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1 - The Four Core Financial Statements - YouTube
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I'm Larry Walther and this is principles
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of accounting comm chapter 1 in this
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particular module we're going to look at
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the four core financial statements
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before we begin that thought what I'd
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ask you to consider is what types of
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information would you want about a
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particular company you were considering
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investing in I've included in this
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little thought cloud here things that
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are financial in blue you'd want to know
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about the revenues of the company the
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income the assets things of that nature
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you would also want to know about though
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the things that are in red corporate
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governance environmental
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responsibilities the management team
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what brands are held by the particular
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company accounting is focused primarily
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on providing the financial information
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this other information is necessary for
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proper decision making it can be found
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on corporate websites SEC filings and so
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forth the four core financial statements
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are the income statement the statement
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of retained earnings the balance sheet
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and the statement of cash flows we'll
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look at each of these in turn the income
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statement reports the revenues and
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expenses and results of operations for a
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particular company the difference
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between the revenues and expenses is
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termed the income or net income of the
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company here we have an example for
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kourt's corporation importantly note
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that we're reporting the name of the
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corporation in the heading the name of
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the statement the income statement in
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the time period this is a statement for
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a period of time so we label it as such
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for the year ending December 31 2o x 9
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the total revenues of the company were
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seven hundred sixty five thousand the
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total expenses were six hundred fifty
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thousand and the net income was 115
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thousand this brings us to the statement
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of retained earnings you already know
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that retained earnings is the income of
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the business that has not been paid out
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in dividends over a period of time
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retained earnings will either increase
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or decrease in the first illustration
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I'm showing how net income offset by
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some dividends has still resulted in an
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increase in retained earnings but we can
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also have a decrease in retained
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earnings during a period of time if we
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have a net loss or pay excessive
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dividends this is activity is reported
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in the second primary financial
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statement the statement of retained
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earnings again for a period of time pay
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attention to the heading we're showing
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the beginning retained earnings plus the
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net income arriving at a subtotal and
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then subtracting the dividend
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from that to arrive at the ending
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retained earnings of four hundred and
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eighty thousand dollars
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the third financial statement we'll look
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at is the balance sheet your you should
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already be familiar with the balance
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sheet it reflects the fundamental
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accounting equation assets equal
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liabilities plus owner's equity this
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time it's not for a period of time the
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dating shows that it is at a point in
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time so I've just dated at December 31
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to lx9 and on that date this company had
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nine hundred thousand and assets two
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hundred thousand and liabilities total
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equity of seven hundred thousand notice
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within equity we've got retained
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earnings of four hundred and eighty
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thousand that's the same retained
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earnings that was revealed in the
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statement of retained earnings in the
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previous slide the fourth financial
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statement is a statement of cash flows
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it's a bit more complex at least
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initially in your study of accounting it
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shows how cash is generated and expended
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during a period of time that is not the
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same thing as income as you'll see here
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in a moment the statement of cash flows
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has three key sections the operating
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activities section the investing
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activities section and the financing
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activities section in the operating
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activities section here we shall cash
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received from customers we shall cash
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paid for various expenses like salaries
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and rent and so forth and this business
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generated a net $80,000 cash from
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operating activities not exactly the
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same thing as net income because some
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items might have been measured as they
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occurred independent of when the cash
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flows actually happened so if you for
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example sell on credit you'll recognize
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the revenue before you actually collect
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the cash so there's oftentimes a
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disconnect between the cash from
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operations and the net income of the
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business there's also other activities
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that bear for example we purchased land
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for two hundred and fifty thousand
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dollars we pay dividends of thirty five
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thousand dollars and this business
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actually had a two hundred and five
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thousand dollar decrease in cash during
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the period despite its income a largely
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explainable of course by the large
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purchase of land during the period but
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you can begin to appreciate how
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important it is to study the statement
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of cash flows when you consider what's
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happening at a particular business
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finally I want to close by asking you to
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consider how the financial statements
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articulate or tie together or mesh
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together in a self-balancing fashion and
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so if you'll study this illustration
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very carefully you'll note that the
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revenues minus expenses gave rise to a
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net income of a
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fifteen thousand that flowed through
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into the statement of retained earnings
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the green arrow showing the flow through
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adding that to the beginning retained
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earnings and subtracting the dividends
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gave us ending retained earnings of four
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hundred and eighty thousand dollars
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which is also the amount that appeared
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on the balance sheet and allowed the
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balance sheet to balance total assets
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now equal total liabilities plus equity
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it might be a mystery as to why that
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occurs so let's think about adding one
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more transaction to this particular
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company if we added one more dollar of
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revenue here let's suppose services to
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customers were 750 thousand and one
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dollar and no additional expenses were
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incurred then income would be one
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hundred and fifteen thousand and one
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dollar and ending retained earnings
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would be four hundred and eighty
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thousand and one dollar and total
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liabilities and equity would be nine
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hundred thousand and one dollar but
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remember we got an extra dollar of cash
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so cash would be one hundred ninety two
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thousand and one dollars the balance
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sheet would be preserved it's really a
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brilliant system it's a simple system
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but it's a brilliant system in terms of
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capturing all transactions and events
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into a set of articulating or
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self-balancing financial statements and
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these are the key financial statements
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that investors look at when they make
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decisions about business enterprises
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