Overview of Financial Statements

• Author: Vern Krishna
• Pages: 59-87

Chapter IV: Overview of Financial Statements 59

Chapter IV: Overview of Financial

Statements

A. OVERVIEW

Accounting is concerned with the assimilation and dissemination

of nancial information. e term “nancial statement” encom-

passes the presentation of nancial data, including accompanying

Notes, derived from accounting records and intended to communi-

cate an entity’s economic resources and sources of nancing at a

point in time, or changes thereto for a period of time, in conformity

with generally accepted principles, conventions, and assumptions.

ere are ve components in a set of nancial statements:

) e Balance Sheet;

) e Income Statement (and Statement of Comprehensive Income);

) e Statement of Cash Flows;

) e Statement of Shareholders’ Equity; and

) Notes to the Statements.

Each component discloses nancial information about the business or

entity from a dierent perspective. Collectively, however, they provide

a composite that facilitates nancial analysis and decision making.

e fundamental principles underlying these statements are

reasonably uniform between entities and industries. us, when

reduced to a common size, they permit one to apply similar tech-

niques of interpretation and analysis, regardless of the size of the

entity, the nature of its business, or its location.

60 Understanding Financial Statements

e ve key concepts underlying nancial statements are:

• Assets are resources with monetary value.

• Liabilities are creditors’ monetary claims on assets.

• Owners’ equity represents the owners’ or stockholders’ claims

against assets (net of liabilities).

• Revenues are sales and income from other sources.

• Expenses are the costs that an entity incurs in order to gener-

ate revenues and its income.

Each nancial statement paints a part of the picture, but col-

lectively they tell us of the entity’s overall nancial performance.

Specically, the nancial statements tell us of the entity’s economic

resources; sources of nancing from creditors and owners; ability

to generate future income and cash ows; and solvency.

B. ILLUSTRATIVE FINANCIAL STATEMENTS

e following are illustrative (and simplied) comparative nancial

statements of a company, Duggan Inc:

Balance Sheets as at 30 September (in thousands of dollars)

20-2 20-1

$ $

Assets

Current Assets:

Cash 268 561

Cash equivalents 713 702

Marketable securities 1,100 1,000

Accounts receivable 5,835 5,621

Allowance for doubtful accounts (467) (430)

Inventories 4,031 4,164

Deferred tax assets 755 662

Prepaid expenses 216 86

Total Current Assets 12,451 12,366

 For a comprehensive set of nancial statements, see, for example, BCE Inc’s