Overview of Financial Statements

• Author: Vern Krishna
• Pages: 21-67



Chapter 2: Overview of Financial

Statements

A. OVERVIEW

In this chapter, we introduce nancial statements and their basic

functions, which we will examine in greater detail in subsequent

chapters. At this time, we rst need to understand the language of

accounting. Indeed, why is it even called “accounting”? Why does a

businessperson or professional need to know anything about account-

ing and nance?

e four quantitative nancials are:

) e Balance Sheet;

) e Income Statement;

) e Statement of Retained Earnings;

) e Statement of Cash Flows.

Each of these quantitative statements summarizes an entity’s nancial

results, but from dierent perspectives. Although the information in

the statements is interrelated, each statement provides a dierent pic-

ture of the entity’s results, for dierent time frames.

e accompanying Notes to nancial statements, which are

an integral part of the nancial statements, are qualitative and add

explanatory information that explain principles and methods used in

preparing the quantitative. e Notes are essential reading as that is

often where management will bury its skeletons.

Financial Skills for Professionals

Unfortunately, we add to the novice’s initial confusion by using

various terminology to describe the same nancial statements. For

example, the following are some of the alternatives used to describe

conventional nancials:

• Balance Sheet:

»Statement of Financial Position

• Income Statement:

»Statement of Prot and Loss

• Statement of Retained Earnings:

»Statement of Owner Equity

»Statement of Earned Surplus

• Statement of Cash Flows:

»Sources and Uses of Cash Statement

»Statement of Changes in Financial Position

ese are all essentially identical statements. In this text, we will

use the main headings to describe the nancials.

B. WHAT IS A BALANCE SHEET?

e balance sheet is a point in time picture of an entity’s nancial

position. It is based on the fundamental accounting equation: Assets

(A) = Liabilities (L)+Equity (E), where:

• Assets

»Assets are economic resources controlled by an entity as a

result of past transactions or events and from which future

economic benets may be obtained.

»Hence, assets are resources controlled by the entity that rep-

resent future benets.

• Liabilities

»Liabilities are obligations of an entity arising from past

transactions or events, the settlement of which may result

 CPA Canada Handbook – Accounting, Chartered Professional Accountants of

Canada () [Handbook] at para ..

Chapter 2: Overview of Financial Statements

in the transfer or use of assets, provision of services, or other

yielding of economic benets in the future.

• Equity

»Equity is the ownership interest in the assets of a prot-ori-

ented enterprise after deducting its liabilities.

»Equity of a prot-oriented enterprise in total is a residual

and includes specic categories of items (for example, types

of share capital, contributed surplus, and retained earnings).

»Equity is the net nominal amount (not necessarily in cash)

available for distribution to the owners of the business.

e following is a simplied illustration of a balance sheet for the

rst scal period of a corporation:

XYZ Corporation Inc

Balance Sheet as at  December -

Assets: ($) ($)

Cash 

Accounts receivable

Inventory 

Total assets:

Liabilities & Shareholders’ Equity:

Accounts payable

Stated capital  Class A shares

Retained earnings

Total shareholders’ equity

Total liabilities & shareholders’ equity

e rst point to observe is that the balance sheet balances.

Assets (A)=Liabilities (L)+Equity (E)

$,= $,+ $,

 Handbook at para ..

 Handbook at para ..