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    Primary Financial Statements

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    1. Can you please provide a description of the 3 primary financial statements (balance sheet, income statement, and statement of cash flows) and what each statement tells users about an organization

    2. Explain the components of each statement (assets, liabilities, equity, revenues, expenses)

    3. Explain the set of activities required to produce a set of financial statements for each period.

    Thank you.

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    Solution Preview

    1. Can you please provide a description of the 3 primary financial statements (balance sheet, income statement, and statement of cash flows) and what each statement tells users about an organization?

    Balance Sheet
    A balance sheet is a snapshot of a business' financial condition at a specific moment in time, usually at the close of an accounting period. A balance sheet comprises assets, liabilities, and owners' or stockholders' equity. Assets and liabilities are divided into short- and long-term obligations including cash accounts such as checking, money market, or government securities. At any given time, assets must equal liabilities plus owners' equity. An asset is anything the business owns that has monetary value. Liabilities are the claims of creditors against the assets of the business.

    What is a balance sheet used for? What does it tell us about the organization?

    A balance sheet helps a business owner quickly get a handle on the financial strength and capabilities of the business. Is the business in a position to expand? Can the business easily handle the normal financial ebbs and flows of revenues and expenses? Or should the business take immediate steps to bolster cash reserves?

    Balance sheets can identify and analyze trends, particularly in the area of receivables (e.g. cash received for sales) and payables (e.g., cash paid out for bills, etc.). Is the receivables cycle lengthening? (E.g. do customers take a long time to pay their bills? A short receivable cycle is preferred because your capital E.g., cash is tied up for less time). Can receivables be collected more aggressively? (E.g., if someone charges their food at your store and does not pay their account on time, what steps could you take to collect sooner, without loosing customers, if possible?) Is some debt uncollectable? Has the business been slowing down payables to forestall an inevitable cash shortage?

    Balance sheets, along with income statements, are the most basic elements in providing financial reporting to potential lenders such as banks, investors, and vendors who are considering how much credit to grant the firm.

    Components of the Balance Sheet...

    1. Assets
    Assets are subdivided into current and long-term assets to reflect the ease of liquidating each asset. Cash, for obvious reasons, is considered the most liquid of all assets. Long-term assets, such as real estate or machinery, are less likely to sell overnight or have the capability of being quickly converted into a current asset such as cash.
    2. Current assets
    Current assets are any assets that can be easily converted into cash within one calendar year. Examples of current assets would be checking or money market accounts, accounts receivable, and notes receivable that are due within one year's time.
    • Cash
    Money available immediately, such as in checking accounts, is the most liquid of all short-term assets.
    • Accounts receivables
    This is money owed to the business for purchases made by customers, suppliers, and other vendors.
    • Notes receivables
    Notes receivables that are due within one year are current assets. Notes that cannot be collected on within one year should be considered long-term assets.
    3. Fixed assets
    Fixed assets include land, buildings, machinery, and vehicles that are used in connection with the business.
    • Land
    Land is considered a fixed asset but, unlike other fixed assets, is not depreciated, because land is considered an asset that never wears out.
    • Buildings
    Buildings are categorized as fixed assets and are depreciated over time.
    • Office equipment
    This includes office equipment such as copiers, fax machines, printers, and computers used in your business.
    • Machinery
    This figure represents machines and equipment used in your plant to produce your product. Examples of machinery might include lathes, conveyor belts, or a printing press.
    • Vehicles
    This would include any vehicles used in your business.
    • Total fixed assets
    This is the total ...

    Solution Summary

    This solution describes the 3 primary financial statements (balance sheet, income statement, and statement of cash flows) and what each statement tells users about an organization. It also explains the components of each statement (assets, liabilities, equity, revenues, expenses) and the set of activities required to produce a set of financial statements for each period.

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