# 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
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 ..