Financial Statements (September 30, 2021)

Summary

This script covers the fundamentals of financial statements, including balance sheets, income statements, and cash flow statements. It explains the categorization of assets, liabilities, and net worth, and how they relate to the accounting equation. The script also discusses the different types of businesses, focusing on merchandising, and touches on inventory management, cost of goods sold, and the calculation of net income. It briefly mentions service and manufacturing businesses, emphasizing the importance of understanding financial statements for business operations.

Takeaways

• 📊 Financial statements are essential documents that record the financial activities and position of a business or entity.
• 🔍 The basic financial statements include the balance sheet, income statement, and cash flow statement.
• 🏦 The balance sheet details assets, liabilities, and net worth or owner's equity, and follows the accounting equation: Assets = Liabilities + Equity.
• 💼 Assets are categorized into current, intermediate, and long-term assets, while liabilities are divided into current, intermediate, and long-term liabilities.
• 💵 The income statement, also known as the profit and loss statement, measures revenue and expenses over a specific accounting period.
• 💹 The cash flow statement tracks the inflow and outflow of cash, including sources like investments and operations, and uses like paying debts and operational costs.
• 🛍️ A merchandising business focuses on selling goods, tracking inventory, and managing the cost of goods sold.
• 📈 Inventory management is crucial as it directly impacts a business's net income and financial statements.
• 💼 Wholesalers buy products from manufacturers or other wholesalers and sell to retailers or other wholesalers, while retailers sell directly to consumers.
• 💹 Net income for a merchandiser is calculated by subtracting the cost of goods sold and other expenses from sales revenue.
• 💳 Cash sales involve immediate exchange of cash for goods, whereas credit sales involve a delay in cash collection through accounts receivable.

Q & A

What is the purpose of financial statements?

Financial statements are formal records of financial activities and the financial position of a business, person, or other entity. They should be understandable, relevant, reliable, and comparable.

What are the basic financial statements?

The basic financial statements are the balance sheet, income statement, and cash flow statement.

What does the balance sheet represent?

The balance sheet represents the financial position of a business, showing assets, liabilities, and owner's equity.

How are assets categorized on a balance sheet?

Assets are categorized into current assets, intermediate assets, and long-term assets.

What are liabilities and how are they categorized?

Liabilities are financial obligations of a business, such as money owed to lenders, suppliers, employees, and others. They are categorized into current liabilities, intermediate liabilities, and long-term liabilities.

What is the accounting equation?

The accounting equation is Assets = Liabilities + Capital, which shows that the total assets of a business are equal to the sum of its liabilities and owner's equity.

What is the income statement and what does it measure?

The income statement, also known as the profit and loss statement, measures revenue and expenses during a specific accounting period, usually one year.

What is the cash flow statement and what does it include?

The cash flow statement, also called the sources and uses of funds statement, includes total cash inflow and outflow, which consists of cash available and cash required, excluding borrowings and principal repayments.

What are the different types of businesses mentioned in the script?

The script mentions service businesses, merchandising businesses, and manufacturing businesses.

How does a merchandising business track inventory?

A merchandising business tracks inventory through either the periodic inventory method, where adjustments are made at the end of the accounting period, or the perpetual inventory method, where adjustments are continually updated.

What is the significance of inventory in a merchandising business?

Inventory is significant in a merchandising business because it directly relates to profit and loss. The more items sold, the higher the income. However, inventory can also become obsolete or be subject to theft.

How is net income measured for a merchandiser?

Net income for a merchandiser is measured by taking sales revenue, subtracting the cost of goods sold to get gross profit, and then subtracting operating expenses from the gross profit.

What is the difference between cash sales and credit sales?

In cash sales, the business receives cash immediately and gives out inventory. In credit sales, the business gives out merchandise but the cash collection happens later through accounts receivable.

Outlines

00:00

📊 Introduction to Financial Statements

The paragraph introduces the concept of financial statements, which are formal records of financial activities and positions of a business or entity. It emphasizes the importance of these statements being understandable, relevant, reliable, and comparable. The basic financial statements mentioned are the balance sheet, income statement, and cash flow statement. The balance sheet is explained as consisting of assets, liabilities, and net worth or owner's equity. Assets are further divided into current, intermediate, and long-term assets, while liabilities are categorized into current, intermediate, and long-term liabilities. The net worth or equity is calculated as the difference between total assets and total liabilities. The income statement is described as a measure of revenue and expenses during a specific accounting period, typically one year. The cash flow statement is referred to as the sources and uses of funds, detailing the total cash inflow and outflow of a business. The paragraph also distinguishes between different types of businesses: service, merchandising, and manufacturing, with a brief explanation of each.

