Financial Statements

Why we need financial statements?

The general purpose of the financial statements is to provide information about the results of
operations, financial position, and cash flow of an organization. This information is used by the
readers of the financial statements to make decisions regarding the allocations of the resources.

Types of financial statements?

There are two types of financial statements are present they are.

1. Income Statement: The income statement is a statement that illustrates the profitability of the company. It begins with
the revenue line and after subtracting various expenses arrives at net income. The income
statement covers a specified period like a quarter or year.

2. Balance Sheet: Unlike the income statement, the balance sheet does not account for the entire period and rather
is a snapshot of the company’s resources and funding for those resources(liabilities and
stockholder’s equity). Assets must always equal the sum of liabilities and equity.

What is income?

Income is the revenue a business earns from selling it goods and services or the money an
individual receives in compensation for his or her labor, services, or investments.

Following are common sources of income recognized in the financial statements.

Sales revenue generated from the sale of commodities(raw material or item).

Interest received on a bank deposit.

Rentals received on properties.

Gain or re-valuation of company assets.

Income from land.

What is expense?

An expense in accounting is the money spent, or cost incurred by a business in their effort to
generate revenues. Essentially, accounts expenses represent the cost of doing business; they are the sum of all the
activities that result in (hopefully) a profit.

Difference between cost and expense?

It is important to understand the difference between “cost” and “expense” since they each have a
distinct meaning in accounting. Cost is the monetary measure (cash) that has been given up in
order to buy an asset. An expense is a cost that has expired or been taken up by activities that
help generate revenue. Therefore, all expenses are costs, but not all costs are expenses.

What is profit?

A financial gain, especially the difference between the amount earned and the amount spent in
buying, operating, or producing something.

Profit = Income - expenses

What is an asset?

An asset is a resource with economic value that an individual, corporation or country owns or
controls with the expectation that it will provide future benefit. Assets are reported on a company's
balance sheet and are bought or created to increase a firm's value or benefit the firm's operations.

Following are the some of the examples of asset.

Bank balance

Bond investments

Building fixed assets

Finished goods inventory

Land

Raw materials inventory

Jewellery

Furniture

Vehicles

Stock in other companies

What is liability?

Liabilities are defined as a company's legal financial debts or obligations that arise during the
course of business operations. ... The most common liabilities are usually the largest like
accounts payable and bonds payable.

Liability = asset - equity

Some examples of liabilities are

Notes payable

Accounts payable

Salaries payable

Wages payable

Customer deposits

What is equity?

Equity is typically referred to as shareholder equity (also known as shareholders' equity) which represents the amount of money that would be returned to a company’s shareholders if
all of the assets were liquidated and all of the company's debt was paid off.

Equity = assets- liabilities

Exercise on financial statements

Cash flow statement:

Income statement:

Balance statement:

Types of Assets: There are two types of assets they are

1.Current Asset: These are the assets which changes daily or hourly or monthly.

For every business the main current assets are

1.Cash/Bank balance

2.Inventory

3.Accounts Receivable

2.Fixed Asset: These are the assets which does not change regularly

Following are the examples for the fixed assets

1.Land, House, Jewelry etc..

2.Lease hold improvements

Tangible Assets: These are the assets which can be touched.

Eg: Land, Machinery, House, Gold, Vehicles, Stock, Cash

Intangible Assets: These are the assets which can not be touched.

Eg: Patents, Brands, Licenses, Copyrights, Trademarks, Franchises.

Types of Liabilities: Liabilities are categorized into two types they are

1.Short term liabilities: These are the liabilities which can be paid monthly or weekly wise.Accounts payable is
considered as short term liability.

Eg: Current bill, Water bill and paper bill etc..

2.Long term liabilities: These are the liabilities which can be paid yearly or quarterly.

Eg: House loans, Vehicle loans etc..

Difference between Cost and Price

Cost: It is nothing but the amount which is spent on the finished good.

Price: It is nothing but the amount which is marked on the finished goods for selling.

Types of Cost: Cost is categorized into two types.

1.Direct Cost: A direct cost is a price that is directly tied to the production of specific goods or services.
Direct cost is proportional to the sale quantity means if the sale quantity increases the respective
direct cost also increases.

Eg: Direct materials, Direct labor, commissions etc..

2.Indirect Cost: Indirect costs are the costs that are not directly tied to the particular project, function and
products. Indirect cost is fixed cost which never changes.

Eg: Production supervisor salaries , Quality control cost, Insurances etc..

Formula:

Sale price - Direct cost = Gross profit

Gross profit - Indirect cost = Net profit

Supplier: A supplier is a person or business that provides a product or service to another entity.

Vendor: Anyone who provides goods or services to another entity.

A person or company offering something for sale, especially a trader in the street.

Sale is happened in two ways in any business

1.Buy first sale next

2.Sale first buy next

Business cycle: Business cycle is divided into two parts

1.Purchase cycle

2.Sale cycle

1.Pre Purchase request is nothing but when we are going to buy anything we have to send a request to the supplier.

2.Quotation is nothing but estimated cost for a particular job or service. After quotation approval has to be
happened.

3.Purchase order is nothing but it is a commercial document and first official offer issued by a buyer to a seller
indicating types and quantities etc. After this there is a possibility of advance payment in some
business.

4.Packing list is a document that includes details about the content of the package.

5.Payment is nothing but an amount paid or payable.

6.In business case Debit memo is extra amount for goods or services.

7.When our products gets damaged or mismatched then we will go for replacement of that
product is nothing but return order.

8.Credit memo is a document which is issued by the seller to the buyer, reducing the amount that the buyer
owes to the seller under the terms of an earlier invoice.

9.If the seller doesn’t have the products then he is going to buy from another seller and deliver it
to the buyer, this process comes under special order.

Pick ticket: It is issued by the seller when he receives the purchase order from the customer.

Production ticket: It is also issued by the seller when he receives the purchase order but there is no stock in his
warehouse, but he has the production department then production ticket issued over there.

Revision on Business cycle done by me