2. Understanding Financial Statements Together these statements provide information about an organization’s financial strength and ability to meet current obligations, the effectiveness of its sales and collection efforts and its effectiveness in managing its assets. Organizations and individuals use financial statements to spot opportunities and problems, to make business decisions and to evaluate a company’s past performance, present condition, and future prospects. In sum, they’re indispensable. Balance Sheet Income Statement Cash-Flow Statement

3. The Accounting Equation Owner’s Equity = Net Worth: Accounting Equation: Assets = Liabilities + Owner’s Equity Assets – Liabilities = Owner’s Equity For thousands of years, businesses and governments have kept records of their assets — valuable items they own or lease, such as equipment, cash, land, buildings, inventory, and investments. Claims against those assets are liabilities, or what the business owes to its creditors — such as banks and suppliers. For example, when a company borrows money to purchase a building, the lender or creditor has a claim against the company’s assets. What remains after liabilities have been deducted from assets is owners’ equity:

4. The Balance Sheet also known as the statement of financial position , is a snapshot of a company’s financial position on a particular date. This statement includes all elements in the accounting equation and shows the balance between assets on one side and liabilities and owners’ equity on the other side. Assets Liabilities and Shareholder’s Equity Current Assets Fixed Assets Current Liabilities Long-Term Liabilities Shareholder’s Equity

5. A new business is started with the owner’s savings of $100,000. The beginning balance sheet will look like this: Assets Liabilities+Net Worth CURRENT ASSETS Cash $100,000 Net Worth $100,000

6. The owner decides to stock the store and purchases $50K of merchandise, but pays only $25K in cash and promises to pay the balance in 30days. The balance sheet will now look like this: Assets Liabilities+Net Worth CURRENT ASSETS Cash $75,000 Inventory $50,000 TOTAL $125,000 CURRENT LIABILITIES A ccount s P ayable $ 25,000 Net Worth $100,000 TOTAL $125,000 The BALANCE SHEET is in balance with the addition of $25K that is owed to the vendor. It is place under current liabilities because it is due to be paid back within one year.

7. Now the owner decides to buy a building for $100,000. The owner pits $25K down and obtains a $75K mortgage for the remainder. The balance sheet will now look like this: Assets Liabilities+Net Worth CURRENT ASSETS Cash $50,000 Inventory $50,000 Total C/A $100,000 FIXED ASSETS Building $100,000 Total F/A $100,000 TOTAL $200,000 CURRENT LIABILITIES A ccount s P ayable $ 25,000 Total C/L $ 25,000 LONG TERM DEBT Mortgage $ 75,000 Total L/T debt $ 75,000 Net Worth $100,000 TOTAL $200,000 The addition of 2 new accounts: one called long-term debt-(longer than 1 year, and fixed assets which includes property, plant, and equipment.

19. Fred’s House of Fun April 1, 2008 Assets Cash $10,745 Accounts receivable 868 Inventory 5,799 Supplies 433 Total Assets $17,845 ¯¯¯¯¯¯¯ Liabilities Accounts Payable $3,444 Notes Payable 5,705 Total Liabilities $ 9,149 Net Worth Fred Flintstone 8,696 Total Liabilities & Net Worth $17,845 ¯¯¯¯¯¯¯ Balance Sheet