Understanding Financial Statements 1 Users of Financial Information

Understanding Financial Statements 1

Users of Financial Information + Internal Users + Managers plan, organize and run a business 2

Users of Financial Information + External Users + Investors + Creditors + Others Primary users + Taxing authorities + Regulatory agencies + Customers + Labour unions + Economic planners 3

Objective of Financial Reporting + Provide the most useful financial information fordecision making + This is accomplished through the development of financial statements. 4

How much is Joe Student Worth? + HE HAS + - cash $19. 22 + - beer can empties $45. 38 + - CDs $345. 12 (new) + - ’ 97 beater $1200. 00 (market) + TOTAL $1609. 72 5

How much is Joe Student Worth? + HE OWES + Back Rent + Std Loan* $400 (current) $1000 (long term) + TOTAL $1400 + HE IS WORTH 1609. 72 – 1400 = $209. 72 6

Accounting Equation Assets = Liabilities + Shareholders’ Equity Assets = Liabilities + net worth

Basic Terms + Assets- resources owned by a business + Liabilities- obligations of the business + Shareholders’ equity + Share capital- representing the primary ownership interest in a corporation + Retained earnings – accumulated earnings of corporation that have not been distributed to shareholders 8

CSU CORPORATION Balance Sheet December 31, 2006 Balance Sheet ØHead up the statement Øname of company Øname of statement Ødate (as at a specific point in time)

CSU CORPORATION Balance Sheet December 31, 2006 Assets Cash Accounts receivable Inventory Equipment Total assets $ 2, 000 4, 000 1, 800 16, 000 $23, 800 ØList the assets and total Note the order of listing

CSU CORPORATION Balance Sheet December 31, 2006 Assets Cash Accounts receivable Supplies Equipment Total assets Liabilities and Shareholders’ Equity Liabilities Accounts payable Notes payable Total liabilities $ 2, 000 4, 000 1, 800 16, 000 $23, 800 $ 2, 000 5, 000 7, 000 ØList the liabilities and subtotal Hmm. . Same order for liabilities

CSU CORPORATION Balance Sheet December 31, 2006 ØList shareholders’ equity. Subtotal ØAdd to liabilities, total

CSU CORPORATION Balance Sheet December 31, 2006 Assets Cash Accounts receivable Supplies Equipment Total assets Liabilities and Shareholders’ Equity Liabilities Accounts payable Notes payable Total liabilities Shareholders’ equity Common shares $10, 000 Retained earnings 6, 800 Total shareholders’ equity Total liabilities and shareholders’ equity $ 2, 000 4, 000 1, 800 16, 000 $23, 800 $ 2, 000 5, 000 7, 000 16, 800 $23, 800

Classified Balance Sheet Generally contains the following standard classifications: Assets + Current assets + Long-term investments + Capital assets Liabilities + Current liabilities + Long-term liabilities Shareholders’ Equity + Share capital + Retained earnings 14

Stop and Check ü Total assets must equal total liabilities and shareholders’ equity

Yeah, but I have a job now. I’ll have money coming in. + Money coming in (for October) + - wages $1800 + Money going out + Rent + Food + Entertainment $400 $800 + IMPROVED NET WORTH $200 16

Revenues (money coming in) + Revenuesarise from sale of a product or service + Revenues result in an inflow of assets 17

Expenses + Expensesare the costs of assets consumed or services used to generate revenues + Examples + Cost of sales + Store operating expenses + General and administrative expenses + Interest expense 18

Net Earnings + Net earnings are the excess of revenue over expenses Revenue Less: Expenses Net earnings $10, 000 3, 000 $ 7, 000 (Net loss is the excess of expenses over revenues) 19

CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006 Statement of Earnings ØHead up the statement Øname of company Øname of statement Øperiod of time covered

CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2001 Revenues Service revenue ØList the revenues $22, 200

CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006 Revenues Service revenue Expenses expense Insurance expense Supplies expense Total expenses Earnings before income tax Income tax expense $22, 200 Rent $9, 000 1, 000 200 10, 200 12, 000 5, 200 ØList and total the expenses. Note that income tax is shown separately from other expenses

CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006 Revenues Service revenue Expenses expense Insurance expense Supplies expense Total expenses Earnings before income tax Income tax expense Net earnings $22, 200 Rent $9, 000 1, 000 200 10, 200 12, 000 5, 200 $ 6, 800 ØSubtract expenses from revenues to obtain net earnings (loss) 23

Joe Student’s Worth Now? + He was worth + He has since cleared $209. 72 $200. 00 + His current Net Worth $409. 72 At end of October 24

CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006 Statement of Retained Earnings ØHead up the statement Øname of company Øname of statement Øperiod of time covered (same period as statement of earnings)

CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006 Retained earnings, January 1 $ 0 ØStart with beginning retained earnings (same as ending retained earnings of prior period)

CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2001 Retained earnings, January 1 Add: Net earnings $ 0 6, 800 ØAdd net earnings (subtract loss) from the current year (see Statement of Earnings) ØSubtotal

CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006 Retained earnings, January 1 Add: Net earnings Less: Dividends Retained earnings, December 31 $ 0 6, 800 0 $ 6, 800 ØSubtract current year’s dividends (if any) and total

In what order are financial statements prepared? Presented? WHY?

CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006 Revenues Service revenue Expenses expense Insurance expense Supplies expense Total expenses Earnings before income tax Income tax expense Net earnings $22, 200 Rent $9, 000 1, 000 20 10, 200 12, 000 5, 200 $ 6, 800 Net earnings is needed for the Statement of Retained Earnings

CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006 Retained earnings, January 1 Add: Net earnings Less: Dividends Retained earnings, December 31 $ 0 6, 800 0 $ 6, 800 Ending retained earnings is needed for the Balance Sheet

CSU CORPORATION Balance Sheet December 31, 2006 Assets Cash Accounts receivable Supplies Equipment Total assets Liabilities and Shareholders’ Equity Liabilities Accounts payable Notes payable Total liabilities Shareholders’ equity Common shares $10, 000 Retained earnings 6, 800 Total shareholders’ equity Total liabilities and shareholders’ equity $ 2, 000 4, 000 1, 800 16, 000 $23, 800 $ 2, 000 5, 000 7, 000 16, 800 $23, 800

Remember … + Remainingliquidand solventis as important as making a profit because. . . + A company can survive without earnings, but it can’t survive very long withoutcash “B u r n R a t e”

Financial Accounting Statements + Statement of Earnings + Reports the results of operations for a specific perio of time + Statement of Retained Earnings + Reports the changes in retained earnings for a spec period of time + Balance Sheet + Reports the assets, liabilities, and shareholders’ equ as at a specific point in time + Statement of Cash Flows + Reports the cash receipts and payments for a specif period of time 34

Elements of an + Management Discussion and Analysis + Auditor's Report + Financial Statements + Statement of Earnings + Statement of Retained Earnings + Balance Sheet + Statement of Cash Flows + Notes to Financial Statements