FA4 - Preparing the Financial Statements

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on YouTube alright let's jump into the problem welcome to problem 1-3 a in this problem finally we're here we will explore the financial statements in this video or this series of videos it'll be multiple parts you're gonna learn how to prepare an income statement a statement of changes in equity and a balance sheet we're not gonna touch the statement of cash flows here but we'll talk about it a little bit um before we can jump into the problem we should understand what all three statements are and what they do so our first video is just

going to explain the three statements what we're looking for what we're trying to do and then we'll actually jump into the problem in the next bunch of videos so here are the statements that were kind of worried about here income statement standard changes in equity balance sheet and cash flow statement and let's start with the income statement the income statement summarizes list is list is lists out the company's revenues and expenses so it's all about revenues and expenses and what this statement does is it captures this relationship revenues minus expenses equals net income or profit

so what does the income statement tell us it tells us if the company was profitable or not and if they were profitable how profitable were they how much money did they make that's the question that's being answered here was the company profitable if so how much money did they make if not how much money did they lose right so what I'm sort of examining a company I want to see how they're doing this is typically a first place I look I say hey do they make any money this year how much money did they make

right they make more this year than last year look at the income statement so tells you how profitable the company is this is also called the statement of operations and you'll hear it frequently called a P&L profit and loss like a profit and loss statement and all it is is a list of all the revenues the stuff the company earned versus all the costs the expenses and we say did the earnings exceed the costs if so we were profitable okay moving over to the statement of changes in equity this one I find to be a

little less useful but we do need to learn how to prepare it so across the top of the statement of changes in equity we list all of our shareholders equity accounts and in an intro class and in my intro class I only introduce two accounts your prof might introduce different accounts or more they might label them differently the two I think that really matter are common shares CS for common shares and re retained earnings common shares and retained earnings are our two accounts that really matter here and here's how it works we say what did

we begin with as a balance how many dollars worth of common shares how many dollars worth of retained earnings did I have at the beginning of the period how did those amounts change and triangle just means change and what did i end with so it says how did my what happened to my equity accounts this year that's what this statement is sort of summarizing for the user it's saying what happened to those shareholders equity accounts so what did they begin with how did they change what add and with that's what happens on the statement of

changes in equity the third statement we're going to learn now to prepare is the balance sheet and this is another super important statement and it is one of the first places I look I do look at the income statement first balance sheet is second for me the balance sheet lists all of the company's assets it says how many assets does the company have what kind of assets does the company have right what are the good stuff that the company owns it controls that's what we can look up on the balance sheet it also lists out

the company's debts the liabilities and finally it lists out the equity accounts and what we find on the balance sheet is assets equals liabilities plus equity that's what makes a balance sheet balance because the two sides are equal the asset side the liabilities and equity side and at the end of the day that's what makes a balance sheet balance and so it's sort of good to say okay what stuff does the company have what kind of debts does the company have that's what we've learned by looking at the balance sheet the cash flow statement is

one that we don't prepare at least in my courses I've designed it we don't learn that until like module 11 so for weeks and weeks and weeks the reason is it's more complicated but some courses do put it in module one they do sort of a basic version of it and then they come back at it again I don't even touch it in module one I will explain what it is it's very similar statement of changes in equity except it's just for cash so you say what amount of cash did I begin with how did

it change and what did I end with for cash and there are lots of interesting subtotals and lots of interesting information on there why do I have a statement devoted to cash right all of my other statements there's multiple accounts listed the cash flow statement is all about cash the reason is two reasons one if the company runs out of cash they're dead so as a shareholder you're very interested in how they're managing their money their physical cash like cash in the bank account because if they run out of that cash they're dead - uh

it's hard to manipulate cash so you can manipulate various revenue and expense accounts cash is thought of as very difficult to manipulate that number right it's not an area up in the air' number so for example the value of my car you know if I said it was fifteen thousand dollars and somebody else said it's fourteen and somebody else might say it's sixteen because it's this used car it's actually hard to argue and there are numbers like that in accounting what it's like is the car worth fifteen is over 16 is it worth 13 you

know is building worth you know a million bucks or is it worth 1.1 million or is it worth nine hundred you know it's debatable and reasonable people can disagree typically with cash reasonable people can't disagree and so the numbers around cash are thought of as very trustworthy so when a company discloses its cash flow you can really trust those numbers so a lot of times analysts and investors really like to see those cash flow numbers they think they're more honest than say income statement numbers but we're leaving those for later in module 1 I don't

trust that touch this at all when we get back to the problem we're gonna prepare an income statement a statement of changes in equity and a balance sheet so we'll do that we'll begin to do that in the next video stay tuned