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Reference Guide

Permachart - Marketing Reference Guide: Statement Of Changes In Equity, Retained Earnings, Cash Cash

4 pages1636 viewsFall 2015

Department
Accounting
Course Code
ACTG 2010
Professor
all
Chapter
Permachart

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TM
permacharts
FINANCIAL STATEMENTS
Financial statements are documents that are
prepared to represent quantitative information that
has been gathered through various business
transactions
• All financial statements list the name of the entity,
the name of the financial statement, and the
relevant date or period
• The standard statements used are the Balance
Sheet, the Income Statement, the Statement of
Retained Earnings, and the Statement of
Changes in Financial Position
FEATURES OF FINANCIAL STATEMENTS
• They provide financial data to users so that they can
perform their own analysis of the company
• They contain only a generic preparation of
statements
• They are limited to the reported information on the
statements
• There is no access to detailed information
• You must accept the opinion of the auditor
(see Auditors) regarding statements, even though
they may be misleading
• Most users cannot ask for supplemented reports
because the users are small (i.e., individuals) and
have no leverage
INCOME STATEMENTS
Income statements summarize the actual
transactions that occur over the period
Revenues equal inflow of resources (e.g., cash)
that are attributed to goods or services provided
• Revenues include gross sales (total amount sold
during period), sales returns (amount returned),
sales allowances (deductions from sale price),
sales discounts (discounts for quick payment), and
net sales (total sales after other items are deducted
from gross sales)
Expenses are outflows that are incurred in making
a profit
Operating expenses include all expenses related
to sale of merchandise or expenses plus all costs
related to business operations
Cost of goods sold (CGS) refers to net cost of
bringing goods to market during the period
• CGS = beginning inventory + cost of goods
(purchased and/or produced) – ending inventory
Gross profit (gross margin) indicates amount that
is available to pay operating expenses
• Gross profit = revenues – CGS
Net income occurs when revenues exceed
expenses
Net loss occurs when expenses exceed revenues
Non-operating income and expenses result from
activities other than those for which the business
was originally organized
Extraordinary gains or losses are significant
material gains or losses which result from events
that are unusual in nature and infrequent in
occurrence
Non-recurring items are similar to extraordinary
gains/losses
REVENUE RECOGNITION
Revenue recognition focuses on
an event where revenue is earned
• Exchange has taken place and
revenues are certain to be collected
• The firm has exerted a substantial
part of production (sales) effort,
revenues can be measured
objectively, the majority of total
costs have been incurred, and cash
will be collected with certainty
• Revenue will be recorded at time of
sale, during production, at
completion of production or on
receipt of cash
• Affects accounts on balance sheet
to reflect changes in liabilities, and
income statement in terms of
matching expenses to revenue
• The statement of retained earnings
reconciles beginning and ending retained
earnings of period
• Changes amount shown in retained
earnings on Balance Sheet to reflect net
effects of revenue inflows and expense
outflows over period
• It provides a link between the Balance
Sheet and Income Statement
• A balance sheet is a picture of a
firm’s financial position at a point in
time
• It shows assets as well as liabilities
and equity against assets
• The B/S must balance
(assets = liabilities + equity)
Assets and liabilities are current or
non-current
Owners’ equity is the amount paid
into the firm for shares and retained
earnings
Contra accounts are offsetting
accounts; the asset side has credit
balances, but the liability side may
have credit or debit balances
• Both sides of a transaction are recorded in
a General Journal
Work sheets allow unadjusted account
balances to be segregated
Adjusting entries are made at the end of
the accounting period prior to statement
preparation and closing entries
Notes to financial statements provide
information on accounting methods,
debt provisions, inventory methods, etc.
that are not usually found in financial
statements
• They enhance the reader’s ability to
understand the firm’s current financial
situation
• Assist in predicting future cash flows and
viability
• Every recorded transaction has a left side
(debit) and a right side (credit)
• Placement of entry indicates debit or
credit
NOTES TO FINANCIAL STATEMENTS
DEBITS & CREDITS
BALANCE SHEET (B/S)
RECORDING ACCOUNTING INFORMATION
USERS OF FINANCIAL STATEMENTS
Bankers Assess whether the company has collateral available as insurance for a
potential loan • Determine the company’s cash flow to see whether
the borrower can repay the loan (i.e., principal + interest)
Shareholders Assess the company’s performance in which they have invested and
determine if the company will maintain its profits • Analysis allows
shareholders to decide whether to maintain investment, sell
investment or purchase equity in the company
Owners Assess the performance of their company and the growth or shrinkage
that may have occurred • Also used to identify strengths and
weaknesses within the company
Managers Assess if a bonus is owing to them • Managers may be evaluated
based on the company’s performance and are rewarded for efforts if
there are increased profits
Employees Assess the companys performance in which they may have invested
• They would want to know if a profit was made
Suppliers Assess the companys performance as to whether it will be able to pay
its outstanding debt
Internal Assess whether the company has complied with tax laws when
Revenue preparing financial statements
Service
Potential Assess the current conditions of the company and predict its future
investors cash flows • Used to predict the amount and rate of return the
investor would be receiving from the company
ACCOUNTING I • A-727-71© 2000-2013 Mindsource Technologies Inc.
STATEMENT OF RETAINED EARNINGS (SRE)
www.permacharts.com
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