The Financial Statements - Video Tutorials & Practice Problems
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Here we introduce the four main financial statements. This is also the perfect time to practice classifying accounts into one of five main categories.
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Financial Statements
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6m
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Alright. So now we're gonna discuss on a high level, the main financial statements that are required by gap to be reported for external users. All right, So let's check out what those financial statements are. So, these main financial statements, there's gonna be four of them. Right? There are four main financial statements and they are required by Gap well as well, they're they're required overseas as well by I for So Gap. Remember gap is the set of rules in the United States uh that that sets the standards for accounting accounting information. Okay, So it's required by gap to show these four financial statements to the external users being banks being stockholders, whatever it might be, this is what's required by Gap. Let's start with the first one. The balance sheet. Okay, the balance sheet is going to show our assets and it's gonna show how those assets are financed and it's gonna show it at a point in time. Okay, At a point in time. This is important. Okay, because this is like a snapshot of the company. So we might say here's the balance sheet at december 31st 2011, Right? At december 31st 2011. At this point in time, what were our assets? What were our liabilities and equity? Right. So on this day, how much cash did you have on this day, how much was sitting in your inventory on this day? How much money did you go to other people how much stock was there in the company? Right. It's at a point in time and it shows us that fundamental accounting equation, it shows us that assets equal liabilities plus equity. Okay, this information is going to be shown on the balance sheet. It's gonna show us the balance of assets, the balance of liabilities and the balance of equity at a certain date. Okay, So the next one is the income statement, another very important statement here. And it shows the firm's revenues, sorry for that little mind lapse revenues and expenses over a period of time. Okay, So notice where where the balance sheet was a snapshot. This show's over a period of time. Okay, This isn't just one quick shot of what's happening. This shows what happened over a period of time in the company. All right. So it's gonna show how much money we brought in through revenues and how much it cost us for those revenues and expenses. Right? So we're gonna have our revenues minus expenses leads us to our net income. Okay, Net income, that is the bottom line. This is the bottom line in accounting. And it shows how much we got away with at the end of the day. Right? We brought in so much in revenues. We paid so much in expenses and we're left with net income. Alright, that's what's shown on the income statement next. We have the statement of cash flows. Well, this statement, it's gonna show the cash flow, right? It shows how the firm's cash changed over a period of time again. Okay, So this one as well is a period of time. We're gonna start, let's say on january 1st of 2017, we're gonna start with a certain amount of cash. All these transactions are gonna happen throughout the year, all these things are gonna happen and then the year is gonna be over and we're gonna be left with a different amount of cash or maybe the same amount, right? Whatever happened, we want to know how we got from that beginning amount of cash to that ending amount of cash. Right? And the statement of cash flows shows us everything that happened from a cash perspective. Okay, last we have our statement of stockholders equity. So the statement of stockholders equity, just like the statement of cash flows. It's gonna show how the firm's equity changed over a period of time. And you can see how this would be important to investors. Right? The investors, well, the equity is their share of the business, right? So they're gonna want to see how that equity has changed over time. Okay, So that's important as well. And we do see sometimes when they don't share, they don't just show a whole equity. If equity is not so complicated for the company, they might just show a statement of retained earnings, okay, Where they just show the retained earnings account, remember retained earnings, That's where all the money from previous years gets put into. And then as we make money this year, it also gets funneled into retained earnings as well. And we pay dividends to our owners out of retained earnings. The dividends is the payments from the company. Um So that's all will be shown in the statement of retained earnings. Okay, So those are four main financial statements that we're always going to be showing, and it's going to be the focus of this class. Okay, So when we create the financial statements, we're gonna follow this flow right here. Okay. The financial statements flow in in when we assemble them. Okay. We usually start with our income statement where we where we calculate the revenues and the expenses for the year and it gives us the net income that net income is going to flow into our statement of stockholders Equity, where we show the equity, the net income, the money we made this here. It's part of our equity. It's part of the owners money. Okay, So that flows into the statement of stockholders equity. And remember that the balance sheet shows equity right? We've got equity in the balance sheet up here. So that statement of stockholders equity is almost a more detailed version of what ends up in the balance sheet. Okay, so then we have our balance sheet that shows a point in time. And then we use the information from all of these other statements to create our statement of cash flows. Okay, So we're gonna deal with all of these financial statements throughout the course, but for now, it's just good to know them on a high level like this. All right, So let's pause here, and in the next video, it's gonna be one of our most important videos to set a foundation for you in accounting. Okay? We're gonna discuss accounts and account titles. Alright? So make sure you pay attention and let's move on to that video now.
