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Maximizing Profits through Understanding Financial Statements

Explore the connection between the Income Statement and Balance Sheet, and learn how they relate to Owner's Equity. Understand how Net Income impacts the company's value and discover the significance of Capital, Revenue, Expenses, and Drawings. Enhance your financial literacy with practical insights into financial statements. This knowledge is essential for anyone interested in financial management.

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Maximizing Profits through Understanding Financial Statements

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  1. Relating Profit to OE The relationship between the Income Statement and the Balance Sheet Reference p. 136 Chapter 5, IS & BS relationship

  2. First think about… • Who uses the financial statements? • What does a balance sheet tell the user? • What does the income statement tell the user? • How are the balance sheet and the income statement “connected”? Chapter 5, IS & BS relationship

  3. Chapter 5, IS & BS relationship

  4. Chapter 5, IS & BS relationship

  5. DEFINITION CAPITAL REVENUE EXPENSES DRAWINGS (or dividends) Net Income = Net Loss = EFFECT ON OE RECALL: the four different accounts in the owner’s equity section Chapter 5, IS & BS relationship

  6. Net Income and OE • As Owner’s Equity is the value of the company, if the company has a net income it will ___________, the OE. Conversely, if the company has a net loss, the losses will ___________ the OE. Drawings will always ___________ the OE. Chapter 5, IS & BS relationship

  7. Net Income and OE Relationship of Income Statement to Balance Sheet: This makes sense… if your company has a profit of $10,000,000, you would expect the value (OE) of the company to increase by $10,000,000 Chapter 5, IS & BS relationship

  8. Chapter 5, IS & BS relationship

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