7. The Income Statement
The income statement measures
performance over a specific period of time,
say, a year.
The accounting definition of income is:
Revenues – Expenses = Income
Are increases in ownership
claims arising from the
delivery of goods or
services.
Are decreases in ownership
claims arising from
delivering goods or services
or using up asset.
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9. The Balance Sheet
• The balance sheet (also called statement of
financial position or statement of financial
condition) is a snapshot of the financial status of
an organization at a point in time.
• The balance sheet shows the assets owned by a
company, and how those assets are financed
(debt and equity).
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11. The Balance Sheet (Cont.)
Assets = Liabilities + Equity
What the company
owns (used to generate
income)
• How the ownership of assets
was financed (By third parties or
by the owners)
• Equity = book value of company
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12. The Balance Sheet (Cont.)
Assets = Liabilities + Equity
What the company
owns (used to generate
income)
Assets are economic resources that a
company owns and expects to provide
future benefits.
Consist of:
1- Current assets
2- Fixed assets
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13. The Balance Sheet (Cont.)
Assets = Liabilities + Equity
Fixed assets are reported at
the cost to purchase or
acquire the asset minus the
depreciation accumulated
on the assets since the time
of purchase.
• How the ownership of assets
was financed (By third parties or
by the owners)
• Equity = book value of company
• Current assets are those the business
expects to turn into cash during the next
year.
(Cash, account receivable, inventory,
prepaid expenses)
• Fixed assets are things of value that will
provide benefits to the company for one or
more years.
(Machines, lands, equipment, plants)
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14. The Balance Sheet (Cont.)
Assets = Liabilities + Equity
• How the ownership of assets
was financed (By third parties or
by the owners)
• Equity = book value of company
Liabilities are the
obligations to non owners.
Consist of:
1- Current liabilities.
2- Long term liabilities.
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15. The Balance Sheet (Cont.)
Assets = Liabilities + Equity
• How the ownership of assets
was financed (By third parties or
by the owners)
• Equity = book value of company
• Current liabilities are the
debts that a company must
pay off within the coming
year.
(Accounts payable, notes
payable, taxes payable)
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16. The Balance Sheet (Cont.)
Assets = Liabilities + Equity
What the company
owns (used to generate
income)
• How the ownership of assets
was financed (By third parties or
by the owners)
• Equity = book value of company
• Long term liabilities are
obligations, usually loans,
that are due to be paid not in
the current year but in some
future period.
The amount specified in the
balance sheet is equal to the
total amount borrowed.
(long term debt, deferred
taxes)
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17. The Balance Sheet (Cont.)
Assets = Liabilities + Equity
What the company
owns (used to generate
income)
• How the ownership of assets
was financed (By third parties or
by the owners)
• Equity = book value of company
Equity is the excess of the
assets over the liabilities.
It summarizes the owners‘
investment in the business.
(Stockholders’ equity,
accumulated retained
earnings, capital surplus)
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23. Statement of Cash Flows
(Cont.)
• The fundamental approach to the statement of cash
flows includes two steps:
1- List the activities that increased cash (cash
inflows) and those that decreased cash (cash
outflows).
2- place each cash inflow and outflow into one of
three categories according to the type of activity
that caused it: operating activities, investing
activities, and financing activities.
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24. 24
Statement of Cash Flows (Cont.)
• Cash flow from operating activities is the cash
flow that results from the firm’s normal activities
producing and selling goods and services.
• Cash flow from investing activities.
• Cash flow from financing activities is the net
payments to creditors and owners made during
the year.
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Statement of Cash Flows (Cont.)
• The three components of the statement of cash
flows are:
1- Cash flow from Operating Activities
2- Cash flow from Investing Activities
3- Cash flow from Financing Activities
This fundamental relationship must always exist, because the assets represent the things owned by the organization, and the liabilities and equity indicate how much was supplied by both creditors and owners
Accounts Receivable: Money owned to the company by debtors, generally for the purchase of goods and services.
Inventories: The value of products that have been completed and are in storage waiting to be sold (finished goods), products that have been partially completed (work in process), and raw materials.
Prepaid Expenses: The value of items that the company has paid for in advance, such as insurance premiums.
Accounts Receivable: Money owned to the company by debtors, generally for the purchase of goods and services.
Inventories: The value of products that have been completed and are in storage waiting to be sold (finished goods), products that have been partially completed (work in process), and raw materials.
Prepaid Expenses: The value of items that the company has paid for in advance, such as insurance premiums.