Financial Statements for a Sole Proprietorship Chpt 9

Financial Statements Financial Statements – summarize the changes resulting from business transactions that occur during an accounting period. There are 4 Financial Statements Prepared Income Statement Balance Sheet The Statement of Changes in Owner’s Equity Cash Flows Pg 220

The Income Statement Income Statement reports the net income or net loss for a specific period of time. Sometimes called a profit-and-loss statement Sections of the report Heading Revenue for the period Expenses for the period The net income or loss for the period Pg 221

Income Statement Pg 222

Reporting a Loss Pg 223

Statement of Changes in Owner’s Equity Summarizes changes in the owner’s capital account as a result of business transactions that occur during the period Sections of the report Heading (3 lines answering Who, What, When) Beginning Capital, date Add: investments by Owner + net income Total increase in capital Subtotal Less: Withdrawals by Owner Ending Capital, date Pg 225

Statement of Change in Owner’s Equity Pg 226

Statement of Change in Owner’s Equity showing a Net Loss pg228

Getting Beginning Capital For a Statement of Owner’s Equity report on an existing business, the beginning number may not match the number on the worksheet. The best way to find the beginning balance is to go to the date on the beginning of the period in the ledger and take the number from there Pg 228

The Balance Sheet Balance Sheet is a report of the balances in the permanent accounts at the end of a period. (Assets, Liabilities, Owner’s Capital) What the business owns What the business owes What the business is worth Sometimes called a Statement of Financial Position It uses the Worksheet and Statement of Change in Owner’s Equity Pg 231

Preparing a Balance Sheet Fill in the heading (Who, What, When) Date is a single date in time not for period ending Copy Assets and Liabilities as they appear in the worksheet Total Assets and Liabilities Take Owner’s Equity from the Statement of Change in Owner’s Equity Add Liabilities and Owner’s Equity Compare Total Assets to Total Liabilities and Owner’s Equity. If the same double rule. Pg 232

Pg 233

Statement of Cash Flows The Statement of Cash Flows summarizes the following information: The amount of cash the business took in The source of the cash The amount of cash the business paid out The uses of the cash Pg 234

Current Assets – Current Liabilities = Working Capital Ratio Analysis Pg 235 Profitability Ratios – Used to evaluate the earning performance of the business during an accounting period. Return on Sales $1,150 (net income)/$2,650 (sales) = .434 or 43.3% Liquidity Measures – The ease of converting assets to cash Current assets – those used up or converted to cash during the normal operating cycle of the business (AR, Cash, Supplies) Current liabilities – debt of the business that must be paid within the next accounting period Working Capital – the amount by which current assets exceed current liabilities Current Assets – Current Liabilities = Working Capital

Ratio Analysis 2 Liquidity Ratio – the ability of a business to pay its current debts as they become due and to provide for unexpected needs of cash Current Ratio – relationship between current assets and current liabilities Current Assets/Current Liabilities = Current Ratio $22,575/$11,725 = 1.92 or 1.9:1 A ratio of 2:1 or higher is considered favorable by creditors Quick Ratio – relationship between short-term assets (cash and A/R) and current liabilities. Cash and Receivables/Current Liabilities = Quick Ratio $22,575/$11,725 = 1.92:1