Understanding Financial Statements

Users of Financial Information Internal Users Managers plan, organize and run a business

Users of Financial Information External Users Investors Creditors Others Taxing authorities Regulatory agencies Customers Labour unions Economic planners Primary users

Objective of Financial Reporting Provide the most useful financial information for decision making This is accomplished through the development of financial statements. 4

How much is Joe Student Worth? HE HAS - cash $19.22 - beer can empties $45.38 - CDs $345.12 (new) - ’97 beater $1200.00 (market) TOTAL $1609.72

How much is Joe Student Worth? HE OWES Back Rent $400 (current) Std Loan* $1000 (long term) TOTAL $1400 HE IS WORTH 1609.72 – 1400 = $209.72

Assets = Liabilities + net worth Accounting Equation Assets = Liabilities + Shareholders’ Equity Assets = Liabilities + net worth

Basic Terms Assets - resources owned by a business Liabilities - obligations of the business Shareholders’ equity Share capital - representing the primary ownership interest in a corporation Retained earnings – accumulated earnings of corporation that have not been distributed to shareholders

CSU CORPORATION Balance Sheet December 31, 2006 Head up the statement name of company name of statement date (as at a specific point in time)

CSU CORPORATION Balance Sheet December 31, 2006 Assets Cash $ 2,000 Accounts receivable 4,000 Inventory 1,800 Equipment 16,000 Total assets $23,800 List the assets and total Note the order of listing

CSU CORPORATION Balance Sheet December 31, 2006 Assets Cash $ 2,000 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,800 Liabilities and Shareholders’ Equity Liabilities Accounts payable $ 2,000 Notes payable 5,000 Total liabilities 7,000 List the liabilities and subtotal Hmm .. Same order for liabilities

CSU CORPORATION Balance Sheet December 31, 2006 List shareholders’ equity. Subtotal Add to liabilities, total

CSU CORPORATION Balance Sheet December 31, 2006 Assets Cash $ 2,000 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,800 Liabilities and Shareholders’ Equity Liabilities Accounts payable $ 2,000 Notes payable 5,000 Total liabilities 7,000 Shareholders’ equity Common shares $10,000 Retained earnings 6,800 Total shareholders’ equity 16,800 Total liabilities and shareholders’ equity $23,800

Classified Balance Sheet Generally contains the following standard classifications: Assets Current assets Long-term investments Capital assets Liabilities Current liabilities Long-term liabilities Shareholders’ Equity Share capital Retained earnings 21

Stop and Check Total assets must equal total liabilities and shareholders’ equity

Yeah, but I have a job now. I’ll have money coming in. Money coming in (for October) - wages $1800 Money going out Rent $400 Food $400 Entertainment $800 IMPROVED NET WORTH $200

Revenues (money coming in) Revenues arise from sale of a product or service Revenues result in an inflow of assets

Expenses Expenses are the costs of assets consumed or services used to generate revenues Examples Cost of sales Store operating expenses General and administrative expenses Interest expense

(Net loss is the excess of expenses over revenues) Net Earnings Net earnings are the excess of revenue over expenses Revenue $10,000 Less: Expenses 3,000 Net earnings $ 7,000 (Net loss is the excess of expenses over revenues)

Statement of Earnings Head up the statement CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006 Statement of Earnings Head up the statement name of company name of statement period of time covered

CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2001 Revenues Service revenue $22,200 List the revenues

CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006 Revenues Service revenue $22,200 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 Total expenses 10,200 Earnings before income tax 12,000 Income tax expense 5,200 List and total the expenses. Note that income tax is shown separately from other expenses

Subtract expenses from revenues to obtain net earnings (loss) CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006 Revenues Service revenue $22,200 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 Total expenses 10,200 Earnings before income tax 12,000 Income tax expense 5,200 Net earnings $ 6,800 Subtract expenses from revenues to obtain net earnings (loss)

Joe Student’s Worth Now? He was worth $209.72 He has since cleared $200.00 His current Net Worth $409.72 At end of October

Statement of Retained Earnings Head up the statement CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006 Statement of Retained Earnings Head up the statement name of company name of statement period of time covered (same period as statement of earnings)

CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006 Retained earnings, January 1 $ 0 Start with beginning retained earnings (same as ending retained earnings of prior period)

CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2001 Retained earnings, January 1 $ 0 Add: Net earnings 6,800 6,800 Add net earnings (subtract loss) from the current year (see Statement of Earnings) Subtotal

Subtract current year’s dividends (if any) and total CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006 Retained earnings, January 1 $ 0 Add: Net earnings 6,800 6,800 Less: Dividends 0 Retained earnings, December 31 $ 6,800 Subtract current year’s dividends (if any) and total

In what order are financial statements prepared? Presented? WHY?

Net earnings is needed for the Statement of Retained Earnings CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2006 Revenues Service revenue $22,200 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 20 Total expenses 10,200 Earnings before income tax 12,000 Income tax expense 5,200 Net earnings $ 6,800 Net earnings is needed for the Statement of Retained Earnings

Ending retained earnings is needed for the Balance Sheet CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2006 Retained earnings, January 1 $ 0 Add: Net earnings 6,800 6,800 Less: Dividends 0 Retained earnings, December 31 $ 6,800 Ending retained earnings is needed for the Balance Sheet

CSU CORPORATION Balance Sheet December 31, 2006 Assets Cash $ 2,000 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,800 Liabilities and Shareholders’ Equity Liabilities Accounts payable $ 2,000 Notes payable 5,000 Total liabilities 7,000 Shareholders’ equity Common shares $10,000 Retained earnings 6,800 Total shareholders’ equity 16,800 Total liabilities and shareholders’ equity $23,800

Remember … Remaining liquid and solvent is as important as making a profit because... A company can survive without earnings, but it can’t survive very long without cash “B u r n R a t e”

Financial Accounting Statements Statement of Earnings Reports the results of operations for a specific period of time Statement of Retained Earnings Reports the changes in retained earnings for a specific period of time Balance Sheet Reports the assets, liabilities, and shareholders’ equity as at a specific point in time Statement of Cash Flows Reports the cash receipts and payments for a specific period of time

Management Discussion and Analysis Auditor's Report Elements of an Management Discussion and Analysis Auditor's Report Financial Statements Statement of Earnings Statement of Retained Earnings Balance Sheet Statement of Cash Flows Notes to Financial Statements