Financial accounting records the financial transactions of a business and
communicates this information to potential investors and creditors.
The output of the accounting process are the financial statements.
An income statement reports a business's profitability;
the statement of retained earnings reports the change in retained earnings for corporation;
a balance sheet details of the economic resources
and the claims on those resources;
finally, a statement of cash flow summarizes the cash inflows and outflows
for various business activities.
The income statement, which is sometimes called a statement of operations or a P and L statement, reports how profitable company is.
On a simple income statement there just two categories of accounts,
revenues and expenses.
The difference between revenues and expenses is called net income.
This occurs when a company has more revenues than expense.
Net loss occurs when a company has more expense than revenue.
Net income is one of the first things investors and creditors look for in the financial statements.
The statement of retained earnings is prepared after the income statement.
This is because information from the income statement is used in the statement of retained earnings.
Retained earnings account - the name of it - represents exactly what it is. The portion of the earnings that have been retained
by a company rather than being paid to investors in the form of a dividend.
Net income, from the income statement, increases retained earnings
and dividends decrease retained earnings.
A balance sheet is sometimes called a statement of financial position,
meaning at any point in time it tells us how many assets a company has, how many liabilities or
debts a company has, and how much equity the stockholders have.
The most common form of a balance sheet is the classified balance sheet.
In this format assets and liabilities are classified into two categories:
current and long-term.
The easiest way to remember, if something is current long-term, is no one year cutoff.
Less than one year is current,
more than one year is long-term.
So current assets are those assets that will be collected in cash or used up in one year or less.
You can see some common examples on the slide.
Long-term assets are those assets that are expected to provide value into the future more than one year,
and you can see some common examples of those on the slide.
Current liabilities are those debts that will be paid in one year or less.
Again there are some examples listed on the slide.
And finally long-term liabilities are those liabilities that are expected to take more than one year to pay off.
And again, there are some common examples
listed there.
Stockholders' equity reports the total amount of equity the stockholders have in the company.
It is commonly defied divided into two categories or two sections.
Contributed capital, which is the section that reports common stock
and retained earnings, which is the section that reports the ending retained earnings balance
from the statement of retained earnings.
The statement of cash flows reports the change in cash for a reporting period
by reporting cash receipts and payments
from three categories of activities.
Operating activities section reports cash collection and payments
from transactions related to the operations of a business, like buying and selling goods or services.
Investing activities section reports cash receipts and payments for transactions involving long-term assets.
Financing activities section reports cash receipts and payments for transactions involving long-term liabilities and equity.
And that concludes this brief overview of the financial statements.
You'll learn more about them and get a chance to prepare them in the future, when we discuss the accounting cycle.