Video Transcript: Financial Statements of Business Organizations

Hello and welcome back now we're going to discuss the financial statements of  a business organization. There are four basic financial statements together.  They represent the profitability and strength of a company. The financial  statement that reflects a company's profitability is the income statement. The  statement of retained earnings shows the change in retained earnings between  the beginning and the end of a period, a month a year, etc. The Balance Sheet  reflects a company's solvency, solvency and financial position. The Statement of Cash Flows shows the cash inflow and outflow for a company over a period of  time. The headings and elements of each statement are similar from company to company. The income statement, sometimes called an earnings statement,  reports the profitability of a business organization for a stated period of time. In  accounting, we measure profitability for a period such as a month a year by  comparing the revenues earned with the expenses incurred to produce these  revenues. Revenues are the inflows of assets, such as cash, resulting from the  sale of products or the rendering of services to customers. We measure  revenues by the prices agreed on in the exchanges in which a business delivers goods or render services. Expenses are the cost incurred to produce revenues.  Expenses are measured by the assets surround surrendered or consumed in  servicing customers, if the revenues of a period exceed the expenses of the  same period, net income results. Thus, net income equals revenues minus  expenses. Net income is often called the earnings of the company. When  expenses exceed revenues, the business has a net loss and it is up and it has  operated unprofitably. Metro's income statement for the month ended 2010 of  July. 31 shows that the revenues generated by servicing customers for the July  totaled 5700 US dollars. Expenses for the month amounted to 3600 US dollars.  As a result of this business activity, Metro's net income for July was $2,100 to  determine its net income, the company subtracts its expenses of $3,600 from its revenues of $5,700 even though corporations are taxable entities, we ignore  corporate income taxes at this point, one purpose of the statement of retained  earnings is to connect the income statement and the balance sheet. The  statement of retained earnings explains the changes in retained earnings  between two balance sheet dates. These changes usually consist of the addition of net income and a deduction of dividends. Dividends are the means by which  a corporation rewards its stockholders for providing it with investment funds. A  dividend is a payment, usually of cash, to the owners of the business. It is a  distribution of income to owners rather than an expense of doing business.  Corporations are not required to pay dividends, and because dividends are not  an expense, they do not appear on the income statement. The effect of a  dividend is to reduce cash and retained earnings by the amount paid out, then  the company no longer retains a proportion of the income earned, but passes it  on to the stockholders. Receiving dividends is, of course, one of the primary  reasons people invested in corporations. The statement of retained earnings 

from Metro Courier for July 2010 is relatively simple, and you can see this in part B of exhibit two organized on June. One Metro did not earn any revenues or  incur any expenses during June, so Metro is beginning retained earnings  balance in July. One zero Metro then adds its 22,100 net income for July. Since  Metro paid no dividends in July, the $2,100 would be the ending balance of the  retained earnings. And you can see that here in this example here, so your  service revenue of $5,700 Dollars on the on the right hand side, your expenses  for salaries 2600 your rent expense of 400 your gas and oil expenses of six your total expenses are 3600 and again, it nets you an income of $2,100 and your  statement of retained earnings, as you can see, since the company was  established, July one, there July one, the beginning balance is zero. And then  you're going to add, from your income statement for the month, you're going to  add net income for July the $2,100 therefore giving you a retained balance, or  your retained earning balance of $2,100 now here's your balance sheet, and  these are from previous introductions, from the trans the accounting  transactions that we had previously done so the cash investment of 500 or  $15,500 and then here is another layout of what your balance sheet will look like from those previous transactions. And again, you have your assets. Again,  keeping your accounting equation, you have your assets that should equal your  liabilities and your stockholders equity or owner's equity. It has a different name  depending on the type of formation of business. Since it's a corporation, it's the  stockholders equity, the original proprietorship would be the owner's equity,  okay? And again, you can see that they remain in balance, 38,700 for both  sides.