Reporting Financial results on Financial statements Chapter 3 T.Hend Alajaji

Financial statement : Balance sheet Income statement Statement of cash flows Statement of retrained earning

Classified Balance Sheet Preparing Balance Sheet Income Statment Ch3 Financial Statement Balance Sheet Transaction Classified Balance Sheet Preparing Balance Sheet Income Statment Classified income statement Preparing income statement

Objectives ( Balance Sheet ) : Transaction The types of events for transactions Balance sheet Classified Balance Sheet Preparing a balance sheet

Transactions and other actives : Business activities that effect the basic accounting equation A = L + SE Are called  Transactions

Transactions include two types of events : External exchanges : There are exchanges involving assets, liabilities and stockholder equity that you can see between the company and someone . Internal exchanges : these events do not involve exchanges with others outside the business but rather occur within the company itself .

Preparing a balance sheet

Preparing a balance sheet Using the ending amount from each T-account you could now prepare a balance sheet Before do this , it’s good idea to check that the accounting records are in balance by determining whether debits = credit

Balance sheet : Reports the amounts of assets , liabilities and stockholders equity of a business at a point in time . Classified Balance Sheet : A balance sheet that shows a subtotal for currents assets and current liabilities .

Classified Balance Sheet Current Assets  Cash and other assets that are expected to be converted into cash, sold, or used up usually within a year or less, through the normal operations of the business, are called current assets. Cash Accounts Receivable Notes Receivable  are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate. Supplies. Prepaid expenses . Accrued revenues .

Classified Balance Sheet 2- Fixed Assets  Property, plant, and equipment (also called fixed assets or plant assets) include assets that depreciate over a period of time. Land is an exception, as it is not subject to depreciation. Equipment Buildings Land

Classified Balance Sheet 3- Current Liabilities  Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets are called current liabilities. Accounts payable Wages payable Interest payable Unearned fees

Classified Balance Sheet 4- Long-Term Liabilities  Liabilities not due for a long time (usually more than one year) are called long-term liabilities. Short-term notes payable Mortgages payable Bonds payable

Classified Balance Sheet 5- Owner’s Equity  Owner’s equity is the owner’s right to the assets of the business. Owner’s equity is added to the total liabilities, and this total must be equal to the total assets.

Company Name Balance Sheet Date Assets Liabilities Current Assets Current Liabilities Cash ………………………………………... xx Accounts payable …………………………… Accounts Receivable …………… Note payable …………………………………… Notes Receivable ………………… Wages payable ………………………………… Supplies ………………………………… Interest payable ……………………………… Prepaid Expenses…………………… Unearned fees ………………………………… ……………………Total current Assets Total current Liabilities ………………… Fixed Assets Long-Term Liabilities Land ………………………………………… Short-term notes payable …………… Equipment ……………………………… Mortgages payable ………………………… Accum. Dep. – equipment …… Bonds payable ………………………………… Machinery ……………………………… Loans ………………………………………………… Accum. Dep. – machinery …… totalLong-Term Liabilities………… Buildings ………………………………… Accum. Dep. – Buildings ……… Owner’s Equity Cars (automobile) ………………… Owner’s capital ………………………………… Accum. Dep. – cars ……………… Total fixed assets ……………… Total assets …………………………… Total Liabilities and Owner’s equity

NetSolutions Balance Sheet December 31, 2011 Assets Liabilities Current Assets Current Liabilities Cash 2,065 Accounts payable 900 Accounts Receivable 2,720 Wages payable 250 Supplies 760 Unearned rent 240 Prepaid insurance 2,200 Total current Liabilities 1,390 Total current assets 7,745 Fixed Assets Owner’s Equity Land 20,000 Chris clark, capital 28,105 Equipment 1,800 Accum. Dep. - equipment (50) Total fixed assets 21,750 Total assets 29,495 Total Liabilities and Owner’s equity

Exercise 1 : complete the following table . Indicate whether the account is classified as Current assets , noncurrent assets , current liabilities , noncurrent liabilities , or stockholder equity and whether the account usually has a debt or credit balance .

