A Balance Sheet Assets Current assets: Cash . . . . . . . . . $34,000 A/R (net) . . . . . .$80,000 Inventory . . . . .$170,000 PPE…………….$40,000 Less: Acc. Dep...($4,000) Total assets . . . .$320,000 Source: Inn, Kaw, Hoots, LLP 13 Dark Alley Dr. Fargo, ND Liabilities and Owners’ Equity Current liabilities: Short-term debt . . . . . . . . . . . $20,000 Accounts payable . . . . . . . . . .$35,000 Other accrued liabilities . . . $12,000 Long-term debt . . . . . . . . . . . .$50,000 Total liabilities . . . . . . . . . . . $117,000 Owners’ equity . . . . . . . . . . $203,000 Total liabilities and owners’ equity . . . . . . . . . . $320,000 DECEMBER 31, 2005

Income or "P&L" Statement Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,200,000 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .($850,000) Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $350,000 Selling, general, and administrative expenses . . . . . . . . . . . . . . . . ($311,000) Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$39,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($9,000) Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .($12,000) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$18,000 Net income per share of common stock outstanding . . . . . . . . . . . . . . $ 1.80 The principal purpose of the income statement is to answer the question: “Did the entity operate at a profit for the period of time under consideration?” DECEMBER 31, 2005

Income Statement Net sales Cost of goods sold Gross profit represent the amount of sales of merchandise to customers, less the amount of sales originally recorded but canceled because the merchandise was subsequently returned by customers for one reason or another. The sales amount is frequently called sales revenue, or just revenue. Revenue results from selling a product or service to a customer. Cost of goods sold represents the total cost of merchandise removed from inventory and delivered to customers as a result of sales. This is shown as a separate expense because of its significance, and because of the desire to show gross profit as a separate item. Gross profit is the difference between net sales and cost of goods sold and represents the seller’s maximum amount of “cushion” from which all other expenses of operating the business must be met before it is possible to have net income. Selling, general, and administrative expenses represent the operating expenses of the entity. In some income statements, these expenses will not be lumped together but will be reported separately for each of several operating expense categories, such as wages, advertising, and depreciation. DECEMBER 31, 2005

Income Statement Income from operations represents one of the most important measures of the firm’s activities. Income from operations can be related to the assets available to the firm to obtain a useful measure of management’s performance. Interest expense represents the cost of using borrowed funds. This item is reported separately because it is a function of how assets are financed, not how assets are used. Income taxes is shown after all of the other income statement items have been reported because income taxes are a function of the firm’s income before taxes. Net Income Money owed to the instructor of this class for teaching you all of this rubbish! Net income per share of common stock outstanding is reported as a separate item at the bottom of the income statement because of its significance in evaluating the market value of a share of common stock. DECEMBER 31, 2005

Change In O/E Paid-In Capital: Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ –0– Common stock, par value, $10; 50,000 shares authorized, 10,000 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $90,000 Balance, 31 December, 20XX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $190,000 Retained Earnings: Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ –0– Net income for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,000 Less: Cash dividends of $.50 per share . . . . . . . . . . . . . . . . . . . . . . . . . . .($5,000) Balance, 31 December 20XX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$13,000 Total owners’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$203,000 The statement of changes in owners’ equity shows the detail of owners’ equity and explains the changes that occurred in the components of owners’ equity during the year. DECEMBER 31, 2005

Cash Flow Statement DECEMBER 31, 2005 Cash Flows from Operating Activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,000 Add (deduct) items not affecting cash: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …$4,000 Increase in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..($80,000) Increase in merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . .($170,000) Increase in current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$67,000 Net cash used by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . ...$(161,000) Cash Flows from Investing Activities: Cash paid for equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($40,000) Cash Flows from Financing Activities: Cash received from issue of long-term debt . . . . . . . . . . . . . . . . . . . . . . . $50,000 Cash received from sale of common stock . . . . . . . . . . . . . . . . . . . . . . . $190,000 Payment of cash dividend on common stock . . . . . . . . . . . . . . . . . . . . . . .($5,000) Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . $235,000 Net increase in cash for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,000 The purpose of the statement of cash flows is to identify the sources and uses of cash during the year. This objective is accomplished by reporting the changes in all of the other balance sheet items. Because of the equality that exists between assets and liabilities plus owners’ equity, the total of the changes in every other asset and each liability and element of owners’ equity will equal the change in cash. NOTE THE CASH BALANCE HERE AND ON THE BALANCE SHEET!!!! DECEMBER 31, 2005

Cash Flow Statement Explanations Operating Activities: Depreciation expense is added back to net income because, even though it was deducted as an expense in determining net income, depreciation expense did not require the use of cash. The increase in accounts receivable is deducted because this reflects sales revenues, included in net income, that have not yet been collected in cash. The increase in merchandise inventory is deducted because cash was spent to acquire the increase in inventory. The increase in current liabilities is added because cash has not yet been paid for the products and services that have been received during the current fiscal period. Cash flows from Investing Activities show the cash used to purchase long-lived assets. Cash flows from Financing Activities include amounts raised from the sale of long term debt and common stock, and dividends paid on common stock. DECEMBER 31, 2005