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Lesson 2 Financial Statements

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71 views5 pages

Lesson 2 Financial Statements

Uploaded by

hamza.mzo42
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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University of Algiers 3

Faculty of economics, commercial sciences, and management.

1st year English / semester 2


Financial Statements
The preparation of financial statements is virtually the last step in the accounting process but it is
an appropriate point to begin studying accounting in order to understand what will be produced.
 Definition of Financial statements: Financial statements are the primary means through which an
organization communicates information about its economic activities. The purpose of these statements is
to provide useful financial information to parties such as banks, investors, suppliers, governments, etc., who
may make decisions affecting the organizations’ operations or otherwise influence the direction of its
activities.
 Types of Financial statements According to the Algerian Financial Accounting System, these
obligatory statements are: the balance sheet, the income statement, the cash-flow statement, the statement
of changes in equity and the accompanying notes.
1- The Balance Sheet: The balance sheet, which is also known as the statement of financial position,
reports a corporation's assets, liabilities, and stockholders' equity account balances as of a point in time. The
point in time is often the final instant or moment of the accounting period. Hence it is common for a balance
sheet to report a corporation's amounts as of the final instant of December 31
An interesting point concerning the balance sheet accounts is that the account balances at the final
instant of an accounting year will carry forward to become the beginning balances of the subsequent year.
 The format of the balance sheet is similar to the accounting equation:
Assets = Liabilities + Stockholders' Equity

2- The Income Statement: An income statement (also known as: Statement of income; Statement of
earnings; Statement of operations; Profit and loss statement “P&L”) is a financial statement that shows you
the company’s income and expenditures. It also shows whether a company is making profit or loss for a given
period.
An income statement helps business owners decide whether they can generate profit by increasing
revenues, by decreasing costs, or both. It also shows the effectiveness of the strategies that the business set
at the beginning of a financial period.
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3- The Cash Flow Statement: The cash flow statement, also known as a statement of cash flows, or a
statement of changes in financial position, is an important financial statement that gives users an
understanding of how well a business is managing its cash flow.
It explains how an organization obtains cash (sources of funds) and how it spends cash (use of funds)
including the borrowing and repayment of debt, capital transactions, and other factors that may affect the
cash position. Using the information in a cash flow statement, users are able to see whether a business is
generating sufficient cash to meet both its debt obligations and its operating expenses.
The three sections of the cash flow statement are: operating activities, investing activities and financing
activities.
4- The statement of changes in equity An equity statement – also referred to as a statement of
owner’s equity or statement of changes in equity – is a business' financial statement that measures the
changes in owners’ equity throughout a specific accounting period.
 The formula for a statement of changes in equity : it includes the opening and closing value of the
equity, net income for the year, dividends paid, and other changes.
Opening Balance of Equity + Net Income – Dividends +/- Other Changes = Closing Balance of Equity
5- The accompanying notes: Financial statement footnotes (otherwise known as explanatory notes
or notes to the financial statements) are supplemental notes that are included with the published financial
statements of a company because the financial statements cannot provide sufficient information .Those
notes are used by both analysts and auditors to better understand the company’s financial position.
The notes usually begin with the corporation's significant accounting policies. This note describes
how revenues were recognized on the income statement, how inventory is accounted for, etc.

Activities:
Activity 01: Underline the correct answer

1. What is the formula for the basic accounting equation?


A. Liabilities = Assets + Owner's Equity
B. Owners Equity = Assets + Liabilities
A. Assets = Liabilities + Owner's Equity

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B. Assets = Liabilities - Owner's Equity
2. Which financial statement will allow you to determine the gross margin for a retailer or
manufacturer?
A. Balance Sheet B. Income Statement C. Statement Of Cash Flows

3. Which financial statement's structure is closest to that of the basic accounting equation?
A. Balance Sheet B. Income Statement C. Statement Of Cash Flows

4. The changes that occurred in a company's share capital, accumulated reserves and retained earnings
over the reporting period will be found in which financial statement?
A. Income Statement B. Statement Of changes in equity C. the accompanying notes

Activity 02 : fill in the gaps with the following : : the balance sheet, the income statement, the cash-flow
statement, the statement of changes in equity , the accompanying notes.
The fiancial statement Title of the financial statement

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