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 dierent perspectives. Although the information in
the statements is interrelated, each statement provides a dierent pic-
ture of the entity’s results, for dierent 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 Prot 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 benets may be obtained.
» Hence, assets are resources controlled by the entity that rep-
resent future benets.
• 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 benets in the future.
• Equity
» Equity is the ownership interest in the assets of a prot-ori-
ented enterprise after deducting its liabilities.
» Equity of a prot-oriented enterprise in total is a residual
and includes specic 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 simplied 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 ..
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