Introduction to financial statement:

A financial statement is a document that outlines an organization's financial position at a specific

point in time. It is an important tool used by investors, lenders, and other stakeholders to gain
insight into a company's financial health. Financial statements typically include a balance sheet,
income statement, statement of cash flows, and statement of changes in equity. These
statements provide a comprehensive overview of an organization's financial performance and
can help identify potential risks and opportunities. Furthermore, financial statements provide
important information for making decisions about the future of an organization.

In this chapter, we introduce three primary financial statements:

• Statement of financial position (commonly referred to as the balance sheet).

• Income statement.

• Statement of cash flows.

Statement of financial position:-

A statement of financial position, also known as a balance sheet, is a financial statement that
summarizes an organization's assets, liabilities, and equity at a specific point in time. It provides
a snapshot of the organization's financial health and is used to assess the organization's
solvency, liquidity, and financial stability. The balance sheet also provides insight into the
organization's sources and uses of funds and helps identify potential risks and opportunities.
Income statement:
An income statement, also known as a profit and loss statement, is a financial statement that
summarizes an organization's revenues, expenses, and profits over a given period of time. It is
used to measure the organization's financial performance and to assess the success or failure
of its operations and strategies. The income statement provides useful information for decision-
making and planning, and can help investors and lenders evaluate the organization's financial
health.
statement of cash flows
A statement of cash flows is a financial statement that summarizes an organization's cash flows
over a given period of time. It is used to measure the organization's liquidity, solvency, and
financial health. The statement of cash flows provides insight into the organization's sources
and uses of funds and can help stakeholders identify potential risks and opportunities. It also
helps investors and lenders evaluate the organization's ability to generate cash and meet its
financial obligations.
A Starting Point of Statement of Financial Position:
The starting point of a statement of financial position is the total of all assets that an
organization owns. Assets are resources that an organization owns or controls, such as cash,
accounts receivable, inventory, and fixed assets. The total of all assets must equal the total of
all liabilities plus equity. Liabilities are obligations of an organization, such as accounts payable
and loans. Equity is the amount of ownership interest held by the owners of the organization.
The statement of financial position is used to assess the organization's financial health and is
typically reported at the end of a fiscal year.
The Concept of the Business Entity
The business entity concept is the idea that a business should be viewed separately from its
owners. This means that a business should be treated as an entity that is separate and distinct
from its owners and other entities. The concept is important because it allows a business to be
viewed objectively when financial statements and other financial information is prepared. This
enables stakeholders to make informed decisions and helps to ensure that the business is
managed in the best interests of the owners.
Assets:
Assets are resources that an organization owns or controls, such as cash, accounts receivable,
inventory, and fixed assets. Assets are reported on the balance sheet of a company and are
used to measure the financial health of the organization. Assets can be classified as current
assets, long-term assets, or intangible assets. Knowing the value of an organization's assets is
important for decision-making, planning, and understanding financial performance.
Cost principle:
The cost principle states that assets should be recorded at their cost, which is the amount paid
to acquire the asset. The cost principle is important because it helps ensure that companies are
accurately reporting the value of their assets. The cost principle is one of several fundamental
accounting principles and is used when preparing financial statements. It is important to note
that the cost of an asset may not represent its current market value.
Liabilities
Liabilities are obligations of an organization, such as accounts payable and loans. Liabilities are
reported on the balance sheet of a company and are used to measure the financial health of the
organization. Knowing the value of an organization's liabilities is important for decision-making,
planning, and understanding financial performance. Liabilities can be classified as current
liabilities, long-term liabilities, or contingent liabilities.
owner equitity:
Owner equity, also known as shareholders' equity, is the amount of ownership interest held by
the owners of the organization. It is reported on the balance sheet of a company and is used to
measure the financial health of the organization. Owner equity is the difference between an
organization's total assets and total liabilities. Owner equity can be positive or negative and can
change over time depending on the organization's financial performance.
Increases in Owners: Equity Increases in owners' equity can be caused by investments made
by owners, profits earned by the company, or reductions in liabilities. Investments made by
owners can include contributions of cash or other assets to the company. Profits earned by the
company can be reported as retained earnings or paid out as dividends. Reductions in liabilities
can be caused by debt payments or other changes in the liabilities of the company.
Decrease in Owners’ Equity:
 Decreases in owners' equity can be caused by losses incurred by the company, withdrawals
made by owners, or increases in liabilities. Losses incurred by the company can be reported as
losses on the income statement. Withdrawals made by owners can include distributions of cash
or other assets from the company. Increases in liabilities can be caused by new debt or other
changes to the liabilities of the company.
THE ACCOUNTING EQUATION
The accounting equation is a fundamental concept in accounting that states that the value of a
company's assets must equal the sum of its liabilities and owners' equity. This equation is used
to measure the financial health of a company and is the basis for all financial statements. The
accounting equation is also used to record transactions and track changes in a company's
financial position over time. The equation is expressed as Assets = Liabilities + Owner Equity.
THE EFFECTS OF BUSINESS TRANSACTIONS:
AN ILLUSTRATION
When a business engages in a transaction, it affects the accounting equation by changing the
amounts of assets, liabilities, or owner's equity. For example, if a business purchases a new
piece of equipment, it increases the business's assets and decreases its owner's equity. This is
because the business has acquired a new asset and has used its own funds to do so. Similarly,
if the business borrows money from a lender, it increases its liabilities and increases its owner's
equity, since the borrowed funds are considered an investment in the business. All business
transactions must be recorded in a manner that complies with the accounting equation.
The Business Entity:
The business entity concept is the idea that a business should be viewed separately from its
owners. This means that a business should be treated as an entity that is separate and distinct
from its owners and other entities. The concept is important because it allows a business to be
viewed objectively when financial statements and other financial information is prepared. This
enables stakeholders to make informed decisions and helps to ensure that the business is
managed in the best interests of the owners.