05:02

📈 Merchandising Business and Inventory Management

This paragraph delves into the specifics of merchandising businesses, which involve the sale of goods. It discusses the importance of tracking inventory, distinguishing between the periodic and perpetual inventory systems. The paragraph explains that in a periodic inventory system, adjustments are made at the end of the accounting period, while in a perpetual system, adjustments are continually updated. It also covers different types of purchases and discounts that can affect inventory valuation. The concept of net income in a merchandising business is explored, with a focus on how inventory values can impact a business's financial statements. The paragraph also touches on the role of wholesalers and retailers in the supply chain, and the importance of measuring net income through sales revenue, cost of goods sold, and operating expenses. The difference between cash sales and credit sales is highlighted, with an explanation of how these transactions affect a business's cash flow.

10:05

🏭 Manufacturing Business and Cost Analysis

The final paragraph shifts focus to manufacturing businesses, discussing the components that contribute to the cost of goods sold, such as direct materials, direct labor, and overhead costs. It explains how these costs are incorporated into the manufacturing process to determine the value of goods in inventory and how they are reflected in the profit and loss statement. The paragraph reiterates the principles learned in the context of a merchandising business but acknowledges that the manufacturing process introduces additional complexities. The instructor encourages students to ask questions and clarifies that the current lesson is focused on merchandising businesses. The paragraph concludes with an invitation for further discussion and clarification, and a reminder to take a break before moving on to the next topic.

Keywords

💡Financial Statements

Financial statements are formal records that detail the financial activities and position of a business or entity. They are crucial for understanding the financial health of a company. In the video, financial statements are introduced as the central theme, with a focus on their importance for businesses, including their need to be understandable, relevant, reliable, and comparable.

💡Balance Sheet

A balance sheet is one of the basic financial statements that presents a company's assets, liabilities, and owner's equity at a specific point in time. It is foundational in accounting as it represents the accounting equation: Assets = Liabilities + Equity. In the script, the balance sheet is described as consisting of assets, liabilities, and net worth, highlighting its role in reflecting a company's financial position.

💡Income Statement

The income statement, also known as the profit and loss statement, measures a company's revenue and expenses over a specific accounting period, typically a year. It is a key indicator of a company's profitability. In the video, the income statement is discussed as a measure of financial performance, showing how revenues and expenses contribute to a company's net income.

💡Cash Flow Statement

The cash flow statement tracks the inflow and outflow of cash within a business. It is often referred to as the sources and uses of funds statement and is essential for assessing a company's liquidity. In the script, the cash flow statement is explained as a record of cash movements, including operating, investing, and financing activities.

💡Assets

Assets are items of monetary value owned by a business or individual. They are categorized into current, intermediate, and long-term assets. In the video, assets are discussed as part of the balance sheet and are divided into three categories to reflect their liquidity and contribution to the company's value.

💡Liabilities

Liabilities are financial obligations of a business, such as money owed to lenders, suppliers, or employees. They are classified into current, intermediate, and long-term liabilities based on their due dates. In the script, liabilities are mentioned as part of the balance sheet, emphasizing the financial responsibilities of the entity.

💡Net Worth or Owner's Equity

Net worth or owner's equity represents the residual interest in the assets of a business after deducting its liabilities. It is the owner's claim on the total assets. In the video, net worth is described as the difference between total assets and total liabilities, illustrating the owner's investment in the business.

💡Merchandising Business

A merchandising business is a type of business that purchases goods for the purpose of resale. It is distinct from service businesses in that it involves the buying and selling of tangible goods. In the script, merchandising businesses are discussed in the context of inventory management and the tracking of cost of goods sold.

💡Inventory

Inventory refers to the stock of goods that a business holds for the purpose of resale. It is a significant component of a merchandising business's assets. In the video, inventory is highlighted as a critical aspect of financial management, with discussions on periodic and perpetual inventory systems and their impact on financial statements.

💡Cost of Goods Sold (COGS)

Cost of goods sold is the direct cost attributable to the production of the goods sold in a specific period. It is a crucial figure in calculating gross profit and net income. In the script, COGS is explained as part of the revenue generation process, where the cost of items sold is subtracted from sales revenue to determine gross profit.

