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CHAPTER F4: REPORTING EARNINGS AND FINANCIAL POSITION I. The Purpose of Financial Statements A. Financial statements are the primary format organizations use to report general-purpose accounting information to external decision makers. B. Income Statement 1. An income statement (sometimes called an earnings statement or a profit and loss [P&L] statement) reports an organization’s revenues and expenses for a fiscal period. 2. Presents operating results on an accrual basis. C. Balance Sheet 1. A balance sheet (sometimes called a statement of financial position or statement of financial condition) reports the balances of the asset, liability, and owners’ equity accounts at a particular date. 2. The balance sheet presents the amount of resources at a particular date and the sources of financing used to acquire resources. D. Statement of Cash Flows 1. The statement of cash flows identifies the primary activities of a fiscal period that result in cash inflows and outflows for a company. 2. The statement provides information that enables creditors, investors, and other users to assess the company’s ability to meet cash requirements. E. Statement of Stockholders’ Equity 1. The Statement of Stockholders’ Equity is necessary due to the variety and complexity of ownership transactions. 2. Dividends are distributions of cash or stock by a corporation to its shareholders. II. The Income Statement A. The income statement reports the revenue and expense account balances and the net income for the period. 1. The income statement for Cookie Company is illustrated in Exhibit 1 . 2. Net income is not cash. B. Gross Profit 1. Gross profit is the difference between the selling price of goods (or services) sold to customers during a period and the cost of goods sold (or cost of services sold ). 2. Cost of Goods Sold for a merchandising company is the cost of merchandise inventory sold during the period. 3. Cost of Goods Sold for a manufacturing company is based on the manufacturing product costs of the goods sold during the period. 4. Cost of Services Sold is the cost of resources consumed directly in producing the services sold during a period. C. Other Operating Expenses and Operating Income 1. The second section of an income statement lists operating expenses other than cost of goods sold or cost of services sold. 2. Operating expenses are the costs of resources consumed as
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part of operating activities not directly associated with specific goods and services.
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