The Financial StatementsThe Financial Statements

Presentations for Chapter 2 by Glenn Owen

Key PointsKey Points The three basic activities of a business and how they

are reflected in the financial statements. The balance sheet, income statement, statement of

retained earnings, and statement of cash flows and how these financial statements are used.

Fruit Tree AnalogyFruit Tree Analogy

Financing Activities

Investing Activities

Operating Activities

Trunk/Branches

Roots

Fruit

The Balance SheetThe Balance SheetAssetsLiabilitiesStockholders’ equity

AssetsAssetsCurrent assets

– Cash– Short-term investments– Accounts receivable– Inventory– Prepaid expenses

Long-term investmentsProperty, plant, and equipmentIntangible assets

LiabilitiesLiabilitiesCurrent liabilities

– Accounts payable– Wages payable– Interest payable– Short-term notes payable– Current maturities of

long-term debt– Deferred revenues– Other payables

Long-term liabilities

Stockholders’ EquityStockholders’ EquityContributed capitalRetained earnings

The Income StatementThe Income Statement Operating revenues

– Sales – Fees earned– Other revenues

Operating expenses– Cost of goods sold– Wage expense– Rent expense– Selling expense– Depreciation expense– Amortization expense– Other expenses

The Statement The Statement of Retained Earningsof Retained Earnings

Beginning retained earnings balance Plus: Net income Less: Dividends = Ending retained earnings balance

The Statement of Cash FlowsThe Statement of Cash Flows Cash flows from operating activities:

– Collections from sales, rent, interest, etc.– Cash paid to suppliers and employees, and for rent, selling

activities, interest, and taxes etc. Cash flow from investing activities:

– Proceeds from sale of investment securities, property, etc. – Purchase of investment securities, property, etc.

Cash flow from financing activities:– Proceeds from issuance of notes, debt,

sale of equity, etc.– Payments on notes, debt, dividends, etc.

Relationships Among the Relationships Among the Financial StatementsFinancial Statements

IncomeStatement

Statement ofRetainedEarnings

EndingBalance Sheet

Statement ofCash Flows

BeginningBalance Sheet

Cash from the Beginning Balance Sheet is included in the Statement of Cash

Flows.

Net income from the Income Statement is included in the Statement of Retained Earnings

Retained earnings from the Beginning Balance Sheet is included in the Statement of Retained Earnings

Ending cash from the Statement of Cash Flows is included in the Ending Balance Sheet.

Ending retained earnings from the Statement of Retained Earnings is included in the Ending Balance Sheet.

C O P Y R I G H T

C o p y r i g h t © 2 0 0 3 , J o h n W i l e y & S o n s , I n c . A l l r i g h t s r e s e r v e d .R e p r o d u c t i o n o r t r a n s l a t i o n o f t h i s w o r k b e y o n d t h a t p e r m i t t e d i n S e c t i o n 1 1 7 o f t h e 1 9 7 6 U n i t e d S t a t e s C o p y r i g h t A c t w i t h o u t t h ee x p r e s s w r i t t e n p e r m i s s i o n o f t h e c o p y r i g h t o w n e r i s u n l a w f u l . R e q u e s t f o r f u r t h e r i n f o r m a t i o n s h o u l d b e a d d r e s s e d t o t h e P e r m i s s i o n s D e p a r t m e n t , J o h n W i l e y & S o n s , I n c . T h e p u r c h a s e r m a y m a k e b a c k - u p c o p i e s f o r h i s / h e r o w n u s e o n l y a n d n o t f o r d i s t r i b u t i o n o r r e s a l e . T h e P u b l i s h e r a s s u m e s n o r e s p o n s i b i l i t yf o r e r r o r s , o m i s s i o n s , o r d a m a g e s , c a u s e d b y t h e u s e o f t h e s e p r o g r a m s o r f r o m t h e u s e o f t h e i n f o r m a t i o n c o n t a i n e d h e r e i n .