11. Financial statements of a bank (3.5.3. 3/5/11 3.5.18)

12. Balance Sheet (3.5.11) The financial position of an accounting entity as of a specified moment in time is shown by a balance sheet. In fact, its formal name is statement of financial position. More specifically, the balance sheet reports the assets and equities and liabilities (liabilities and owner’s equity) of the entity at the specified moment in time.

Figures in balance sheet represent the historical value of the stock of assets available to the firm generating sales and profits.

Generally speaking, however, the balance sheet is a statement of assets, liabilities, and stockholders’ equity. As of certain date, the left side on this statement shows a breakdown of current assets in the form of cash and other assets that constitute the working capital of the firm. Fixed assets are mainly long-term investments, including plant and equipment.

The right side of the balance sheet shows current liabilities consisting of accounts payable, notes payable, and other short-term liabilities. From this point on you find long-term debt, shich has a maturity date of over 1 year. This part of the balance sheet may also include the capitalized value of financial leases. After you deducted the liabilities from the assets, the remaining value is the net worth of the firm. The components of net worth include the par value of common stock outstanding, paid-in capital surplus, and retained earnings being accumulated from previous profits generated by the firm after the deduction of dividend payments. If the firm were liquidated and all creditors’ claims paid off, the net worth is what would be left over the distribution to the stockholders.

By deducting current liabilities from current assets, you can find out something about the liquidity of the firm, and by matching profits against the assets invested in the firm, you can gain some idea of how effectively the firm has utilized assets to generate profits.

13. Income statement (3.5.7.)

The purpose of income statement (sometimes called the earnings statement) is to report upon profitability of a business organization for a stated period of time. In accounting, profitability is measured by comparing the revenues generated in a period with expenses incurred to produce those revenues. Revenue is defined as inflow resulting from the delivery of products or service supply to customers. Many firms earn their revenues by selling their customers tangible commodities, such as automobiles, office equipment, cameras, or paint. Others, called service firms or businesses, earn their revenues in the form of commissions or fees by rendering various types of services to customers, such as the fees for the professional services rendered by accountants, architects, lawyers, or physicians or commissions from the sale of life insurance of life property or real estate. Other types of services generate revenues for other firms – earned interest by banks and small loan companies, the premiums received by insurance companies, the admissions charged by theatres, or the rents collected by firms earning apartment buildings. The revenues earned are measured by assets value customers are willing to surrender for the products or services received.

Expense is defined as the sacrifice made or the cost incurred generate revenues. The expenses incurred can be classified into a number of categories that differ among firms. Common expense categories are wages and salary, utilities (electricity, gas, oil, telephone, and water), insurance, taxes (both on property and on income or earnings), supplies used, advertisement, and interest. Expense is measured by the cost of the assets surrendered or consumed in serving customers. The process of comparing the revenues earned with the expenses incurred is referred to as matching. Expenses are matched against revenues identify net profit. If revenues exceed expenses, net income results. If the reverse is true, the business is operating at a loss.

In a technical sense, the income statement is subordinate to the balance sheet. This is because it shows in some detail the items that collectively explain most of the period’s net change in only one balance sheet item, retained earnings. («Most» excludes dividends as well as a few relatively unusual retained earnings changes). Nevertheless, the information on the income statement is regarded by many to be important than information on the balance sheet. This is because the income statement reports the results of operations and indicates reasons for profitability of a company (or lack thereof).

The importance of the income statement is illustrated by this fact: in situations where accountants, in recording an event, must choose between a procedure that distort the balance sheet ore one that distort the income statement, they usually choose not distort the income statement.

In practice, there is great variety in the formats and degree of detail used in income statements. Less detailed income statements are published in corporate annual reports to their shareholders. Income statements prepared for the managers of an entity usually contain more detailed information.

The heading of a statement must show the entity to which it relates, the name of the statement, and the period covered. To provide the basis for comparison Securities and Exchange Commission (SEC) requires that corporate annual report contain income statements for the most recent years and balance sheets as of the end of the most recent two years.

It is easy to determine from balance sheet and income statement whether the issuing company was a merchandiser or a manufacturer.