Debit or Credit Balance Balance sheet Classification Account Land Retained Earning Notes payable (due in three years ) Accounts Receivable Supplies Equipment Accounts Payable Cash Taxes payable

Exercise 2 : complete the following table Balance Sheet December 31, 2011 Assets Liabilities Current Assets Current Liabilities Cash 1000 Accounts payable 3000 Accounts Receivable 500 Wages payable 1500 Supplies 2500 Unearned rent Prepaid insurance Total current Liabilities Total current assets Fixed Assets Owner’s Equity Land 5000 Chris clark, capital 8000 Equipment 2000 Accum. Dep. - equipment (500) Total fixed assets Total assets Total Liabilities and Owner’s equity

Exercise 3 : From the following table prepare a classified Balance sheet at December 31 2013  3000 land Cash 5000 Supplies Accounts Receivable 7000 Accounts Payable 4000 Inventory 8000 Note payable ( due 2013) 2000 Notes receivable ( due 2013) Retained Earning 2500 Equipment Loans 500 Accum. Dep. – equipment

Preparing a Income Statement

Objectives : Income Statement . The Three main sections of income statement. Accounting Methods Preparing Income Statement .

Income Statement It called also the statement of operations . It is reports the amount of revenues less expenses for a period of time . The income Statement summarize the financial impact of operating actives under taken by the company during the accounting period . A financial statement that measures a company's financial performance over a specific accounting period.

Income Statement include three main sections : 1- Revenues . Amounts earned by selling goods or services . 2- Expenses . Costs of business necessary to earn revenues 3- Net income . The excess of revenues over expenses

For The Period Ended (Date) Company Name Income Statement For The Period Ended (Date) Revenues …………………………………………………………… xxx Total Revenues ………………………………………………… Expenses …………………………………………………………… Total expenses ………………………………………………… (xxx) Net income (or net loss) ………………………………

Expenses+Assets=Liabilities+Capital+Revenues Debit Accounts If Debit, and if Credit Credit Accounts If Credit, and if Debit Decrease Increase Item Revenues Expenses

Accounting Methods : 1- Cash Basis Accounting : Reports revenues when cash is received and expenses when cash is paid . 2- Accrual Basis Accounting : Reports revenues when they are earned and expenses are incurred regardless of the timing of cash receipts

Matching Principle : The requirement under accrual basis accounting to record expenses in the same period as the revenues they generate not necessarily the period in which cash is paid for them . Expense Revenues

For The Year Ended December 31, 2011 Netsolutions Income Statement For The Year Ended December 31, 2011 Fees earned ……………………………………………………… 16,840 Rent revenue …………………………………………………… 120 Total revenues ……………………………………… 16,960 Expenses: Wages expense …………………………………… 4,525 Supplies expense …………………………………… 2,040 Rent expense ………………………………………… 1,600 Utilities expense …………………………………… 985 Insurance expense ……………………………… 200 Depreciation expense ………………………... 50 Miscellaneous expense ………………………… 455 Total expenses ………………………… 9,855 Net income ……………………………………………………… 7,105

Exercise 1 : Complete the following table by entering either debts or credit in each cell : Decrease Increase Item Revenues Expenses

Company Name : Alaml Company For The Period Ended (December 31 2013 ) Exercise 2 : Complete the following : Company Name : Alaml Company Income Statement For The Period Ended (December 31 2013 ) Revenues …………………………………………………………… 8000 Total Revenues ………………………………………………… Expenses …………………………………………………………… 3000 Total expenses ………………………………………………… ( ) Net income (or net loss) ………………………………

Exercise 3 : From the following table prepare a Income statement at December 31 2013  Items 10000 Passenger ticket Revenues 8000 Onboard Revenues 1000 Ship expenses 1500 Selling expenses 4000 Wage expenses Income tax Expenses

Objectives ( statement of cash flow) : Business Activities and Cash Flows Classifying Cash Flows

