Hi.
Else here.
And in this video, we'll be exploring financial statements,
what they look like, and how they interconnect.
Why are financial statements necessary?
Remember that external users, mainly investors, lenders,
and other creditors, have to make decisions
about resource allocations, where to put their money.
They use financial statements to answer questions
that they may have about a business.
From the video on business organizations,
we know that corporations can be either public or private.
Public corporations must follow IFRS, International Financial
Reporting Standards.
Private corporations can follow either IFRS or ASPE, Accounting
Standards for Private Enterprises.
Corporations who follow IFRS, whether public or private,
must produce the following financial statements--
the income statement, statement of comprehensive income,
statement of changes in equity, statement
of financial position, and finally, a statement of cash
flow.
A private company who follows ASPE
produces slightly different statements--
an income statement, statement of retained earnings, balance
sheet, and a cash flow statement.
If you wish to learn about these statements,
go to my video on ASPE financial statements.
IFRS required financial statements must be completed
in a specific order, and we'll start
with the income statement.
An income statement reports the results of a company's
day-to-day operation.
It reports the revenues, less the expenses incurred
to generate that revenue, to obtain a profit or loss figure.
The income statement measures the company's performance
within a period of time, either annually, quarterly,
or monthly.
To better understand the income statement,
we have to understand the two main elements, revenues
and expenses.
Revenues are an increase in assets, either cash or accounts
receivable, from selling a product or providing a service.
Other forms of revenue are interest income, royalty
income, or rental income.
Expenses are the cost of anything
which is consumed, used, or incurred to help earn revenue
during that period of time.
Common expenses are salaries, advertising, depreciation,
utilities, interest, and income tax expense.
The format of an income statement is important.
Note that the heading must always
include the company name, the title
of the financial statement, and the time period covered.
Revenues are listed first.
If there are multiple revenues, you
must list each different type of revenue
individually and then show a subtotal called total revenues.
Expenses are listed next, with a total of all expenses.
There is a profit before income tax expense, then
income tax expense as a separate line item,
before listing a final profit amount.
Note that if expenses are greater than revenues,
a loss amount is provided at the bottom of the statement.
This is called a single step income statement.
We'll be covering a multiple step income
statement in a future video.
Remember to pause the video to determine
your answer to this check your understanding
question about the uses of the income statement.
Investors are interested in a company's past performance
because it helps them--
the answer is not A. Determining the amount of debt
a company currently has is answered
by reviewing the statement of financial position.
The answer is not B, as the current value of a company's
property, plant, and equipment is only
on the statement of financial position
if the company chooses to use fair value.
The answer is not D either.
Determining if a company is profitable enough
to repay its debt is what lenders will
use the income statement for.
The correct answer is C, as investors
are interested in determining the future profitability
of a company.
Why is this?
Because it will help investors determine
if they should keep or sell the shares they own in the company.
Investors also use the income statement
to determine if the company will be
in a position to pay dividends.
Lenders use the income statement to help them determine
if they can fund the company with loans
and if the company will be in a position to repay the loan
plus interest in the future.
Other creditors use this statement
to figure out if the company will be profitable enough
to repay their debts as they come due.
The long-term survival of any corporation
depends on its ability to produce revenues that are
greater than their expenses.
Profits allow a company to fund their financing activities
by paying dividends to shareholders and interest
to lenders.
It also allows a company to pay for investing activities,
like buying new equipment.
Investors buy and sell shares, and creditors loan money,
based on their beliefs about a company's future performance.
Income statements, which show past performance,
give users information to help predict future performance.
The income statement is a statement
that is connected to many other financial statements.
The profit or loss from the income statement
is the opening number for both the statement
of comprehensive income and the statement of cash flows,
under the indirect method.
In addition, profit is carried forward
to the statement of changes in equity,
under the retained earnings column.
Since the profit from the income statement
is used in other statements, it is always
the first financial statement completed.
The next statement produced is the statement
of comprehensive income, which we'll
be covering in the next video.