BASIC FINANCIAL

STATEMENTS
BA-402 – FINANCIAL ACCOUNTING
BASIC FINANCIAL STATEMENTS

COMMUNICATION STAGE / FINANCIAL

REPORTING
Business Communicate Accounting Info Financial Reporting

TYPES OF FINANCIAL
STATEMENTS General Public
1. Balance Sheet (Statement of Financial Position)
2. Income Statement (Statement of Operations)
3. Statement of Changes in Owners’ Equity
4. Cash Flows Statement

BALANCE SHEET
Where company stands in Financial Terms
Generally prepared at the end of the year
At a specific date
Presents ASSETS, LIABILITIES & OWNERS’EQUITIES
BASIC FINANCIAL STATEMENTS

CONCEPT OF “BUSINESS
ENTITY”
GAAP Requires Financial Statements Describe Affairs
Owners’ Personal Affairs should not be involved in
Business Transaction
Specific Eco. Entity
BALANCE SHEET ORGANIZATION

Assets: From Most Liquid – Least Liquid

Liabilities: From Short Term – Long Term

ASSETS
Benefit Future
Economic Resources Owned by Business Operations
1. Potential Economic Benefit – Specific Business Entity
2. Owned or Acquired Fully – not planned
BASIC FINANCIAL STATEMENTS

CURRENT ASSETS
Life Span Of One Year or Less
Easily / Quickly Convertible Into Cash
1. Cash or Cash Equivalents
2. Accounts Receivables (For Credit Sales)
3. Notes Receivables (For Credit Awarded – Sale of Money Given)
4. Inventory: Raw Materials, Work In Progress Materials, Finished Goods
5. Prepaid Expenses & Others

NON-CURRENT / FIXED ASSETS

Life Span More Than One Year
Not Easily / Quickly Convertible Into Cash
Tangible Intangible
Assets Assets
Assets have No Physical Form
Assets have Physical Form
Building, Machinery, Equipments, Goodwill, Trade Mark, Copy Right
Furniture & Fixtures etc.
Depreciation: Economic Cost of Assets Over Its Useful Life…!
BASIC FINANCIAL STATEMENTS

COST BASIS “ASSETS

VALUATION”?
Following Accounting Principles Support
The Cost Principle
Assets Recorded At (Historical Cost / Value)
Original Amount Paid To Acquire An Asset

Going-Concern
Principle
Business Is Continuing Enterprise
Not Established For Sale – But To Operate & Earn Money
Objectivity Principle
Adopt Definite & Factual Assets Valuation
Can Be Verified By Independent Experts

Stable Dollar
Assumption
Assume “Dollar is Stable” , no effect of Inflation or deflation
Inflation: Value of Monetary Unit Decreases
Inflation: Value of Monetary Unit Increases
BASIC FINANCIAL STATEMENTS

Assets Belong To Resource Providers – They Have Claim On

Assets (Owner or Creditors)

LIABILITIES Creditors:
Financial Obligations or Debts Of Business Entity To Whom Debt
Claims Over The Assets of Business Is Owed.

ASSETS = CLAIMS

Types of
Claims
Creditors’ Claims are called liabilities
Owners’ Claims are called Owner Equities

ASSETS = CLAIMS
Assets = Liabilities + Owners’ Equity
BASIC FINANCIAL STATEMENTS

CURRENT LIABILITIES
Come Due & Must Be Paid In One Year
1. Accounts Payable
2. Notes Payable / Commercial Papers
3.Accured Liabilities, Income Tax
4. Long Term Debt Due With In One Year
5. Capital Lease Obligations Due With In One Year

NON-CURRENT / LONG-TERM
LIABILITIES
Due After A Period Of One Year – From The Date of Balance Sheet
1. Long Term Debt
2. Long Term Obligation Under Capital Lease
3. Deferred Income Tax & Others
4. Minority Interests
SHAREHOLDERS’ / OWNERS’ EQUITY
Represents Company’s Net Worth, Also Called Net Assets
(What Company Owes to Owners)
BASIC FINANCIAL STATEMENTS

SOURCES OF OWNERS’
EQUITY
1. Cash or Other Assets Invested By Owner
2. Earnings From Profitable Business Operations

DECREASE IN OWNERS’
EQUITY
1. Payment of Cash Or Transfer of Assets To Owner
2. Losses From Business Operations

Components of Owners’ Equity

Depends Upon Form of Business Organization
Preferred Stock
Common Stock
Capital In Excess of Par Value
Accumulated Other Comprehensive Income, Retained Earnings
BASIC FINANCIAL STATEMENTS

THE ACCOUNTING EQUATION

Assets = Liabilities / Claims
Application Of Double Entry Book-Keeping:
Transaction Recorded At Least Twice, Dual
Effect of Transaction

Effects of Transactions
1. Cash Contribution
2. Assets Contribution
3. Purchase of Assets For Cash
4. Purchase of Assets For Credit (Part Cash & Part Credit)
5. Sale of Assets For Cash & Part Credit
6. Collection of Accounts Receivable
7. Payment Liabilities / AP
8. Payment of Expenses (Cash & Earnings Decreases)
9. Earning of Revenue (Cash & Earnings Increases)
10. Borrowing, Lending, Investing Etc.
BASIC FINANCIAL STATEMENTS

Permanent Accounts:
Are balance sheet accounts and not closed every year

Temporary Accounts:
Are Income Statement accounts Except Equity Accounts –
Closed Every Year.
INCOME STATEMENT

Measure Changes in Net Assets / Net Worth

Difference B/W Assets Increase & Assets Decrease
Assets Increase are Revenues - Assets Decreases Are Expenses
Net Income: Revenues > Expenses Net Loss: Expenses > Revenues

STATEMENT OF CASH FLOWS Investment in

Debt or
How Obtained & used Cash – During Accounting Period Equity of
Cash Inflows: Sources of Cash Cash Outflows: Uses of Cash Other
Company
Operating Activities: Inflow – Revenues Outflow – Expenses
Investing Activities: Inflow – Sale of Assets Outflow – Purchase of Assets
Financing Activities: Transactions associated with resource providers
BASIC FINANCIAL STATEMENTS

Adequate
FORMS OF BUSINESS ORGANIZATIONS
Disclosure:
1. Sole Proprietorship Users Are Informed
About Any Facts –
2. Partnership
Necessary For Proper
3. Corporations Interpretation of
Statements.
Differences Made in Body or
Notes.
Ownership: One Man – Partners - Shareholders
Investment Providers: One Man – Partners - Shareholders
Equity Accounts: Capital Accounts, Partners’ Capital Account,

Window DressingRetained Earnings Interest In Financial Statements)

(Management’s
1. Special Interest – Outside Decision Makers
2. Confidence of Investors & Creditors
Window Dressing: Measures Taken By Management –
Company Appear As Strong As Possible in Financial
Statements.