💡Service Business

A service business provides intangible services rather than tangible goods. It is distinguished from merchandising and manufacturing businesses by the nature of its offerings. In the video, service businesses are briefly mentioned in contrast to merchandising businesses, with examples such as accounting and legal services.

💡Manufacturing Business

A manufacturing business is involved in the production of goods through processes that transform raw materials into finished products. It is different from merchandising businesses in terms of operations and cost structures. In the script, manufacturing businesses are mentioned in relation to the costs associated with production, such as direct materials, direct labor, and overhead costs.

Highlights

Financial statements are formal records of financial activities and position of a business or entity.

Financial statements should be understandable, relevant, reliable, and comparable.

The basic financial statements include the balance sheet, income statement, and cash flow statement.

Balance sheet represents the financial position or net worth of an entity.

Assets are owned items with monetary value and are categorized into current, intermediate, and long-term assets.

Liabilities are financial obligations such as money owed to lenders, suppliers, employees, etc.

Net worth or equity is the difference between total assets and total liabilities.

Income statement measures revenue and expenses during a specific accounting period.

Cash flow statement tracks the flow of cash in and out of a business.

Total cash inflow includes all cash coming into the business, such as investments and revenue from operations.

Total cash outflow consists of cash required for operations, including payments to creditors and for goods or supplies.

Service business net income is the difference between revenues and expenses for services provided.

Merchandising businesses sell goods and must track the cost of sales and merchandise inventory.

Merchandising inventory is purchased for resale and is a key aspect of business operations.

There are two inventory tracking methods: periodic and perpetual.

Inventory can significantly impact a business's supported net income.

Cost of goods sold is a part of the cost of generating revenue, which includes the cost of items sold.

Wholesaler and retailer are intermediaries in the supply chain, buying from manufacturers or other wholesalers and selling to retailers or consumers.

Net income for a merchandiser is measured by sales revenue minus cost of goods sold and other operating expenses.

Cash sales and credit sales are two different methods of transaction, impacting cash flow and accounts receivable.

Service businesses are different as they are based on the performance of a service, which is considered revenue once performed.

Manufacturing businesses include costs such as direct materials, labor, and overhead in their financial calculations.

Transcripts

day class so this will be the next

subject

all right so

okay here

okay first we need to make it a

slideshow

on the very beginning okay so financial

statements

this is to be here

right

okay

so this is your classmate and then

financial statements

so aka financial report is a formal

record of financial activities and

position of a business

person or other entity financial

statements should be understandable

relevant reliable and comparable okay so

the basic financial statements are

balance sheet income statement cash flow

statement

balance sheet the statement of financial

precision or net worth or statement

while income statement or statement of

comprehensive income or statement or

revenue

and expense profit and loss report

well cash flow statement is a flow of

bad statement

so balance sheet balance sheet consists

of assets liabilities net worth or

owner's equity

balance sheet asset includes anything

that is owned by the entity that has

monetary value

asset

assets should be separated to three

categories

and that is

current assets intermediate assets and

long-term assets

liabilities are financial obligations of

the business such as money owned to

lenders suppliers employees

and others so a liability should be

separate into three categories and

that's current liabilities intermediate

liabilities

and long-term liabilities

so buyer sheet net worth or equity is

the difference between total assets and

total liabilities

total liabilities less liabilities

total assets less liabilities is equals

to equity or capital this is this is the

accounting equation from the very

beginning

that is the basic rule asset is equals

to liabilities plus

capital therefore if total assets minus

liabilities that will equal to your

capital

okay what's this oh my

all right income statement our profit

and loss statement it is a measure of

revenue on expenses

during a specific specified accounting

period usually

one year

[Music]

