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Weekly Discussion 1

Financial statements include the balance sheet, income statement, and statement of retained earnings. The balance sheet summarizes a company's assets, liabilities, and equity at a point in time. The income statement shows revenues and expenses over a period of time. Retained earnings represent cumulative earnings since inception less any dividends and are included in equity. While financial statements provide important information, they can be challenging to create due to issues like non-cash transactions, valuation of intangible assets, and the use of accrual accounting.

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34 views3 pages

Weekly Discussion 1

Financial statements include the balance sheet, income statement, and statement of retained earnings. The balance sheet summarizes a company's assets, liabilities, and equity at a point in time. The income statement shows revenues and expenses over a period of time. Retained earnings represent cumulative earnings since inception less any dividends and are included in equity. While financial statements provide important information, they can be challenging to create due to issues like non-cash transactions, valuation of intangible assets, and the use of accrual accounting.

Uploaded by

Vivek Sharma
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Weekly Discussion 1

Interesting financial accounting concepts

Financial statements are documents that summarize the financial activities and performance
of a business or organization. These statements are typically prepared at the end of a
company's accounting period, which may be monthly, quarterly, or annually.

The two different sorts of accounting are financial accounting and managerial accounting
which can be explained as:

 Financial accounting is primarily concerned with informing external stakeholders,


including creditors, regulators, and investors. The primary objective of financial
accounting is to prepare financial statements based on past happenings that
accurately reflect a company's financial performance and position. Financial
statements are created by using generally accepted accounting standards (GAAP).

 Managerial accounting, on the other hand, is concentrated on giving information to


internal stakeholders, such managers and staff. The main goal of management
accounting is to give managers the data they need to make future decisions about the
operations of a firm in a well-informed manner. Budgeting, cost-volume-profit
analysis, and variance analysis are just a few of the methods used by managerial
accountants.

While financial accounting and managerial accounting are different, they are both important
for the success of a business. Financial accounting provides external stakeholders with the
information they need to make investment and lending decisions, while managerial
accounting helps managers make informed decisions about how to allocate resources and run
the business.

1.1 The financial statements prepared within an organization include the following:

i. Balance Sheet: A balance sheet gives a quick overview of a company's financial


situation at a particular period. It displays a company's assets, liabilities, and equity,
with the rule that a company's total assets must always equal its total liabilities plus its
total equity.

The Balance sheet formula is:


Assets = Liabilities + Equity
The assets section includes current assets, such as cash, accounts receivable, and
inventory, as well as long-term assets, such as property, plant, and equipment.

The liabilities and equity section includes current liabilities, such as accounts payable
and short-term debt, as well as long-term liabilities, such as long-term debt. Whereas
Common stock and retained earnings are included in equity.

ii. Income Statement: An income statement, also known as profit and loss statement,
shows a company's revenues, expenses, and net income over a specific period of time.

The Income statement formula is:


Net Income = Revenues – Expenses

There are two sections within an Income statement:

Revenue: Revenue is the amount of money a company earns from the sale of its
goods or services and hence it includes sales revenue, service revenue, interest
income, and other income.

Expense: An expense is a cost incurred by a company in order to generate revenue or


to maintain its business operations. The expenses of a company for a particular period
may include the cost of goods sold, salaries and wages, rent, utilities, advertising, and
other expenses.

Here comes the concept of Profit and Loss. If the company's total revenue is greater
than its total expenses, the result is a net income or profit. If the total expenses are
greater than the total revenue, the result is a net loss.

1.2 The Concept of Retained Earnings

Retained earnings are a component of a company's net income that is kept within the business
rather than given to shareholders as dividends, and they can be added to the net income for
use in the following financial year. Retained earnings are included in the balance sheet's
equity section. They represent a business's cumulative earnings since its inception, less any
dividends given to shareholders.

It can be described within Equity as:


Equity = Retained Earnings + Contributed Capital
(Where Contributed capital the funds that have been invested in a company by its owners or
shareholders)

Challenges while creating financial statements.


2.1 Challenges with creating the statement of income (income statement)
The income statement is based on accrual accounting, which means that it records revenues
and expenses when they are earned or incurred, regardless of when the cash is actually
received or paid. This can make it difficult to assess a company's cash flow position and may
lead to discrepancies between reported profits and actual cash on hand.

2.2 Challenges with creating the statement of changes in equity (statement of retained
earnings)
Non-cash transactions, such as depreciation, can affect the calculation of retained earnings
and may require adjustments to prior-period financial statements. Also, dividend payments
reduce the amount of retained earnings and hence the value of Equity. Therefore, it must be
accurately recorded and disclosed in the statement of retained earnings.

2.3 Challenges with creating a statement of financial position (balance sheet)


There are certain challenges associated with the Balance sheet, such as;
 Valuing intangible assets, such as goodwill, patents, and trademarks, can be
challenging as they may not have a market value or observable price.
 Valuing assets, such as property, plant, and equipment, can be challenging as it
requires determining their useful life, and depreciation method. Also, different
valuation methods may result in different asset values.

Despite these challenges, these tools remain critical & integral to any organization, in order to
evaluate and present its financial performance, understand its profitability, and present its
financial position.

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