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Lecture 5

Financial Statements

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The Balance Sheet

What

are the different sections of

the Balance Sheet?

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The Balance Sheet

Sections of the balance sheet:

Assets - resources of the firm that are expected

to increase or cause future cash flows
(everything the firm owns)
Liabilities - obligations of the firm to outsiders
or claims against its assets by outsiders (debts
of the firm)
Owners Equity - the residual interest in, or
remaining claims against, the firms assets after
deducting liabilities (rights of the owners)

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The Balance Sheet

The balance sheet equation:

Assets = Liabilities + Owners Equity

or
Owners Equity = Assets - Liabilities

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The Balance Sheet

HAMILTON COMPANY
Balance Sheet
December 31, 1997
Assets
Current assets:
Cash
$ 4,525
Accounts receivable
2,040
3,765
Total current assets $ 6,565
Fixed assets:
Land
Equipment
Total plant assets
Total assets

$ 9,755
6,500
16,255
$22,820

=============

Liabilities
Current liabilities:
Accounts payable
Wages payable
Total liabilities

Owners Equity
Hamilton, capital
Total liabilities &
Owners equity

=============

$ 9,800
$13,565

9,255
$22,820

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Balance Sheet Transactions

The balance sheet is affected by every
transaction that an entity encounters.
Each transaction has counterbalancing
entries that keep total assets equal to
total liabilities and owners equity, i.e., the
balance sheet equation must always be
balanced.

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Balance Sheet Transactions

Just as the balance sheet equation must

always balance, the balance sheet must
also always balance.

A balance sheet could be prepared after

every transaction, but this practice
would be awkward and unnecessary.

Therefore, balance sheets are usually

prepared monthly or on some other periodic
schedule.

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The Income Statement

Shows the results of a companys
operations over a period of time.
What goods were sold or services
performed that provided revenue for the
company?
What costs were incurred in normal
operations to generate these revenues?
What are the earnings or company profit?

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The Income Statement

Revenues
Assets (cash or AR) created through
business operations
Expenses
Assets (cash or AP) consumed
through business operations
Net Income or (Net Loss)
Revenues - Expenses

McGraw-Hill/Irwin, 2003

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The Example Company

Income Statement
For the Years Ended December 31, 2010 and 2011
2011

2010

Revenues:
Sales
Other revenue
Total revenues

$100
30
$130

$ 85
15
$100

Expenses:
Cost of goods sold
Operating & admin.
Income tax
Total expenses

$ 62
16
20
$ 98

$ 58
12
18
$ 88

Net Income

$ 32

$ 12

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Income Statement

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Lets Check our Understanding

Transaction
1) Inventory acc. balance is $1,000,000
1) Companys yearly salaries expenses is
250,000
1) Consulting Services Revenues is
$150,000
1) Capital investments is $2,000,000
1) Acc. Payables acc. balance is 320,000
1) Buildings purchased during the year for
1,300,000
1) Operating expenses paid for 250,000
1) Sales Revenues from selling goods for
180,000
1) Rent expenses paid for 39,000
1) Inventory of goods was 50,000

Income
Statement

Balance
Sheet