By the end of this lesson, the learner should be able to:
Identify and explain the uses of the four financial statements: the income statement, statement of changes in equity, balance sheet, and statement of cash flows.
Given a list of assets, liabilities, and shareholders’ equity, analyze transactions by using the accounting equation
Key topics covered in this lesson include:
Definition of Accounting
The Four Financial Statements
- Income Statement
- Statement of Changes in Equity
- Balance Sheet
- Statement of Cash Flows.
- The Accounting Equation
People wanting to start a business need to know more than the trade or skill they'll be providing. They need to know at least the basics of running a business. Accounting is the process of identifying, measuring, recording, and communicating economic activities to users so that they can see where the money is coming from, where it is going, and what decisions they can make about their business.
Relevance to Practice
The goal of accounting is to ensure information provided to decision makers is useful. To be useful, information must be relevant and faithfully represent a business’s economic activities. Accounting practices are guided by Generally Accepted Accounting Principles (GAAP), which are comprised of qualitative characteristics and principles.
Key Terms and Concepts
Generally Accepted Accounting Principles (GAAP) – accounting concepts or principles based on International Financial Reporting Standards (IFRS) for publicly accountable enterprises (PAE). Relevance and faithful representation are the primary qualitative characteristics. Comparability, verifiability, timeliness, and understandability are additional qualitative characteristics.
Financial Statements – Statements used to communicate financial information to external users.
Income Statement – Communicates information about a business’s financial performance by summarizing revenues less expenses over a period of time.
Statement of Changes in Equity – provides information about how the balances in Share capital and Retained earnings changed during a period.
Balance Sheet – shows a business’s assets, liabilities, and equity at a point in time.
Statement of Cash Flows (SCF) – explains how the balance in cash changed over a period of time by detailing the sources (inflows) and uses (outflows) of cash by type of activity
Assets – economic resources that provide future benefits to the business.
Liability – an obligation to pay an asset in the future.
Equity – the net assets owned by the owners (the shareholders).
The Financial Equation – shows that the total assets of a business must always equal the total claims against those assets by creditors and owners. The equation is expressed as: ASSETS = LIABILITIES + EQUITY
Instructional Strategies and Activities
Time: 3 minutes
Ask the students to think back to the first time they were paid to do something. Could be when they got an allowance, or babysat, or their first summer job. Then ask them to think of what they were going to do with the money. Finally, ask how they knew they had enough money to do what they wanted. Flash forward today. Now, they want to run their own business. How will they know if they have enough money to expand, or if they should wait?
Time: 2 minutes
Explain that this module will demonstrate how they can determine the financial state of their company, and present the objectives.
Presentation / Modeling / Demonstration
Time: 12 minutes
The demonstrations will use a fictitious company (called Big Dog Carworks Corp. in the source material), and give examples of the assets, liabilities, and equity of this company. Further demonstration will show how to use the four financial statements: the income statement, statement of changes in equity, balance sheet, and statement of cash flows
Guided Practice / Evaluation
Time: 14 minutes
Learners will be given examples of the four financial statements. They will then solve close-to-real-world problems using the appropriate statement.
Time: 2 minutes
Reiterate how the lesson covered the objectives.