Business Activities and Cash Flows The Statement of Cash Flows focuses attention on: Operations Cash received and paid for day-to-day activities with customers, suppliers, and employees. The Statement of Cash Flows shows each major type of business activity that caused a company’s cash to increase or decrease during the accounting period. The major types of business activities are: Operations – The Statement of Cash Flows shows the cash received and paid for day-to-day activities with customers, suppliers, and employees. Investing – The Statement of Cash Flows shows cash paid and received from buying and selling long-term assets. Financing – The Statement of Cash Flows shows cash received and paid for exchanges with lenders and stockholders. Investing Cash paid and received from buying and selling long-term assets. Financing Cash received and paid for exchanges with lenders and stockholders. 12-35

Business Activities and Cash Flows Checking and Savings Accounts Currency Cash Equivalents Highly liquid short-term investments within three months of maturity. Part I Cash includes currency on hand. Part II Cash also includes checking accounts, savings accounts, and certain money market accounts. Part III The third component of cash is called cash equivalents. Cash equivalents are short-term, highly liquid investments that are easily converted into cash and that have very little risk of loss. An example of a cash equivalent would be a short-term Treasury Bill that is government issued, is within three months of its maturity date, and has very little risk associated with it. 12-36

Classifying Cash Flows On your screen, you see a condensed Statement of Cash Flows from Under Armour, Inc. for 2008. Notice the three basic sections on the Statement of Cash Flows:  Operating Activities  Investing Activities  Financing Activities The statement also includes a reconciliation between beginning and ending cash and cash equivalents. We will be examining the sections of this statement in detail for the remainder of the chapter. 12-37

Operating Activities Cash inflows and outflows that directly relate to revenues and expenses reported on the income statement. Part I The cash flows from operating activities section of the Statement of Cash Flows shows us the inflows and outflows of cash that directly relate to income from normal operations reported on the income statement. Part II The Operating Activities Section includes cash inflows and cash outflows that result from the operations of the business and some incidental business transactions. Operating cash inflows include cash collected from customers, receiving dividends, and receiving interest. Operating cash outflows include purchasing services and goods for resale, Paying salaries and wages, paying income taxes, paying interest. 12-38

Under Armour’s 2008 Investing Activities Part I The Investing Activities Section includes cash inflows from the sale or disposal of property, plant, and equipment, and the sale or maturity of investments in securities and cash outflows for the purchase of property, plant, and equipment and the purchase of investments in securities. The difference between these cash inflows and outflows is reported on the statement of cash flows as a subtotal, Net Cash Provided by (Used for) Investing Activities. Part II Under Armour had two investing activities in 2008 that required cash: the purchase of equipment for $36 million and the purchase of intangible assets for $2 million. 12-39

Under Armour’s 2008 Financing Activities Part I The Financing Activities Section includes cash inflows from borrowing from lenders through formal debt contracts and issuing stock to owners and cash outflows for repaying principal to lenders, repurchasing stock from owners, and paying cash dividends to owners. The difference between these cash inflows and outflows is reported on the statement of cash flows as a subtotal, Net Cash Provided by (Used for) Financing Activities. Part II Under Armour had the following financing activities in 2008: Long-term debt of $7 million was paid. $16 million in new long-term loans were issued. Shares of stock were issued for $12 million. Although exceptions exist, a general rule is that operating cash flows cause changes in current assets and current liabilities, investing cash flows affect noncurrent assets, and financing cash flows affect noncurrent liabilities or stockholders’ equity accounts. 12-40

E12-7 Preparing and Evaluating a Simple Statement of Cash Flows (Indirect Method) Required: 2. Prepare a statement of cash flows using the indirect method. Part I Required: 2. Prepare a statement of cash flows using the indirect method. Part II Using the indirect method, we start with Net Income. We add Depreciation, deduct the Accounts Receivable increase, add the inventory decrease, and add the Wages Payable increase to arrive at the net cash provided by operating activities of $170. Part III The only investing activity was the purchase of equipment for $60. Part IV The only financing activity was the increase in long-term debt of $60. 12-41