Understanding Basic Financial Statements
During the accounting cycle, the
accounting system is used to track, organize and record the financial
transactions of an organization. At the close of each period, the
information is used to prepare the financial statements, which are
usually composed of a balance sheet (statement of financial position);
income statement (statement of income and expenses); statement of
retained earnings (owners' equity); and a statement of cash flow. A sample set of financial statements is shown
Financial statements prepared by a Chartered Accountant with a Review
Engagement Report or Audit Opinion attached, are prepared (unless noted
otherwise) according to "Canadian generally accepted accounting
principles", or GAAP. Financial statements that are only compiled or
that have a "Notice to Reader" attached, are not necessarily prepared
according to GAAP.
The balance sheet is based on the equation: assets = liabilities +
owners' equity. It indicates everything the company owns (assets),
everything the company owes to creditors (liabilities) and the value of
the ownership stake in the company (shareholders' equity, or capital).
The balance sheet date is the ending date of the period or year, and is
a continuation of the amounts recorded since the inception of the
company or organization. The balance sheet is a "snapshot" of the
financial position of the company at the balance sheet date and shows
the accumulated balance of the accounts. Assets and liabilities are
separated between current and long-term, where current items are those
items, which will be realized or paid, within one year of the balance
sheet date. Typical current assets are cash, prepaid expenses, accounts
receivable and inventory.
An income statement is a type of summary flow report that lists and
categorizes the various revenues and expenses that result from
operations during a given period - a year, a quarter or a month. The
difference between revenues and expenses represents a company's net
income or net loss. The amounts shown in the income statement are the
amounts recorded for the given period - a year, a quarter or a month.
The next period's income statement will start over with all amounts
reset to zero. While the balance sheet shows accumulated balances since
inception, the income statement only shows the amounts earned or
expensed during the period in question.
Statement of Retained
The statement of retained earnings shows the amount of accumulated
earnings that have been retained within the company since its
inception. At the end of each fiscal year-end, the amount of net income
or loss is added to the opening amount of retained earnings to arrive
at the closing retained earnings. Retained earnings can be decreased by
such items as dividends paid to shareholders. On the sample financial
statements shown below, the statement of retained earnings is combined
with the income statement presentation.
Statement of Cash Flow
The statement of cash flow shows all sources and uses of a company's
cash during the accounting period. Sources of cash listed on the
statement include revenues, long-term financing, sales of non-current
assets, an increase in any current liability account or a decrease in
any current asset account. Uses of cash include operating losses, debt
repayment, equipment purchases and increases in current asset accounts.