Financial Statements Overview

Introduction

• Presenter: James from Accounting Stuff
• Topic: Financial statements including Income Statement, Balance Sheet, and Cash Flow Statement.
• Purpose: Explain the basics of these financial statements in under 8 minutes.

What are Financial Statements?

• Reports summarizing the activities and financial performance of a business.
• Prepared at the end of each accounting period.
• Provide insights into a business's financial health for investors and lenders.

Main Financial Statements

1. Balance Sheet
2. Income Statement
3. Cash Flow Statement

Example: Tealicious

• A family-run business producing black tea.
• Financial year just ended; financial statements prepared.

Balance Sheet

• Definition: A snapshot of a business's assets, liabilities, and equity at a single point in time.
• Also known as the Statement of Financial Position.
• Structure:
  • Header: Business name, financial statement name, and date snapshot (e.g., December 31st).
  • Left Side: Assets (everything owned).
  • Right Side: Liabilities and equity (everything owed).
  • Equity: Includes original capital contributions and retained earnings.
• Tealicious Example:
  • Total equity: $129.5 million.
  • Total assets: $169 million.
  • Balance: Total assets = Total liabilities + equity ($169 million).
• Accounting Equation: Assets = Liabilities + Equity.

Income Statement

• Definition: Summarizes business revenues and expenses over a period of time.
• Similar to a video covering a range of time.
• Structure:
  • Header: States the period covered (e.g., year ended December 31st).
  • Body: Summary of revenue earned and expenses incurred.
• Tealicious Example:
  • Revenue: $255 million
  • Expenses: $248 million
  • Net Profit: $7 million
• Also known as the Statement of Profit and Loss.
• Note: Profit doesn’t equal cash flow.

Cash Flow Statement

• Definition: Shows cash inflows and outflows over a period of time.
• Necessary when using accrual accounting.
• Accounting Methods:
  • Cash Method: Revenue/expenses recorded when cash transactions occur.
  • Accrual Method: Revenue/expenses recognized as earned/incurred.
• Structure:
  • Header: Period of time covered.
  • Body:
    • Opening and Closing Cash Balances: Derived from the balance sheet.
    • Sections:
      • Operating Activities: Regular business activities.
      • Investing Activities: Investments and property/equipment transactions.
      • Financing Activities: Funding through loans or equity.
• Tealicious Example:
  • Opening cash: $11 million
  • Closing cash: $12 million
  • Net increase in cash: $1 million
• Ensures reconciliation with the balance sheet.

Recap

• Balance Sheet: Snapshot of assets, liabilities, and equity.
• Income Statement: Revenues and expenses over time.
• Cash Flow Statement: Cash inflows and outflows, reconciled to balance sheet movements.

Additional Resources

• Videos and cheat sheets available in the description.
• Appreciation for channel members' support.

Conclusion

• Presenter & Co-host: James and Winnie the puppy. See you in the next session!