Fundamentals Of Financial Statements

Running head: FUNDAMENTALS OF FINANCIAL STATEMENTS

Fundamentals of Financial Statements

Instructer: Cathy Young

University of Phoenix

MBA/503 Ð'- Introduction to Finance and Accounting

Week 1 Ð'- April 16, 2006

Introduction

Starting a business is a difficult task that requires a great deal of time, effort and patience. Businesses are usually started with the goal of becoming financially successful. In order to monitor the progress of reaching the goal of becoming financially

successful, the business must meticulously maintain financial statements. The financial statement can be regarded as an MRI of the businesses financial health. The financial statement communicates economic information about the business to individuals involved in making the cash flow decisions that impact the financial

health of the company. According to the Marshall, McManus and Viele (2003), "financial statements are the means of communicating economic information about the entity to individuals who want to make decisions and informed judgements about the entity."

This paper will evaluate a cookie making and selling business started by Connie Roche. This paper will use the Connie Rocha simulation to identify the transactions of the business and what information the financial

staement conveys about the transactions.

Information Conveyed in the Financial Statement

Connie Rocha started a cookie business in November 1986. She developed a business plan and hired people to assist her with her business. Connie became concerned about being able to properly maitain a good financial statement, so she decided she needed someone to maintain the financial accounts. During the simulation Aunt Connie's Cookies' financial statement for November and December are reviewed. The transactions in Connie's financial statement addressed the balance sheet, income statement and statement of cash flows.

Connie's initial transaction of depositing $80,000 into her account to start her business increased the company's equity and was added to balance the account. According to the University of Phoenix (2006), "the balance sheet is sometimes called the statement of financial position because it summarizes the entity's resources (assets), obligations (liabilities), and owners' claims (owners' equity)". Subsequent transactions included the purchase of Kitchen, office equipment, and supplies. These three transactions recorded in the financial statement will show Connie an increase in property which is an asset, at the same time reducing her cash which is also an asset. In the case of the purchase made through credit, the transaction is shown as an incease in liability through the increased accounts payable field. While the Purchase of supplies increased her debt, the purchase also added value to the business.

Expanding the Business

In one part of the scenarion Aunt Connie was seeking a loan to expand her business. This type of transaction can show income in advance. Aunt Connie can, in good faith, accept a future order from a client. Connie can show this transaction as future revenue through the "accounts recievable" portion of the financial statement, and as unearned revenue.

If Connie desired to borrow money against future sales, the above scenario can be used to show revenue to the bank that Connie is asking for the loan however, a bank may not be likely to lend Connie money