Overview of Financial Statements

AuthorVern Krishna
Pages21-67

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 ..

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