1. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-1 Understanding Accounting and Financial Statements

2. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-2 The Income Statement ●Designed to show the profits of a business ●Shows revenues, expenses, and profits over a period of time. ●Unlike the balance sheet snapshot, this is like a video.

3. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-3

4. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-4 The Cash Flow Statement ●Depreciation – decreasing the value of an asset as it gets “used up” –Shown as an expense on the income statement –But is not cash paid out by the business ●The Statement of Cash Flows –Shows a firm’s sources and uses of cash. –Factors in depreciation and other cash moves ●Accrual accounting - uses depreciation ●Cash accounting – does not use depreciation

5. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-5

6. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-6 In Class ●Construct an Income Statement for a DQ store from the following: –each week they sell $20K in ice cream –each month they need to pay $500 in interest on their bank loan –each month they sell $60K in drinks –ice cream supplies cost $70K per month –they pay 20% in taxes ●What is their gross income, EBITDA, net income, profit?