Page 143 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting

Notes 3. Statement of retained earnings: This statement explains the changes in a company’s retained
earnings over the reporting period. Retained earnings links the balance sheet to the income
statement. Retained earnings are increased by net income and decreased by net losses and
dividends paid to stockholders. There are some other possible increases or decreases to
retained earnings besides income (losses) and dividends. The income statement separately
itemizes revenues and expenses, which result from the company’s ongoing major or
central operations, and the gains and losses arising from incidental or peripheral
transactions. Certain irregular items (such as discontinued operations, extraordinary items,
effects of accounting changes) are presented separately, net of tax effect, at the end of the
statement. When revenues and gains exceed expenses and losses, net income is realized.
Net income for the period increases equity. The results of the firm’s operating activities
for the period as presented in the income statement provide information that can be used
to predict the amount, timing, and uncertainty of future cash flows. This statement is
useful to investors, creditors, and other users in determining the profit ability of operations.
The income statement must also show earnings per share (EPS), where the net income is
divided by the weighted average number of shares of common stock outstanding. Since
EPS scales income by the magnitude of the investment, it allows investors to compare
diverse companies of different sizes; hence, investors commonly use it as a summary
measurement of firm performance.
4. Statement of cash flows: These statements provide reports on a company’s cash flow
activities; particularly it’s operating, investing and financing activities. The statement of
cash flows consists of three sections: cash flows from operating activities, cash flows from
investing activities, and cash flows from financing activities. Information about key
investing and financing activities not resulting in cash receipts or payments in the period
must be provided separately. The statement of cash flow is prepared in accordance to
guidelines issued by Accounting Standard -3 (AS -3). According to that sum of net cash
flow from operating activity, net cash flow from investing activity and net cash flow from
financing activity is equal to net change in cash. The cash from operating activities reported
on the statement of cash flows must be reconciled to net income for the period. Because
GAAP requires accrual accounting methods in preparing financial statements, there may
be a significant difference between net income and cash generated by operations.

Did u know? What is the purpose of preparing cash flow statement?

The cash flow statement is used by creditors and investors to determine whether cash will
be available to meet debt and dividend payments.
5. Footnotes (Notes): Footnotes (notes) accompany these financial statements. To evaluate
the financial condition, the profitability, and cash flows of an entity, the user needs to
understand the statements and related notes. The footnotes to the financial statements are
used to present additional information about items included in the financial statements
and to present additional financial information. Footnotes are an integral part of financial
statements.
The financial statements of publicly owned companies also include an auditor’s report, indicating
that the statements have been audited by independent auditors. The auditor’s opinion is related
to fair presentation in conformity with GAAP.
The external financial statements required for not-for-profit organizations are similar to those
for business enterprises, except that there is no ownership component (equity) and no income.
Not-for-profit organizations present a statement of financial position, a statement of activities,
and a statement of cash flows. The financial statements must classify the organization’s net

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