Assignment : Discussion-Understanding Financial Statements

In this assignment, you will learn to read and interpret financial statements. Understanding the four financial statements provided in the lectures and reading for this week and dealing with a company's financial performance is critical to making decisions about its management and its relation to the global economy and financial markets.

Tasks:

Put the following income statement and balance sheet terms (general ledger accounts) in the proper order for properly prepared financial statements:

Taxes, interest, gross profit, selling, general and administrative expenses, sales, depreciation, net income, cost of goods sold, EBITDA.

Put the following balance sheet terms (general ledger accounts) in the appropriate category as either short-term assets, long-term assets, short-term liabilities, long-term liabilities, and/or owner's equity for properly prepared financial statements:

Cash, accounts payable, accruals, property, plant and equipment, inventory, accounts receivables, paid in capital, retained earnings, notes payable, mortgage, accounts payable.

In terms of McGladrey and Pullen's Reading & understanding financial statements: A guide to financial reporting, explain the balance sheet equation.

According to accounting tools (2017), the balance sheet is a report that summarizes all of an entity's assets, liabilities, and equity as of a given point in time.

It is typically used by lenders, investors, and creditors to estimate the liquidity of a business. The balance sheet is one of the documents included in an entity's financial statements. Of the financial statements, the balance sheet is stated as of the end of the reporting period, while the income statement and statement of cash flows cover the entire reporting period.

Typical line items included in the balance sheet (by general category) are:

Assets: Cash, marketable securities, prepaid expenses, accounts receivable, inventory, and fixed assets

Liabilities: Accounts payable, accrued liabilities, taxes payable, short-term debt, and long-term debt

Shareholders' equity: Stock, retained earnings, and treasury stock

The exact set of line items included in a balance sheet will depend upon the types of business transactions with which an organization is involved.

Usually, the line items used for the balance sheets of companies located in the same industry will be similar, since they all deal with the same types of transactions. The line items are presented in their order of liquidity, which means that the assets most easily convertible into cash are listed first, and those liabilities due for settlement soonest are listed first.

The total amount of assets listed on the balance sheet should always equal the total of all liabilities and equity accounts listed on the balance sheet (also known as the accounting equation). If this is not the case, a balance sheet is considered to be unbalanced, and should not be issued until the underlying accounting recordation error causing the imbalance has been located and corrected.