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Programme : Finance for Legal Professionals

Course : Financial Accounting
Block : 1 Introduction to Accounting
Unit : 2 Financial Statements

Unit 2: Financial Statements

A brief overview of the 3 important financial statements:

• Balance Sheet

o Assets = Liabilities + Owners' Equity

• Income Statement

o Net Income = Revenues + Gains - Expenses - Losses

• Cash Flow Statement

o Change in cash = Cash in - Cash out

The Balance Sheet (so named for its cumulative balance of the accounts) shows the position of the
firm at a point in time, that is, a still photograph of the firm at various stages. On one side, it shows
the firm's assets or resources under the stewardship of the managers. On the other side are the
various sources of the resources and assets. Those sources include debt (Liabilities) and Owners'
Equity (both investments by owners and also earnings of the firm itself). Debts and investments by
the owners are both sources of external financing.

The Income Statement gives financial numbers that show a corporation's business results. It
broadly shows all revenues, earnings, expenses, costs, and taxes.

It is worth emphasising that: Net income, disclosed separately on the Income Statement,
becomes a part of Owners' Equity on the Balance Sheet. We say that the Balance Sheet and
the Income Statement linked, that is, they are hinged together.

The Cash Flow Statement simply explains why the firm's cash balance changed from the beginning
of the period to the end. The cash flows are grouped into three categories:

o Cash from Operating Activities;

o Cash from Investing Activities; and

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o Cash from Financing Activities.

The classification into the 3 categories is usually self-evident. Operating cash flows include the
cash effects of the transactions that involve the normal business of the firm. Investing cash flows
are those resulting from acquisition or sale of a property, plant and equipment, subsidiary segment,
and investments in other firms. Financing cash flows are those resulting from issuance or
retirement of debt and equity securities, and from dividends paid to stockholders.

© TresVista Financial Services Private Limited, 2010. Any unauthorised use or reproduction of this material shall attract all
applicable civil and criminal law remedies.