BSAD 221Introductory Financial

Accounting

Donna Gunn, CA

Financial Statements

• Balance Sheet

• Income Statement

• Cash Flow Statement

• Statement of Retained Earnings

Financial statements summarize the financial activities of the business.

Financial Statement Relationships

Net income increases retained earnings, while a net loss will decrease retained earnings.

Dividends decrease retained earnings.

DIVIDENDSDecreases RETAINED

EARNINGS

Net Income = Revenues - Expenses

Increases

Financial Statement Relationships

SHAREHOLDERS’ EQUITY

SHARE CAPITAL

RETAINED EARNINGS

Share Capital and R/E make up Shareholders’ Equity.

Increases

Net Income = Revenues - Expenses

Increases

Financial Statement Relationships

SHAREHOLDERS’ EQUITY

SHARE CAPITAL

RETAINED EARNINGS

Net Income = Revenues - Expenses

ASSETS LIABILITIES SHAREHOLDERS’ EQUITY

= +

Increases

Increases

Note that this statement has ONLY

revenues and expenses!

The income statement impacts Retained Earnings

Income Statement Elements

Results of continuing operations can be presented in one of the two formats

Single step format:

Revenues

(All Operating Expenses)

Operating income

Multiple step format:

Sales

(Cost of Goods Sold)

Gross Margin

(Other Operating Expenses)

Operating Income

Classified Balance Sheet

Includes comparatives for the prior year

Current amounts - Amounts due within / or receivable within 1 year

Non-current amounts- Amounts due or receivable outside of a

year

Balance Sheet

$4,800 fixed assets - $1,440 accumulated amortization.

Balance SheetRemember that Total liabilities and equity ($19,945) must equal Total assets ($19,945).

Financial Statement Relationships

SHAREHOLDERS’ EQUITY

SHARE CAPITAL

RETAINED EARNINGS

Net Income = Revenues - Expenses

ASSETS LIABILITIES SHAREHOLDERS’ EQUITY

= +

Increases

Increases

Closing the Books Even though the balance sheet account balances

carry forward from period to period, the income statement accounts do not.

Closing entries:

1. Transfer net income (or loss) to Retained Earnings.

2. Establish a zero balance in each of the temporary accounts to start the next accounting period.

The Closing ProcessThe following accounts are called

temporary or nominal accounts and are closed at the end of the period . . .

• Revenues• Expenses• Gains• Losses, and• Dividends declared

The Closing Process Assets, liabilities, and shareholders’ equity

accounts are permanent, or real accounts, and are never closed.

•Assets•Liabilities•Shareholders’ Equity

The Closing Process

Three steps are used in the closing process . . .

1. Close revenues and gains to Retained Earnings

2. Close expenses and losses to Retained Earnings

3. Close Dividends (if any) to Retained Earnings

The Closing Process To close Ducharme’s Revenue accounts, the following

entry is required:

Dr. Sales Revenue 35,000

Cr. Retained Earnings 35,000

The Closing Process To close Ducharme’s expense accounts, the following

entry is required:

Dr. Income Summary 33,800 Cr. Cost of Goods Sold Cr. Operating Expenses

27,5006,300

The Closing Process Finally, to close Ducharme’s dividends account, the following entry is required (only if dividends account is directly debited

in original dividend journal entry rather than Retained Earnings):

(existing ??? Closebalance)

DividendsClose ???Dividends

Retained Earnings

Dr. Retained Earnings ???? Cr. Dividends

????

Post-closing Trial Balance

A Post-closing Trial Balance should be prepared as the last step of the accounting cycle to

check that debits equal credits and all temporary accounts have been

closed.

Current Ratio

An important indicator of a company’s ability to meet its current obligations.

Current Ratio = Current Assets ÷ Current Liabilities

Current Ratio

Current Ratio = Current Assets ÷ Current Liabilities

Petro-Canada has current assets of $2,826 and current liabilities of $3,348.

Current Ratio = $2,826 / $3,348

= 0.84

The Debt-To-Equity Ratio

Debt-To-Equity Ratio =Total Liabilities

Total Shareholders’ Equity

This ratio measures the relation between total

liabilities and the shareholders’ equity that

finances the assets.

An increasing ratio over time signals more reliance on debt financing and more

risk.

The Debt-To-Equity Ratio

Debt-To-Equity Ratio =Total Liabilities

Total Shareholders’ Equity

Debt-To-Equity Ratio =$123,900$246,200

= 0.50