PBL Study Blog: Trigger 7

Learning objective 1. What are the Main Components of an Income Statement?

The Income Statement:
A summary of an entity's result of operation for a specified period of time is revealed in the income statement, as it provides information about revenues generated and expenses incurred.
The difference between the revenue and expenses is identified as the net income or net loss.
The income statement can be prepared using a single-step or multiple-step approach, and might be further modified to include a number of special disclosures relating to unique items.

Two basic formats for the income statement are used in financial reporting presentations—the multi-step and the single-step. These are illustrated below in two simple examples:

In the multi-step income statement, four measures of profitability (*) are revealed at four critical junctions in a company's operations—gross, operating, pretax and after tax. In the single-step presentation, the gross and operating income figures are not stated; nevertheless, they can be calculated from the data provided.

Sources:

1. Booklet: Basics of accounting and information processing, link: http://bookboon.com/fi/basics-of-accounting-information-processing-ebook
2. Income statement - http://www.investopedia.com/articles/04/022504.asp

Learning objective 2. What are the Main Components of a Balance Sheet?

The Balance Sheet
The balance sheet focuses on the accounting equation by revealing the economic resources owned by an entity and the claims against those resources (liabilites and owners' equity).
The balance sheet is prepared as of a specific date and it portray financial position or condition of an entity.

The balance sheet contains statements of assets, liabilities, and shareholders' equity.

Assets represent things of value that a company owns and has in its possession, or something that will be received and can be measured objectively. They are also called the resources of the business, some examples of assets include receivables, equipment, property and inventory. Assets have value because a business can use or exchange them to produce the services or products of the business.

Liabilities are the debts owed by a business to others–creditors, suppliers, tax authorities, employees, etc. They are obligations that must be paid under certain conditions and time frames. A business incurs many of its liabilities by purchasing items on credit to fund the business operations.

A company's equity represents retained earnings and funds contributed by its owners or shareholders (capital), who accept the uncertainty that comes with ownership risk in exchange for what they hope will be a good return on their investment.