Financial Statements

FINANCIAL STATEMENTS

Corporation or a Company, Firm use usually Four of Financial Statements

                     i.            Balance Sheet

                   ii.            Income Statement

                  iii.            Statement of Cash Flows

                 iv.            Statement of Owners Equity

Balance Sheet ((بیلنس شیٹ

The balance sheet presents a company's financial position at the end of a specified date. Some describe the balance sheet as a "snapshot" of the company's financial position at a point (a moment or an instant) in time. It prepared at the end of financial year, for example, 31^st December 2019 etc.

Component of Balance Sheet

         i.            Assets

       ii.            Liabilities

      iii.            Owners (Stockholders) Equity

Assets

Assets are things that the company owns. They are the resources of the company that have been acquired. Assets also include costs paid in advance that have not yet expired, such as prepaid advertising, prepaid insurance, prepaid legal fees, and prepaid rent. (Examples of asset accounts that are reported on a company's balance sheet include:

• Cash
• Petty Cash
• Temporary Investments
• Accounts Receivable
• Inventory
• Supplies
• Prepaid Insurance
• Land
• Land Improvements
• Buildings
• Equipment
• Goodwill

Assets are classified into two main categories:

         i.            Current Assets: those assets which are acquire for the period of one year or can liquidate within one financial year for example, cash, raw material, temporary investment etc.

       ii.            Fixed Assets: those assets which are acquire / purchased for the period of more than one year. For example, building, land, machinery and equipment, goodwill etc.

Usually asset accounts will have debit balances

Liabilities

Liabilities are obligations of the company; they are amounts owed to creditors for a past transaction and they usually have the word "payable" in their account title. Along with owner's equity, liabilities can be thought of as a source of the company's assets. They can also be thought of as a claim against a company's assets. The creditors/suppliers have a claim against the company's assets and the owner can claim what remains after the Accounts Payable have been paid.

وہ لوگ جن سے فرم کورقم یا مال و متاع ، میٹریل یا سروسز ادھار دی ہوتی ہیں ان کو creditors کہتے ہیں اور اگر فرم default کر جائے تو ان لوگوں کو پورا حق حاصل ہے کہ یہ فرم کے اثاثہ جات فروخت کر کے اپنے نقصان کو پورا کر سکتے ہیں اور باقی جو بچے گا وہ فرم کے مالک کو ملے گا۔

Examples of liability accounts reported on a company's balance sheet include:

• Notes Payable
• Accounts Payable
• Salaries Payable
• Wages Payable
• Interest Payable
• Other Accrued Expenses Payable
• Income Taxes Payable
• Customer Deposits
• Warranty Liability
• Lawsuits Payable
• Unearned Revenues
• Bonds Payable

Liability accounts will normally have credit balances.

Classifications of Liabilities on the Balance Sheet

Liabilities are two types

         i.            Short term liabilities: payable within one accounting cycle i.e. within one year. For example, salaries of employees, electricity bill etc.

       ii.            Long-term liabilities: payable within more than one year i.e. two / five years. For example, Bank loan for five years.

Another type of liabilities is Contingent Liabilities, liabilities include warranty of a company's products, the guarantee of another party's loan, and lawsuits filed against a company. Contingent liabilities are potential liabilities. Because they are dependent upon some future event occurring or not occurring, they may or may not become actual liabilities.

 

Owner’s / Shareholder’s Equity

Owner’s Equity is defined as the proportion of the total value of a company’s assets that can be claimed by it’s the owners (sole proprietorship or partnership) and by its shareholders (if it is a corporation). It is calculated by deducting all liabilities from the total value of an asset (Equity = Assets – Liabilities). The liabilities represent the amount owed by the owner to lenders, creditors, investors and other individuals or institutions who contributed to the purchase of the asset.

Components of Owner’s / Shareholder’s Equity

The following are the main components of Owner’s equity 

 1. Retained earnings

The amount of money transferred to the balance sheet as retained earnings rather than paying it out as dividends is included in the value of the shareholder’s equity. The retained earnings, net of income from operations and other activities, represent the returns on the shareholder’s equity that are reinvested back to the company instead of distributing it as dividends. The amount of the retained earnings grows over time as the company reinvests a portion of its income, and it may form the largest component of shareholder’s equity for companies that have existed for long.

 2. Outstanding shares

Outstanding shares refers to the amount of stock that had been sold to investors but not have been repurchased by the company. The number of outstanding shares is taken into account when assessing the value of shareholder’s equity.

 3. Treasury stock

Treasury stock refers to the number of stocks that have been repurchased from the shareholders and investors by the company. The amount of treasury stock is deducted from the company’s total equity to get the number of shares that are available to investors.

 4. Additional paid-in capital

The additional paid-in capital refers to the amount of money that shareholders have paid to acquire stock above the stated par value of the stock. It is calculated by getting the difference between the par value of common stock and the par value of preferred stock, the selling price and the number of newly sold shares.

What is the Income Statement?

The Income Statement is one of a company’s core financial statements that shows their profit and loss over a period of time.  The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.

Components of an Income Statement

The income statement may have minor variations between different companies, as expenses and income will be dependent on the type of operations or business conducted. However, there are several generic line items that are commonly seen in the income statement.

The most common income statement items include:

Revenue/Sales

Sales Revenue is the company’s revenue from sales or services, displayed at the very top of the statement. This value will be gross of the costs associated with creating the goods sold or in providing services. Some companies have multiple revenue streams that add to a total revenue line.

 Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) is a line-item that aggregates the direct costs associated with selling products to generate revenue.  This line item can also be called Cost of Sales if the company is a service business. Direct costs can include labor, parts, materials, and an allocation of other expenses such as depreciation (see an explanation of depreciation below).

 Gross Profit

Gross Profit Gross profit is calculated by subtracting Cost of Goods Sold (or Cost of Sales) from Sales Revenue.

Marketing, Advertising, and Promotion Expenses

Most businesses have some expenses related to selling goods and/or services. Marketing, advertising, and promotion expenses are often grouped together as they are similar expenses, all related to selling.

General and Administrative (G&A) Expenses

SG&A Expenses include the selling, general, and the administrative section that contains all other indirect costs associated with running the business. This includes salaries and wages, rent and office expenses, insurance, travel expenses, and sometimes depreciation and amortization, along with other operational expenses. Entities may, however, elect to separate out depreciation and amortization in its own section.

EBIT

Stands for Earnings before Interest, Tax. It is calculated by subtracting interest and tax from gross profit.

 Depreciation & Amortization Expense

Depreciation and amortization are non-cash expenses that are created by accountants to spread out the cost of capital assets such as Property, Plant, and Equipment 

Operating Income (or EBIT)

Operating Income represents what’s earned from regular business operations. In other words, it’s the profit before any non-operating income, non-operating expenses, interest or taxes are subtracted from revenues. EBIT is a term commonly used in finance and stands for Earnings before Interest and Tax.

Interest

Interest Expense. It is common for companies to split out interest expense and interest income as a separate line item in the income statement. This is done to be able to reconcile the difference between EBIT and EBT. Interest expense is determined by the debt schedule.

Other Expenses

Businesses often have other expenses that are unique to their industry. Other expenses may include things such as fulfillment, technology, research and development (R&D), stock based compensation (SBC), impairment charges, gains/losses on the sale of investments, foreign exchange impacts, and many more expenses that are industry or company-specific.

Net Income

Net Income is calculated by deducting income taxes from pre-tax income. This is the amount that flows into retained earnings on the balance sheet, after deductions for any dividends.