Components that Supplement the

Financial Statements in an
Annual Report

• Managements Discussion and Analysis

• Notes to Financial Statements

• Auditor’s report
Management’s Discussion and
Analysis covers three items:
1. Liquidity
2. Capital resources
3. Results of operations
Management’s Discussion and
Analysis
 Notes to Financial Statements
• Explanatory notes and supplementary
schedules
• Clarifies information in financial statements
• Expands with additional detail
• Describes accounting policies
• Explains uncertainties and contingencies
Notes to Financial Statements
 Auditor’s Report
• Certified Public Accountant – CPA
• Auditor (CPA) conducts independent
examination of financial statements
• Fair representation?
• Follow generally accepted accounting
principles (GAAP)?
• Unqualified opinion
Auditor’s Report
 Monetary Unit Assumption

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• Only what can be expressed in money

• Assumes unit of measure stays constant
 Economic Entity Assumption

• Economic events identified with unit

• Separately identified apart from owner
 Time Period Assumption

• Divide life of business into artificial time

periods
• Monthly, quarterly, yearly
 Going Concern Assumption

• Divide life of business into artificial time

periods
• Monthly, quarterly, yearly
 Cost Principle

• Assets must be recorded at cost

• Verifiable vs. subjective
 Full Disclosure Principle

• All circumstances and events that would

make a difference to users must be
disclosed
Do It Problem: CSU Corporation
Service revenue $17,000 • CSU begins on
Accounts receivable $4,000
Accounts payable $2,000 Jan. 1, 2005
Building rental expense
Notes payable
$9,000
$5,000
• For year ended
Common stock $10,000 Dec. 31, 2005,
Retained earnings ?
Equipment $16,000
prepare
Insurance expense $1,000 – Income statement
Supplies $1,800
Supplies expense $200 – Retained earnings
Cash $2,000 statement
Dividends $600
– Balance sheet
Do It Problem: CSU Corporation
Service revenue $17,000 • Action step 1:
Accounts receivable $4,000
Accounts payable $2,000 Report the
Building rental expense $9,000 revenues &
Notes payable $5,000
Common stock $10,000 expenses for a
Retained earnings ? period of time,
Equipment $16,000
Insurance expense $1,000 Income Statement
Supplies $1,800
Supplies expense $200
Cash $2,000
Dividends $600
Do It Problem: CSU Corporation
Service revenue $17,000 • Action step 1:
Accounts receivable $4,000
Accounts payable $2,000 Report the
Building rental expense $9,000 revenues &
Notes payable $5,000
Common stock $10,000 expenses for a
Retained earnings ? period of time,
Equipment $16,000
Insurance expense $1,000 Income Statement
Supplies $1,800
Supplies expense $200
Cash $2,000
Dividends $600
Do It Problem: CSU Corporation

Create the heading

Name of the
company CSU Corporation
Name of the
Income Statement
statement
For the Year Ended December 31, 2005
Period
of time
Do It Problem: CSU Corporation
CSU Corporation
Income Statement
For the Year Ended December 31, 2005
Revenues
Service revenue $17,000

List the revenues

Use dollar signs to denote U.S. currency
Do It Problem: CSU Corporation
CSU Corporation
Income Statement
For the Year Ended December 31, 2005
Revenues
Service revenue $17,000
Expenses
Rent expense $9,000
Insurance expense 1,000
Supplies expense 200
________
Total expenses 10,200
________
List the expenses & underline sub-totals
Do It Problem: CSU Corporation
CSU Corporation
Income Statement
For the Year Ended December 31, 2005
Revenues
Service revenue $17,000
Expenses
Rent expense $9,000
Insurance expense 1,000
Supplies expense 200
________
Total expenses 10,200
________
Net Income $ 6,800
________
________
Calculate net income: revenues - expenses
Do It Problem: CSU Corporation
Service revenue $17,000 • Action step 2:
Accounts receivable $4,000
Accounts payable $2,000 Show amounts
Building rental expense $9,000 and causes of
Notes payable $5,000
Common stock $10,000 changes in
Retained earnings ? retained earnings
Equipment $16,000
Insurance expense $1,000 • Use Net Income
Supplies $1,800
Supplies expense $200
from Income
Cash $2,000 Statement
Dividends $600
• Dividends
Do It Problem: CSU Corporation
CSU Corporation
Retained Earnings Statement
For the Year Ended December 31, 2005

Retained earnings, January 1 $ 0

Add: Net income 6,800

________
6,800
Less: Dividends 600
________
Retained earnings, Dec. 31 $ 6,800
________
________
Do It Problem: CSU Corporation
Service revenue $17,000 • Action step 3:
Accounts receivable $4,000 Present assets and
Accounts payable $2,000
Building rental expense $9,000 claims to those
Notes payable $5,000 assets at a
Common stock $10,000
Retained earnings $6,800 specific point in
Equipment $16,000 time on the
Insurance expense $1,000
Supplies $1,800 Balance Sheet
Supplies expense
Cash
$200
$2,000
• Use $6,800
Dividends $600 Retained earnings
from previous
statement!
 CSU CORPORATION
Balance Sheet
December 31, 2005
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000
Stockholders’ equity
Common stock $10,000
Retained earnings 6,800
Total Stockholders’ equity 16,800
Total liabilities and stockholders’ equity $23,800