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Account Title Classification
Video duration:
9m
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Alright, let's let's start this account title, classification video. Alright. This is super important because this is at least for me where I got confused when I started this course. It's because they start throwing all these different names for things, different account titles and you've never been exposed to it before. All right. So here we're gonna go through and we're gonna discuss different account titles and how to classify them into different categories. Okay, So accounts are gonna fall into one of five. Let's let me go to my red pen, one of five broad categories. Okay. And it's very important just like I said, to be able to classify them into a category. So here are five categories along the left hand side. It's things we've talked about already. We've got assets, liabilities, equity, revenue, and expenses. Okay. These are five categories that we want. When you see an account title, I want you to be able to say that's a liability or that's an equity account or that's an asset, that's a revenue. Right. I want you to have that skill super down. Okay, so let's go over some of the most common accounts that we're gonna see. Let's start here with assets. And remember that assets are on the balance sheet. Right? We show the assets on the balance sheet and here are some of the most common ones. We see cash and cash equivalents, right? The cash is an asset of the company, investments that the company has made. So investments, this has to do with investments that they made in, say other companies. If the company were to purchase, let's say the company itself purchases shares of Apple stock. Well, that would be an investment in the company, it's not equity in this case. Right. They're buying the shares of another company. So to our company, it's an investment to that other company that's part of their equity. But we're thinking just about our company. Okay. So those are investments. We've got land equipment. Now a key one here. When you see this word receivable, notice how we have accounts receivable. Well, accounts receivable is money that our customers owe us and they're gonna pay us in the short term. Right? So whenever you see risk receivable, that is a keyword for asset. That means that it's something that is owed to you. Okay. So we see accounts receivable, we'll see notes receivable, There's different types of receivables. But whenever you see that word, it's a cue that it's an asset account. Okay. And now here's a tricky one here. Prepaid expenses. Okay? Because it has this word expense in it, so you might automatically think that it's an expense. But when we talk about prepaid expenses, which we go into more detail later, Prepaid expenses is something that you paid for in advance. Let's say you bought an insurance policy that's gonna last you five years. Well, if you paid for the entire insurance policy up front, then you prepaid for other years, right? You have other years payments involved here. So it actually becomes an asset. Alright. And we discussed that in further detail. But that is a tricky one. Their prepaid expenses. That is an asset. This is expenses that we paid in advance. Alright. Then when we're going to use them. So that's an asset there. Other common ones, machinery, patents, patent is an intangible thing. That's something a patent is something you get from the government. If you invented something and they're gonna give you write the exclusive right to produce that thing. Well, that that is an asset, right? Having this exclusive right to produce something that can have value. So that can be an asset as well. Other common ones inventory, right, merchandise that we have to resell buildings a building that we own long term investments. Right? Maybe we bought something that we're gonna hold for a long term. That could also be an asset. Okay, let's move on to liabilities. Now, these are also balance sheet accounts, right? Remember assets, equal liabilities plus equity liabilities. Show up on the balance sheet. And here's some of the common ones. We've got some good cues here. Whenever you see payable, just like we have accounts payable, we had accounts receivable as an asset. That's money that customers owe to us. We were, we should receive it. Well, accounts payable. This is money that we owe that we haven't paid yet. Right? We received an invoice from, for some service we received and we gotta pay them. Right? So it's an account payable. That's a liability. Whenever you see that word payable, we're talking about a liability. Okay. Notes payable notice. It's right there bonds payable. Right? These are all very common terms that you're gonna see and that all means money that we have to pay out. It's money that is expected to be paid by us. Okay. So just like I said, accounts payable, let's go over these other two notes payable and bonds payable. These are bigger loans. When we talk about accounts payable, this is on a small scale. This might be to just like our suppliers or you know, some little service, like a, you know the maintenance guy that comes and cleans the office every now and then these are accounts payable. Right? Where