Chapter 1: Financial Statements

Objective: Recognize the information conveyed in

each of the four basic financial statements

Tutorial
Introduction to Financial Accounting- FAC 102
Rupak Thapa & Sonal Chaudhary
30/08/2023
 Financial Reports

External Financial Reports Internal Management

Reports
 Periodic financial Statements
and disclosures  Plans and performance
 External Decision makers reports
(External stakeholders)  Internal Decision makers
 Creditors, Bankers, Investors,
(Internal Stakeholders)
Suppliers, Regulators
 Managers
 Evaluate the company
 Show business performance
 Run the company
in past period  Track the performance and
make prediction about
future performances
 Four major financial statements
1. Income Statement: Reports performance (profit) of firm during the period
Net Income=Revenue- Expenses
Revenue from sale of goods or services to customers
Expenses are the amount spent to earn revenues
2. Balance Sheet: Reports financial position ( assets, liabilities, equity) of the
firm at a particular point in time
Assets=Liabilities+ Shareholder’s equity
Assets: what company owns
Liabilities: what company owes to creditors
Shareholder’s Equity: what company owes to shareholders
3. Statement of Shareholder’s Equity: reports the changes in each of the
company’s stockholders’ equity accounts during that period.
Beginning Retained Earning+Net Income-Dividends=Ending Retained Earning
4. Statement of Cash flows: Reports actual cash inflows and outflows in
business, Operating +Investing + Financing Cash flows
Practice Questions- Income Statement

Segregate as Revenue or Expenses Prepare Income Statement

Cost of goods sold 94

Income tax 30%

Sales revenue 131

Selling, general & administrative Expenses 14

Interest paid 12
Practice Questions- Balance Sheet

Segregate A or L or E Compute Total Assets

Accounts Payable 22

Loan of Banks 180

Common Stock 65

Retained Earning 93
Practice Questions- Statement of Retained Earnings

A company’s financial statements reported the following

amounts:

Beginning retained earnings INR 510 Million

Total assets INR 10,112 Million

Dividends INR 65 Million

Cost of goods sold expense INR 3,142 Million

Net income INR 162.31 Million

Compute ending retained earnings.

Relationship among financial statements

Income Statement Statement of Retained Earnings Balance

Sheet

1. Net income from the income statement results in an increase in

ending retained earnings on the statement of stockholders’
equity.

2. Ending retained earnings from the statement of stockholders’

equity is one of the two components of stockholders’ equity on
the balance sheet.
Q1. Practice Question-full
At the end of first year of operations (December 31), following financial data
for the company are available: ( segregate as A L E first)
Cash $ 25,600
Receivables from customers (all considered collectible) $10,800
Inventory of merchandise (physical count & priced at cost) $81,000
Equipment owned, at cost less used portion $42,000
Accounts payable owed to suppliers $46,140
Salary payable (on Dec 31, owed to an staff to be paid on January 10) $2,520
Total sales revenue $128,400
Expenses, including cost of goods sold (excl income taxes) $80,200
Income tax expense at 30% × Pretax income; all paid during current year
Common stock (December 31) $87,000
Dividends declared and paid during the current year $10,000
The beginning balances in Common Stock and Retained Earnings are zero
because it is the first year of operations
Summarized Income Statement
HIGHLIGHT CONSTRUCTION COMPANY
Income Statement
For the Year Ended December 31, Current Year

Total sales revenue (given) $128,400

Less: Total expenses (given) $ 80,200
Pretax income $ 48,200
Less: Income tax expense ($48,200 x 30%) $ 14,460
Net income $ 33,740
Statement of Stockholders’ Equity
HIGHLIGHT CONSTRUCTION COMPANY
Statement of Stockholders’ Equity
For the Year Ended December 31, Current Year

Common Stock Retained

Earnings
Balance January 1, Current year $0 $0
Stock issuance (given) $87,000
+Net income (from req. 1) $33,740
–Dividends (given)
$(10,000)
Balance December 31, Current year $87,000 $23,740
 HIGHLIGHT CONSTRUCTION COMPANY
Balance Sheet
At December 31, Current Year

