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Financial Statements - PowerPoint PPT Presentation

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Financial Statements. Direct Material Direct Labor Indirect Material/Labor Fixed General/Admin Selling Profit. Prime costs. Cost of goods manufactured. Conversion cost. Factory Overhead. Selling Price. Cost of goods sold. Direct vs Indirect Costs. Terms. Bookkeeping

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Direct Material

Direct Labor

Indirect Material/Labor








of goods









of goods


Direct vs Indirect Costs

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  • Bookkeeping

    accumulate the results of an entities financial activities

  • Financial Accounting

    external evaluation of financial statements of an entity

  • Managerial Accounting

    use of economic & financial information to plan and control activities of an entity

  • Cost Accounting

    determines product, process, or service costs; a subset of managerial accounting

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  • Tax Accounting

    the preperation of income tax returns as a specialized field within accounting - tax planning

  • Auditing

    external review and evaluation of an entitys’s financial records and health

    internal audits

    government audits

    IRS audits

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Functions of Accounting

  • Internal Control

    all measures used by an organization to guard against errors, waste and fraud

  • Audits of Financial Statements

    investigation of a company’s financial statements to determine the fairness of these statements

  • Annual Reports

    comparative financial statements enable user’s to identify trends in the company’s performance and financial position

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Principles of Accounting

  • Principles of accounting dictate that financial statements must show

    • financial position at end of accounting period

    • earnings for the accounting period

    • cash flows during that period

    • investments by & distribution to owners

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Transactions Approach

  • In recording economic activities, accountants focus on completed transactions - those that cause an immediate change in the financial resources or obligations of a company

    • purchasing raw materials

    • sales of finished goods

  • Strength - the reliability of the information that is recorded, based on past events, objectivity

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Financial Statements

  • Balance Sheet

    financial position of a company indicating resources it owns, debts, and the amount of owner’s equity

  • Income Statement

    profitability of the business over the preceeding accounting period

  • Statement of Owner’s Equity

    explains changes in the amount of owner’s equity in the business

  • Statement of Cash Flows

    summarizes cash receipts and cash payments of business over the preceeding accounting period

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Balance Sheet

  • Statement of financial position

  • does not show the current market value of an entity’s assests

  • Assets

    economic resources owned by a business and are expected to benefit future operations

    • cost principle

    • going concern

    • objectivity principle

    • stable dollar assumption

      Current Assets - convertible to cash within 1 yr.

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Balance Sheet

  • Liabilities

    probable future sacrifices of economic benefits as result of current obligations

    Current Liabilities - must be paid within 1 yr.

  • Owner Equity

    ownership right of proprietors or stockholders

    Changes in OE by

    • investment by owner

    • earnings from profitable operation of business

    • withdrawals of cash of other assets

    • losses from business

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Accounting Equation

Owner Equity = Assets - Liabilities

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Income Statement

  • Projects profit/loss of an entity over a period of time

    • Net Sales - gross sales less returns, defects, etc.

    • Cost-of-Goods sold - cost of raw material & direct labor

    • Selling, Gen, Admin - operating expenses of an entity which do not directly contribute to product (sales people, managers, ...)

    • Interest Expense - interest paid on long/short term debt.

    • Net Income/share - net income (after tax) divided by outstanding shares

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Changes to Owner Equity

  • Begin Balance - last year’s ending balance

  • Paid-in Capital - sold 10,000 shares at $19 /share stock par value of $10 / share.

    common stock = 10,000 x $10 = $100,000

    addition paid in =10,000 x ($19-$10) = $ 90,000

  • Retained Earnings - cumulative net income which has been retained for business

  • Dividends - distribution of earnings to stockholders

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Changes to Owner Equity

Balance Sheet Income Statement Balance Sheet

8/31/96 Revenues 8/31/97

- Expenses

Net Income

Statement of OE

A =L +OE Begin Balance

Paid in capital changes

Retained earnings

+ Net Income

- Dividends

Ending Balances A = L + OE

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Statement of Cash Flows

  • Identify the sources and use of cash during year

  • Operating Activities

    • net income $18,000 from income statement

    • depreciation expense $16,400 from balance sheet added back in because it is not an actual cash outlay