we talk about notes payable. This is like a contract that you signed. A note payable would be like a contract with a bank and bonds payable is another similar thing where you, where you have bonds, it's going to be some large amount of money that you're trying to bring in. Okay. So notes and bonds payable, they deal with larger sums of money. Accounts payable is kind of day to day operations kind of stuff. Okay. Another great way to q a liability is the word accrued. When you see accrued expenses, let's say like accrued payroll expenses or something like that. Well, when you see a crude that makes it a liability. That means that you've accrued these expenses, but you haven't paid them up yet. Accruing means they're building up right? All the, all the expenses are building up and you have to pay them off eventually. Okay. So accrued should be a sign that we're talking about liabilities. Again here we have income taxes payable. So we're due to pay some taxes. We haven't paid them yet. We've got this liability to pay that out. And the last one, we might see something like current portion of long term debt. Well, the long term debt is a liability. But remember when we talked about current liabilities versus long term liabilities, a current liability is due in under one year. So we might have part of that long term debt. Maybe we have this huge loan that we're going to pay off over 20 years. Well, the part that we have to pay off this year would be the current portion. Okay, so it's still a liability. It would just be part of the current liabilities there. Alright. So I know we're talking about a lot of things here, but this is an important topic, even if we just expose you to this now and you come back to this video later after you've seen a lot more examples of how we use these accounts. I think it's gonna be really beneficial. Okay, so equity, let's go on to equity here this again is a balance sheet accounts here. Okay, we're dealing with balance sheet accounts again and some of the things in equity. So I see students get tripped up a lot when we see things like common stock. So the, the account called Common Stock. Well, that's different than investments up here. Right. Investments. When we talked about investments, that's when you buy shares of stock in another company. This common stock account in Equity, that's the common stock of our own company. Okay. Just like preferred stock. That's a different type of stock that we'll talk about a little bit. Um but it's, it's also another equity. It's just a different type of stock. Okay. And then we've got additional paid in capital. So that's money that you paid that got paid in over top of the value of the stock and retained earnings. We've talked about retained earnings a bit already. That is one of the main, um, equity accounts. Okay. We also have to Treasury stock and this is stock that the companies bought back in their own stock. You don't have to remember what all these accounts are right now. Okay. I'm just giving you a high level overview of what they are and what you should be aware of when you see these account titles. Okay, So these are the most common ones that you're gonna see in equity. Alright. And the last ones are revenues and expenses. These are actually pretty easy to catch because they have very good cues. Okay, so remember that revenues and expenses, they come up on our income statement. Okay, okay. Both of them. All right. And so let's start here with revenue revenue. When you see a revenue account, it's, it's gonna, it could just be called sales. Sales could be the name of the account, it could be called sales revenue. It could be called revenue. Or they could get into more detail about how they earned the revenue. They might say something like service revenue for the service they provide, right or investment revenue, right? For for revenue they got on investments. As long as it has that word revenue in it. As long as it says sales or revenue, something like that. That means that we're talking about a revenue account and it should be on the income statement. Another weird one that comes up every now and then is fees earned. And that could be a revenue account as well. You don't see it very often. You're generally, you're gonna see called sales revenue or just revenue, something like that. All right. And our expenses, Well, those are really simple to, they're gonna say expense every time you have an expense. The word expense is going to be in their payroll, expense, wage expense, right? Anything that's an expense is going to have the word expense. Now, there are a couple. Excuse me, a couple that kinda don't fit the fit the bill here. But overall, uh, this, this is a great general rule. And what about dividends, expense while we're at it, dividends are not an expense. Alright. I just wanted to throw that in here, just gonna throw it in randomly here and there, because it's a huge way that they love to trick you. Dividends are not an expense. They are an equity account. Okay, so you would see that inequity. Okay, Alright, let's go ahead and move on to the next video.
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Problem
Problem
Label the following accounts as either Asset, Liability, Equity, Revenue, or Expense
