Basic Financial Statements
What are the four financial statements?
Balance Sheet, Income Statement, Statement of Stockholders’ Equity, Statement of Cash Flows
What is the basic equation for the balance sheet?
Assets = Liabilities + Stockholders’ Equity
What does the income statement report?
Revenues and expenses during a specific period to determine net income
How would you record a purchase of equipment with cash and a note?
Debit Equipment $X; Credit Cash $Y, Notes Payable $Z
What is a common asset on the balance sheet?
Cash, Accounts Receivable, Inventory, Property, Equipment
What is the purpose of the statement of cash flows?
To report the cash inflows and outflows during a specific period
What are the two main categories under assets on the balance sheet?
Current assets and non-current (long-term) assets
What equation represents the income statement?
Revenues – Expenses = Net Income
How would you record borrowing money from a bank?
Debit Cash $X; Credit Notes Payable $X
Which accounts are affected by net income?
Retained earnings and stockholders' equity.
How do dividends impact the financial statements?
Dividends decrease retained earnings and cash
What is the role of stockholders' equity?
Represents the owners' claim on the assets after liabilities are deducted
Which expense is typically included in the income statement?
Cost of Goods Sold, Operating Expenses, Interest, Taxes
What is the effect of receiving cash from customers on account?
Increase Cash, Decrease Accounts Receivable
How does a company's stock issuance impact the balance sheet?
Increases cash and stockholders' equity (Common Stock and Additional Paid-in Capital)
What is the role of the income statement in evaluating company performance?
It shows whether the company is profitable by comparing revenues and expenses
How does the balance sheet tie to the statement of cash flows?
Cash on the balance sheet must match the ending cash balance on the statement of cash flows
What is the effect of selling inventory on the balance sheet?
Increases cash/accounts receivable, decreases inventory
What is the effect of selling a building for cash and notes?
Increases cash and notes receivable, decreases building (asset)
What does purchasing equipment do to the balance sheet?
Increases equipment (asset), decreases cash (asset) or increases liabilities (if on credit)
How does the income statement tie to the statement of stockholders’ equity?
Net income from the income statement is added to retained earnings in the statement of stockholders’ equity
What happens to the balance sheet when dividends are declared?
Decreases cash (or increases dividends payable) and decreases retained earnings
How does the income statement help creditors and investors?
It helps them assess the company’s ability to generate profits and pay future debts
How do you record depreciation on equipment in the journal?
Debit Depreciation Expense; Credit Accumulated Depreciation (contra-asset)
How does selling a building for cash and notes affect the balance sheet?
Increases cash and notes receivable, decreases building (asset), no effect on liabilities or equity