets accounts
purchased with
the hope that
they will generate
income and Stocks
appreciate in
value to make it
possible to sell at
a higher price in
the future
What are liabilities?
Loans
(mortgage,
automobile,
student)
Liabilities – A
Balance on a
debt or
credit card
obligation
owed to
others
What is recorded in the Liabilities Section?
Amount you owe if you were to pay the
amount owed in full today
If monthly
Automobile payments are If paid in full Record on
loan continued to today statement
be made

$180/ $6,300 $5,490 $5,490

month
Liabilities vs. Expenses

Liabilities Expenses
Money owed to
Definition others
Money spent

Total amount
Bills paid on a regular basis
Character owed
istics Monthly payment to repay
Automobile loan -
Example that automobile loan -
$5,490 owed
$180/month
Calculating Net Worth

Net
Assets Liabilities
Worth
Net Worth – Your Personal Financial
Thermometer
Provides a number that can
objectively measure your
“financial temperature”

Determine what amount of net worth you desire and then set goals to
reach that amount
How can you increase net
worth?

How do you increase

assets and/or decrease Assets
liabilities?

Evaluate how you

manage your
money Liabilities
 Money Management Tools

Statement of Income & Expense Statement Spending Plan

Financial Position

What is my financial How have I managed my What is my future money

position today? money in the past? management plan?

Work together to help you Reach net

worth level
objectively evaluate your past, desired
present, and future financial
Your present self impacts your
future self

Keep your net worth in mind when making

financial decisions

Present How will this

financial
decision affect
my future net
Future worth?
So who is wealthier?
Ian’s Statement of Financial Position Mitchell’s Statement of Financial Position
Assets Assets
Home 60,000 Home 100,000
Retirement 20,000 Retirement 20,000
Savings 5,000 Savings 7,000
Automobile 10,000 Automobile 20,000
Total Assets $95,000 Total Assets $147,000
Liabilities Liabilities
Mortgage (house loan) 40,000 Mortgage (house loan) 80,000
College loan 5,000 College loan 20,000
Automobile loan 0 Automobile loan 10,000
Credit card debt 0 Credit card debt 2,000
Total Liabilities $45,000 Total Liabilities $112,000
Net Worth $50,000 Net Worth $35,000

Income - $30,000 Income - $85,000

Net Worth - $50,000 Net Worth - $35,000
Discussion

Do you think Ian is making any trade-offs to have higher net
worth than Mitchell even though he has a lower income?

How could both Ian and Mitchell increase their net worth?

If Ian and Mitchell were thinking about going on vacation,

how would their statement of financial position guide their
decision?
When would a person need or want to create
a Statement of Financial Position?

Recommended Special Times

When making decisions
Once per year regarding assets or liabilities

Must be written to be most May have to create a

effective – use any written statement for a financial
method that works for you professional
Meet Tori

Tori is considering purchasing

a new pre-owned car. She would
like to know what her net worth
is to help her make this decision.

Your Job:
Use the information provided to create a
Statement of Financial Position for Tori
Record all applicable
information in the “current”
column of Tori’s Statement of
Financial Position

Completing
training to be a Has one semester
21 years old
radiology of training left
technician

Owes $5,000 in
Works part-time
student loans that
to earn $13,000
helped pay for her
per year
schooling
 About Tori

Owns a car that runs fine but would like an

upgrade
• Used a website to determine the Has $1,000 in her
market value of her current car = checking account
$3000

Keeps $20 in cash Keeps $2,000 in her

in her wallet at all savings account for
times emergencies
About Tori

Rents a one bedroom Bought a laptop

apartment and owns computer when she
$1,000 worth of started school but
furniture and other estimates that it is
household supplies only worth $200 now

Loves to shop and Invests $20 per month

estimates that she into a retirement
owns $1,500 worth of account – that
clothes and shoes account is currently
worth $500
Tori’s Current statement of Financial position
Assets
Monetary assets
Cash on hand 20.00
Value of checking account 1,000.00
Value of savings account 2,000.00
Subtotal of monetary assets $3,020.00
Tangible Assets
Market value of household furnishings 1,000.00
Market value of automobile 3,000.00
Market value of electronics 200.00
Market value of clothing 1,500.00
Subtotal of tangible assets $5,700.00
Investment Assets
Value of retirement account 500.00
Subtotal of investment assets $500.00
Total Assets $9,220.00
Liabilities
Student loan balance 5,000.00
Total Liabilities $5,000.00
Net Worth = Total Assets - Total Liabilities $4,220.00
Tori would like to trade in If she purchased a
her car for a new pre-owned Current new car
Assets
car priced at $12,000. She
Monetary assets
would receive $2,000 trade-in Cash on hand 20.00 20.00
value for her car making the Value of checking account 1,000.00 1,000.00
purchase price of the new car Value of savings account Decrease savings to $1,000 2,000.00 1,000.00
Subtotal of monetary assets $3,020.00 $2,020.00
$10,000.
Tangible Assets
She will use $1,000 from Market value of householdIncrease
furnishings 1,000.00
value of automobile 1,000.00
her emergency savings and Market value of automobile
to $12,000 3,000.00 12,000.00
Market value of electronics 200.00 200.00
apply for a loan for the
Market value of clothing 1,500.00 1,500.00
remaining $9,000. Subtotal of tangible assets $5,700.00 $14,700.00
Investment Assets
Value of retirement account 500.00 500.00
Subtotal of investment assets $500.00 $500.00
If Tori purchased this car Total Assets $9,220.00 $17,220.00
Liabilities
today, how would her
Student loan balance 5,000.00 5,000.00
Statement of Financial Installment loan balance for automobile 9,000.00
Position be affected? Total Liabilities
Add automobile loan for
$5,000.00 $14,000.00
$9,000
Net Worth = Total Assets - Total Liabilities $4,220.00 $3,220.00
Discussion

What is Tori’s current net worth?

What would her net worth be if she purchased the
new car today?
Based upon Tori’s Statements of Financial
Position, would you recommend that she purchase
the new car? Why or why not?
 Consider what trade-offs she will have to
make with both options
Discussion

How could Tori increase her current net worth?

Tori has chosen to use student loans to help her
pay for training to become a radiology technician
This has lowered her current net worth, but what
affect may it have on her future net worth?
 By investing in higher education she is
helping to increase her future income earning
ability and therefore make it easier to increase
her future net worth
Summary
Statement of Financial Position is an important
money management tool that shows net worth

Assets – Liabilities = Net Worth

Net worth is an objective measure of wealth

Net worth is your “financial thermometer” to

objectively measure your financial position
To increase net worth you will have to increase assets
or decrease liabilities
Income statement
Gab Medical Clinic
 The following are the accounts of
Gab Medical Clinic for December
31,2017
Determine the Net Income
Prepare a statement of comprehensive
income
Professional Fees P 500,000
Salaries Expense 50,000
Supplies Expense 75,000
Depreciation Expense 60,000

Utilities Expense 40,000

Insurance Expense 20,000
Rent Expense 90,000
Statement of Comprehensive Income for
the year ended December 31,2015
 ProfessionalFees P_______
 Operating expenses ( )
---------------------------
 Net Income P ________

 STATEMENT OF CHANGES IN
EQUITY FOR THE YEAR ENDED
DECEMEBR 31,2015

Mr. A Equity, Beginning P 100,000

Add:
Additional Investment 10,000
Net Income 25,000 35,000
_______
135,000
Less: Mr. A Drawing ( 20,000)
Mr.A.Equity, Ending P 115,000