Assets
Cash (given) $25,600
Receivables from customers (given) 10,800
Inventory of merchandise (given) 81,000
Equipment (given) 42,000
Total assets 159,400
Liabilities
Accounts payable (given) $46,140
Salary payable (given) 2,520
Total liabilities $48,660
Stockholders' Equity
Common stock (given) $87,000
Retained earnings (from req. 2) 23,740
Total stockholders' equity 110,740
Total liabilities and stockholders' equity $159,400
Q2. Practice Question-full
During the summer between his junior and senior years, James Cook needed to
earn sufficient money for the coming academic year. Unable to obtain a job
with a reasonable salary, he decided to try the lawn care business for three
months. After a survey of the market potential, James bought a used pickup
truck on June 1 for $1,800. On each door he painted “James Cook Lawn
Service, Phone 471-4487.” He also spent $900 for mowers, trimmers, and
tools. To acquire these items, he borrowed $3,000 cash by signing a note
payable promising to pay the $3,000 plus interest of $78 at the end of the
three months (ending August 31).
By the end of the summer, James had done a lot of work and his bank account
looked good. This prompted him to wonder how much profit the business had
earned. A review of the check stubs showed the following: Bank deposits of
collections from customers totaled $15,000. The following checks had been
written: gas, oil, and lubrication,$1,050; pickup repairs, $250; mower repair,
$110; miscellaneous supplies used, $80; helpers,$5,400; payroll taxes, $190;
payment for assistance in preparing payroll tax forms, $25;insurance, $125;
telephone, $110; and $3,078 to pay off the note including interest (on August
31).
Q2. Practice Question-full
A notebook kept in the pickup, plus some unpaid bills, reflected that
customers still owed him $700 for lawn services rendered and that
he owed $180 for gas and oil (credit card charges). He estimated
that the cost for use of the truck and the other equipment (called
depreciation) for three months amounted to $600.
Required:
1. Prepare a quarterly income statement for James Cook Lawn
Service for the months June, July, and August. Use the
following main captions: Revenues from Services, Expenses,
and Net Income. Assume that the company will not be subject
to income tax.
2. Do you see a need for one or more additional financial reports
for this company for the quarter and thereafter? Explain.
 JAMES COOK LAWN SERVICE
Income Statement
For the Three Months Ended August 31
Revenues from Services
Lawn service–cash $15,000
–credit 700
Total revenues $15,700
Expenses
Gas, oil, and lubrication ($1,050+$180) 1,230
Pickup repairs 250
Mower repair 110
Miscellaneous supplies used 80
Helpers (wages) 5,400
Payroll taxes 190
Preparation of payroll tax forms 25
Insurance 125
Telephone 110
Interest expense on note paid 78
Equipment use cost (depreciation) 600
Total expenses 8,198
Net Income $ 7,502
Q2. Part 2
Because the above report reflects only revenues, expenses, and
net income, it is reasonable to suppose that James would need
the following:
(1) A balance sheet–that is, a statement that reports for the
business, at the end of August, each asset (name and amount,
such as Cash, $XX), each liability (such as Wages Payable,
$XX), and stockholders’ equity.
(2) A statement of stockholders’ equity that shows how income
and dividends (if any) affect retained earnings on the balance
sheet.
Q3. Practice Question-Cash flow
Huang Trucking Company was organized on January 1. At the
end of the first quarter (three months) of operations, the
owner prepared a summary of its activities as shown in item
(a) of the following table:
( Table in next slide)
Required:
1. For items (b) through (g), enter what you consider to be the
correct amounts. Enter a zero when appropriate. The first
transaction is illustrated.
2. For each transaction, explain the basis for your response in
requirement (1).
Q3. Part 2

(g) Based only on the above:

Income (loss) $100

Cash inflow (outflow) $ 50,700

Thank You
Thank You