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Chapter 3 HINM 318

The four main financial statements are: 1) The balance sheet reports assets, liabilities, and owner's equity at a point in time. 2) The income statement reports revenues, expenses, and net income over a period of time. 3) The owner's equity statement reports changes in owner's equity from the beginning to the end of the period. 4) The statement of cash flows reports sources and uses of cash over a period.

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31 views24 pages

Chapter 3 HINM 318

The four main financial statements are: 1) The balance sheet reports assets, liabilities, and owner's equity at a point in time. 2) The income statement reports revenues, expenses, and net income over a period of time. 3) The owner's equity statement reports changes in owner's equity from the beginning to the end of the period. 4) The statement of cash flows reports sources and uses of cash over a period.

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MOHAMMAD BORENE
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HEALTH CARE FINANCIAL

STATEMENTS

C h a p t e r Three

1
Describe the four financial statements
and how they are prepared.

Companies prepare four financial statements :

Owner’s
Income Equity
Statement of
Balance Sheet
Statement Cash Flows
Statement

LO 5
1. Balance Sheet

 Reports the assets, liabilities, and owner's equity at a


specific date.
 Highlights the relative strength of a company at a point
in time.
 Lists assets at the top, followed by liabilities and owner’s
equity.
 Total assets must equal total liabilities and owner's
equity.
 Is a snapshot of the company’s financial condition at a
specific moment in time (usually the month-end, quarter,
half year or year-end). LO 5
4
2. Income Statement
 Income Statement reports the revenues and expenses and
resulting net income or net loss of a company for a
specific period of time.
 It shows net income or net loss: If revenue is more than
expenses, you have net income ,If expenses are more
than revenue, you have net loss
 It lists revenues first, followed by expenses.
 It does not include investment and withdrawal transactions
between the owner and the business in measuring net
income.
 The Income statement is sometimes referred to as the
statement of operations, earnings statement, or profit and
LO 5
loss statement.
6
3. Owner’s Equity Statement

 Reports the changes in owner’s equity for a specific


period of time.
 The time period is the same as that covered by the
income statement.
 Explains the effects of transactions on stockholder’s
equity during the accounting period.
 Starts with beginning common stock and adds any
additional shares of stock issued.
 Then it takes the beginning retained earnings and adds
on net income (subtracts net loss)
 Then it subtracts any dividends paid to shareholders
LO 5
Statement of Owners Equity

8
4. Statement of Cash Flows

 A cash flow statement summarizes information


concerning the cash inflows (receipts) and outflows
(payments) for a specific period of time.
 Information on the cash receipts and payments for a
specific period of time. The notes are an integral
part of the financial statements.
 Answers the following:
► Where did cash come from?
► What was cash used for?
► What was the change in the
cash balance? LO 5
-Cash Flow Statement tells you whether your cash increased or
decreased and why.

-Cash Flow Statement = Cash + Flow + Statement


• Cash = Hard Cash + Bank Balance + near Cash Assets ( short term
investments etc.)
• Flow means change i.e. Increase / Inflow or Decrease / outflow.
• Statement means something stated in writing.

Hence, Any statement showing the changes in Cash for a given period is
called Cash Flow Statement.

10
11
12
13
Operating Activities
• Operating activities include receiving cash from revenue
and paying cash for expenses
• Cash flows from operations primarily measures the
cash-generating abilities of the company's core
operations .
• It is important to note that cash flow is not the same as
net income, which includes transactions that did not
involve actual transfers of money (depreciation is
common example of a noncash expense that is included
in net income calculations but not in cash flow
calculations).
14
Investing Activities
• Investing Activities includes paying cash to buy
productive assets (like machinery or
equipment) or receiving cash when you sell
productive assets.

15
Financing Activities
• Financing Activities includes receiving cash
from owners or paying cash to owners
(dividends). It can also include borrowing cash
from the bank or repaying the cash.

