explain differences of use of financial statements in accountancy and finance

Structure of presentation• Definition of Financial statements o Balance sheet o Income statement o Statement of retained earnings o Statement of cash flows • Differences of use of Finan

Explain differences of use of

financial statements in accountancy and finance

GROUP 3 -TON DUC THANG UNIVERSITY

Structure of presentation

• Definition of Financial statements

o Balance sheet

o Income statement

o Statement of retained earnings

o Statement of cash flows

• Differences of use of Financial statements in Accountancy vs Finance

Definition of Financial statements

Financial statement is a report that records the financial activities

of a business, individuals or any other entity.

There are 4 basic statements:

 Balance sheet

 Income statement

 Statement of Retained Earnings

 Statement of Cash Flows

Balance sheet Definition: a balance sheet or statement of financial

position is a summary of the financial balances of a sole proprietorship, a business partnership, a corporation or other business organization.

A balance sheet is often described

• as a "snapshot of a company's financial condition".

• the balance sheet is the only statement which applies

to a single point in time.

Balance sheet

Assets = Equity + Liabilities

There are 3 elements in a balance sheet

• Assets : tangible and intangible things that can be

converted into cash.

• Liabilities : Current liabilities and long-term liabilities,

which are needed to raise capital investment.

• Equity : Capital stocks, share premium, retained earnings, others,…which are the amount of shareholders holding

The Balance sheet equation:

Assets = Liabilities + Stockholders’Equity

Income statement

• Definition: An income statement (statement of income, statement

of earnings, or statement of operations…) shows the revenues and

expenses of a company during the accounting period

• There are some elements:

 Revenues : Cash and promises received from sale of goods or services to customer

 Expenses : money used to earn revenues during period

 Net income : is the excess of total revenues over total

expenses

The Income Statement equation:

Net income=Total Revenues-Total Expenses

Statement of Retained Earnings

• Definition: a statement of retained earning shows

how the net income and distribution of dividends

affected the financial position of a company during the accounting period

The Statement of Retained Earning equation: Ending RE = Beginning RE + Net Income-Dividends

Statement of Cash Flows

• Definication: a cash flow statement (or statement of

cash flows) shows:

 how changes in balance sheet accounts

 income affect cash and cash equivalents

 breaks the analysis down to operating, investing, and financing activities.

Statement of Cash Flows

3 Main categories

Operating activities

Investing activities

Financing activities

Operating activities

• Operating activities : includes net income,

depreciation, changes in current assets and liabilities other than cash, short-term investment, and short- term debt

=>shows how much cash comes from sales of the

company's goods and services, less the amount of

cash needed to make and sell those goods and

services

Investing activities

• Investing activities: includes investments in or sales of fixed assets

Þ this section largely reflects the amount of cash

the company has spent on capital expenditures, such

as new equipment or anything else that needed to keep the business going.

Þ It also includes acquisitions of other businesses

and monetary investments such as money market funds. 

Financing activities

• Financing activities: includes raising cash by selling

short-term investment or by issuing short-term debt,

or shock

=> This section describes the goings-on of cash

associated with outside financing activities

• Typical sources of cash inflow would be cash raised by selling stock and bonds or by bank borrowings

Likewise, paying back a bank loan would show up as a use of cash flow, as would dividend payments

The Statement of Cash Flows equation: +/- C ash F lows from O perating activities ( CFO ) +/- C ash F lows from I nvesting activities ( CFI ) +/- C ash F lows from F inancing activities ( CFF )

= Change in Cash

Relationship of Financial Statements

Differences of use of Financial statements in Accountancy vs Finance

DIFFERENCES ACCOUNTANCY FINANCE

_Finance also deals a lot with risk

_Derivative securities (options, futures, swaps, etc) are used to hedge against possible increase in risk

S

Purpose Measuring, preparation, analyzing, and

interpretation of financial statements

=> To collect and present financial information of a company

Making decision regarding working capital issues:

o level of inventory

o cash holding

o credit levels

o financial strategy

o managing and controlling cash flow

Goal To see how the company is performing To forecast the future performance of

Based on accrual system:

_Revenue is acknowledged at the point

of sale and not when it was collected

_Expenses are acknowledged when they are incurred than when they are paid

S

Balance sheet is used to test, evaluate the

accuracy of the accounts, data recording, and the fluctuation of assets and capital

Is used for decision of the company’s plant

• The income share that companies use to reinvest in the core business of it

• Provide for shareholders and those who want to use the information in financial statements about the

effectiveness of using retained earnings by:

 measuring return on investment

 answer the question of whether the retained earnings to be reinvested could help firm earn the return on investment or whether the company could developed or not If not, the investors and shareholders may want

to receive their dividends

THE END !