so the cash flow statement also called

the sources and uses of fans of low fan

statement

so the total cash flow includes

total cash available which include

excludes borrowings

new operating loans new medium and long

term or as well as consumption loans

total cash outflow consists of total

cash required which excludes principal

repayments principal prepayments

ending cash balance okay total cash

inflow will include all that comes into

the business so whether it is an

investment additional investment or

that is um

revenue from operations it's also uncut

info to the business whether it's

money in from borrowing is also an

inflow to the business your outflow

would be

you lend out your money to creditors

auto debtors and then you also

uh put out money for the operations like

you buy your goods or supplies

or you also pay your debts so that's

also at outflow or you pay your

investors is also not flow

service business net income is the

difference between its revenues and

expenses incurred in providing the

services types of business the service

business the merchandising business and

the manufacturing business

merchandising business

that are businesses that are

sells

merchandise or they are the

merchandising companies so we must track

the purchase the cost of sale

and

of these goods this is through tracking

the merchandise inventory account

merchandising business supplies are

purchased for use in running a business

merchandising inventory is purchased for

resale

note this this does not mean that

pencils and paper can be invented

if you are a stationary store then this

this items are inventory the key concept

is goods for resale

keeping track of inventory the periodic

inventory method adjustments are made at

the end of the accounting period to

track the inventories of periodic and

there's perpetual wherein adjustments

are continually made and updated to keep

track of the mentally

now periodic inventory system purchases

estimated when goods are bought from

supplier

classified as classified as part of the

accounts of cost of goods sold on sale

or merchant merchandising inventory

an asset account if and sold

so these are cash purchases credit

purchases under the there are two types

of purchases no cash purchases and the

product purchases you can purchase

through cash and you could purchase

through where i did okay so periodic

inventory system purchase returns and

allowances

there are the bitmap randoms and

purchase discounts as well

these are the accounts that you may

encounter so types of discount trade

discount cash discount cash discount

when you purchase

discount and sales discount

okay

inventory inventory adds an entirely new

dimension to running and evaluating in

business

inventory values can be played with to

alter a business supported net income

inventory is usually significant

because inventories relates with your

profit and your statements the more you

sold items

the higher your income

okay and mentally can be income obsolete

inventory can can cost a lot inventory

can be stolen right so cost of goods

sold since now we're selling goods part

of the cost of generating revenue is the

cost of items we are selling

okay

so wholesaler

versus retailer wholesaler an

intermediary that buys products from

manufacturer or the wholesaler and sells

them to retailers or other wholesalers

while the tailor buys products from the

manufacturer or wholesaler and sell them

to consumers directly manufacturing

wholesaler retailer

customer

okay measuring net income net income to

a merchandiser implies that the revenue

from selling merchandise

exceeds both the cost of the merchandise

sold to customers and the cost of other

expenses for the period

so measuring income means sales revenue

less cost of goods sold which is equal

to gross profit now gross profit less

operating expenses is equal to net

income

sales revenue class become earned in

selling merchandise while cost of goods

sold is the

cost of merchandise sold during the

period

while operating expenses expenses

occurred in running the business

[Music]

measuring net income

cash sale and credit sales so if it's a

cash sale you will

purchase

you will receive cash

on hand and you will give out your

inventory so that's a cycle

or the other way if you also buy your

goods in cash you keep money you get the

goods and of course you let go of your

cash it's the other way around also if

you are also the seller credit sale

because here the word is saved so we

call it a million so when you sell in

credit ulta

your cash collection happens only after

a while it has to go through within

accounts receivable

ah

an arrangement a contract between you

and the buyer and you you will pay later

through accounts receivable you have to

let go your merchandise got a god but

then your collection for cash will be

later

okay so any questions

i hope there's no more questions but um

thank you so much

hope you will just play this um

over and over again so when you further

understand the topic about

about

financial statements and the type of

businesses here it did not really

include about the service

because service is very easy service is

just

um performance of our delivery of

the contract

through performance of the service like

i said in the accounting services for

example

if you do bookkeeping for one month or

you do audit for a certain client

that is a service okay that is a sample

of service or lawyers fee professional

fee that's a service

right okay so once it's performed then

it's considered a revenue

right

um

for manufacturing business it's a

different

maybe different topic it is it will

include materials like direct materials

and from the raw materials okay and

there's also this labor directly bar

and then

and that

once these materials are in and then

there's overhead as well because say for

example manufacturing they will have

um

light and electricity to do the

manufacturing process and then water

that's that's the overhead there okay so

um

that will be included into a process of

completing all that what is related to

that specific

uh product and the product

the the cost of that related product

will be

used to measure how much should be the

value of your goods

as part of your inventory in your profit

and loss statement

okay so but the same principle comes but

we are only since your own first year in

tackling only actually this is your

minor subject that we learned from the

basic company which is a merchandising

business

all right so no more questions right so

further if you have questions you can

always write you can always message me

and you can always put your

concerns in the google classroom or in

the messenger

thank you so much

thank you also for the maker of the

slide

by class for now let's have another more

um

break let's have a break and then let's

have another topic thank you so much

again