16
CASH FLOW STATEMENT
EXAMPLE

SOFTBYTE
Cash Flow Statement
For the Month Ended September 30, 2016
Cash flows from operating activities
Cash receipts from customers $ 3,300
Cash payments to suppliers and employees (1,950) $ 1,350
Net cash provided by operating activities
Cash flows from investing activities
Purchase of equipment $ (7,000)
Net cash used by investing activities (7,000)
Cash flows from financing activities
Investments by owner $ 15,000
Drawings by owner (1,300)
Net cash provided by financing activities 13,700
Net increase in cash $ 8,050
Cash, September 1 -
Cash, September 30 $ 8,050

17
Net income is needed to determine the
Financial Statements ending balance in owner’s equity.

SOFTBYTE
Income Statement
For the Month Ended September 30, 2017

Illustration 1-9
Financial statements and
their interrelationships

SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2017

LO 5
SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2017

Illustration 1-9
The ending
balance in SOFTBYTE
owner’s equity Balance Sheet
is needed in September 30, 2017
preparing the
balance sheet.

Illustration 1-9
Financial statements
and their
interrelationships
SOFTBYTE
Financial Balance Sheet
September 30, 2017

Statements

Balance sheet and


income statement
are needed to
prepare statement of
cash flows.
SOFTBYTE
Statement of Cash Flows
For the Month Ended September 30, 2017

Illustration 1-9
Financial statements
and their
interrelationships
ILLUSTRATION 1-10
FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
SOFTBYTE
SOFTBYTE
Income Statement
Income Statement
For the Month Ended September 30, 2016
For the Month Ended September 30, 2016
Revenues
Revenues
Service revenue $ 4,700
Service revenue $ 4,700
Expenses
Expenses
Salaries expense $ 900
Salaries expense $ 900
Rent expense 600
Rent expense 600
Advertising expense 250
Advertising expense 250
Utilities expense 200
Utilities expense 200
Total expenses 1,950
Total expenses 1,950
Net income $ 2,750
Net income $ 2,750

Net income of $2,750 shown on the income statement is added to the


beginning balance of owner’s capital in the statement of owner’s equity
21 .
ILLUSTRATION 1-10
FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
SOFTBYTE
Statement of Owner's Equity
For the Month Ended September 30, 2016

M. Doucet, Capital, September 1 $ -


Add: Investments $ 15,000
Net income 2,750 17,750
$ 17,750
Less: Drawings 1,300
M. Doucet, Capital September 30 $ 16,450

Net income of $2,750 is carried forward from the income statement to


the statement of owner’s equity. The owner’s capital of $16,450 at the
end of the reporting period is shown as the final total of the owner’s
equity column of the Summary of Transactions (Illustration 1-9 in text).
22
ILLUSTRATION 1-10
FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
Owner’s capital SOFTBYTE
of $16,450 at Balance Sheet
the end of the September 30, 2016
reporting Assets
period – shown Cash $ 8,050
in the Accounts receivable 1,400
statement of Supplies 1,600
owner’s equity Equipment 7,000
– is also shown Total assets $ 18,050
on the balance
sheet. Cash of Liabilities and Owner's Equity
$8,050 on the Liabilities
balance sheet is Accounts payable $ 1,600
reported on the Owner's Equity
cash flow M. Doucet, Capital 16,450
statement. Total liabilities and owner's equity $ 18,050
23
ILLUSTRATION 1-10
FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
SOFTBYTE
Cash Flow Statement
Cash of For the Month Ended September 30, 2016
$8,050 on the Cash flows from operating activities
Cash receipts from customers $ 3,300
balance sheet Cash payments to suppliers and employees (1,950) $ 1,350
and cash flow Net cash provided by operating activities
statement is Cash flows from investing activities
shown as the Purchase of equipment $ (7,000)
final total of Net cash used by investing activities (7,000)
Cash flows from financing activities
the cash Investments by owner $ 15,000
column of the Drawings by owner (1,300)
Summary of Net cash provided by financing activities 13,700
Transactions Net increase in cash $ 8,050
Cash, September 1 -
(Illustration 1-
Cash, September 30 $ 8,050
9 in text). 24

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