Interpretation of Income Statement

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6/23/2014

FINANCIAL STATEMENTS
The Hidden Road to Wealth

Learning Expection
Review accounting basics to understand
the information on the financial statements
Appreciate the essence of the Financial
Statement
Understand the component of the
Income Statement and the Balance
Sheet
Determine how Income Statement and
Balance Sheet are use in making
financial decision

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BASIC Terms


FINANCIAL STATEMENT
represent a formal record of the financial activities
of an entity. These are written reports that quantify the
financial strength, performance and liquidity of a
company. It reflect the financial effects of business
transactions and events on the entity.



INCOME STATEMENT
also known as the Profit and Loss Statement,
reports the company's financial performance in terms of
net profit or loss over a specified period.



BALANCE SHEET
also known as the Statement of Financial Position,
presents the net worth of an entity at a given date

See more at: http://accounting-simplified.com/financial/statements/types.html#sthash.yNCbgWJv.dpuf

REVIEW OF BASIC ACCOUNTING

The three definitions of ACCOUNTING


It is a service activity. it's function
is to provide quantitative
information, primarily financial in
nature, about economic entities,
that is intended to be useful in
making economic decisions.
- ASC



Accounting is an art or recording,
classifying and summarizing in a
significant manner and in terms of
money, transactions and events
which are in part at least of a
financial character and
interpreting the results thereof.
- AICPA



Accounting is the process of
identifying, measuring and
communicating economic
information to permit informed
judgment and decision by users
of the information.
- AAA

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REVIEW OF BASIC ACCOUNTING

ACCOUNT
Accounts are the categories into which the effects of
transactions are recorded, and from which financial reports
are created.
5 major account categories:
Income

Expenses

Assets

Liabilities

Proceeds
from sales

Costs of
operation

What you
own

What you
owe

Operations

Equity
Net worth /
level of
investment

Financial Position

REVIEW OF BASIC ACCOUNTING

CHART OF ACCOUNTS
Sample Income accounts
Sales revenue
Other income

Sample Expense accounts
Rent
Cost of Goods Sold (COGS)
Marketing
Office supplies
Payroll
Professional fees

Sample Asset accounts Sample Liability
accounts
Current assets
Accounts payable
Cash
Inventory
Credit card payable
Accounts receivable
Loan payable
Fixed assets

Sample Equity
accounts
Owner’s equity
Retained earnings

Equipment
Property

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The essence of a

Financial Statement
With the Financial Statement we will be able to
identify:
1. What does the company own and what does it owe to
others
2. The sources of revenue and how it is being spent
3. The profit it made
4. The state of the company’s financial health

The USE of

Financial Statement
Shareholders use it to
keep tabs of how well
their capital is being
managed

Government use it
to determine the
amount of tax that
should be paid by
the company

FS

Outside investors
use them to identify
opportunities

Lenders and suppliers
routinely examine it to
determine the
creditworthiness of the
company

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The USE of

Financial Statement
Shareholders use it to
keep tabs of how well
their capital is being
managed

WE WANT TO BE Outside investors

Government use it
to determine the
amount of tax that
should be paid by
the company

FS

RICH!

use them to identify
opportunities

Lenders and suppliers
routinely examine it to
determine the
creditworthiness of the
company

The
INCOME STATEMENT

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6/23/2014

What is an

INCOME STATEMENT?

Result of operation over a
specific period

It shows the company’s
profitability

Also known...
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