Financial Statements (Coursework Sample)

Introduction
Business entities have two primary objectives; profitability and solvency (liquidity). Unless a business can produce satisfactory income and pay its debts as they become due, the business cannot survive to realize its objectives. The four financial statements include the balance sheet, the income statement, statement of changes in owner’s equity and the statement of cash flows.
1 The balance sheet (Statement of financial position)
A balance sheet is a financial statement that describes financial position by listing the types and shillings amounts of assets, liabilities and equity. It presents a view of the business as the holder of resources, or assets that are equal to the claims against those assets.
1 Elements in the balance sheet
* Assets
These are economic resources that are owned by a business and are expected to provide future benefits to the business. Assets may have definite physical form (tangible) e.g. buildings, machinery etc. On the other hand, some assets exist in the form of valuable legal claims or rights e.g. investment in government bonds and bills etc.
* Liabilities
Liabilities are obligations of a business and represent future sacrifices (outflows) or economic benefits. Liabilities include such things as: amounts owned to suppliers of goods and services purchased on credit (accounts payable), amounts borrowed from banks or other lenders (notes payable), amounts owned to employees for salaries and wages (wages/salaries payable) and amounts owed to tax agencies for taxes incurred but not paid (taxes payable).
* Owner’s equity (Equity)
Equity is the owner’s claim on the assets of a business. It is the residual interest in the assets of a business after deducting liabilities (i.e. Equity = Assets – Liabilities). Equity is also called net assets.
2 The purpose of a balance sheet
A balance sheet is used for reporting the financial position of a company at a point in time (date) usually at the end of month or year.
2 The income statement (Profit and loss statement)
Expenses are subtracted from revenues on the income statement to show whether the business earned a net income.
1 Elements in the income statement
* Revenues
Revenues are inflows of assets in exchange for products and services provided to customers as part of a company’s primary operations. Although revenues often consist of cash, it may consist of any asset received such as; a customer promise to pay in the future (i.e. an accounts receivable) or the receipt of property from a customer.
* Expenses
Expenses are outflows or the using up of assets from providing produces and service on customers. Expenses are measured by the amount of assets consumed or the amount of liabilities incurred. They may be immediate cash payments, such as currents wages or promises to pay cash in the future for services received such as advertising. In some cases, cash may be paid out before the expense is incurred.
2 The purpose of income statement
The purpose of an income statement is to report revenues earned expenses incurred by a business over a period of time. It is also used to list the types and amounts of both revenues and expenses. This is crucial in information for users as it helps in understanding and predicting company performance.
3 Statement of changes in owners equity
This statement starts with the beginning equity and adjusts it for events that: increase it or decrease it. When the business is incorporated this statement is called the statement of retained earnings and it explains the changes in retained earnings between two balance sheet dates.
3 The purpose of statement of changes in owners equity
The statement of changes in owner’s equity is used to show the change in owner’s capital over reporting period. It serves as a link between the balance sheet and the income statement, explaining the changes that took place in owner’s equity during the period covered.
4 The statement of cash flows
The statement of cash flows is directed toward the company’s liquidity goal. Net cash flows are the difference between the inflows and outflows.
4 Elements in the statement of cash flows
* Operating activities
Generally include the effects of transaction and other events that enter into the determination of net income
* Investing Activities
This includes business transactions involving the acquisition or disposal of long-term assets such as land, buildings and equipment.
* Financing activities
They include the cash-effects of transactions and other events involving creditors and owner (stockholders)
5 The purpose of statement of cash flows
The purpose of the statement of cash flows is to show/report the inflows and outflows of cash into and output of a business.
How Financial Statement would be useful to Users
Accounting information helps users to make better financial decisions