Financial Statements for a Sole Proprietorship Making Accounting Relevant Financial statements provide information to owners and managers about how the business is changing as a result of operations. Making Accounting Relevant Financial statements provide information to owners and managers about how the business is changing as a result of operations.

Why It’s Important Financial statements provide the essential financial information necessary for sound management decisions. The income statement communicates important details about profitability to a business owner. Why It’s Important Financial statements provide the essential financial information necessary for sound management decisions. The income statement communicates important details about profitability to a business owner. Section 1The Income Statement (con’t.) Key Terms  financial statements  income statement Key Terms  financial statements  income statement

The Seventh Step in the Accounting Cycle: Financial Statements The primary financial statements prepared for a sole proprietorship are the income statement and the balance sheet. A third statement, the statement of changes in owner’s equity, is also often prepared. The Seventh Step in the Accounting Cycle: Financial Statements The primary financial statements prepared for a sole proprietorship are the income statement and the balance sheet. A third statement, the statement of changes in owner’s equity, is also often prepared. Section 1The Income Statement (con’t.)

The Income Statement The income statement reports the net income or net loss for the period. The Income Statement The income statement reports the net income or net loss for the period. Section 1The Income Statement (con’t.)

Why It’s Important One way to evaluate how a business is performing is by tracking the increase or decrease in owner’s equity. Why It’s Important One way to evaluate how a business is performing is by tracking the increase or decrease in owner’s equity. Section 2 The Statement of Changes in Owner’s Equity Section 2 The Statement of Changes in Owner’s Equity Key Terms  statement of changes in owner’s equity Key Terms  statement of changes in owner’s equity

The Statement of Changes in Owner’s Equity Statement of changes in owner’s equity summarizes changes in the owner’s capital account as a result of business transactions during the period. The Statement of Changes in Owner’s Equity Statement of changes in owner’s equity summarizes changes in the owner’s capital account as a result of business transactions during the period. Section 2The Statement of Changes in Owner’s Equity (con’t.)

The Statement of Changes in Owner’s Equity (con’t.) The information to prepare this statement is found in three places: The Statement of Changes in Owner’s Equity (con’t.) The information to prepare this statement is found in three places: Section 2The Statement of Changes in Owner’s Equity (con’t.)  the work sheet  the work sheet  the income statement  the income statement  the owner’s capital account in the general ledger  the owner’s capital account in the general ledger

Why It’s Important The balance sheet reports the financial position of a business at a specific point in time. Why It’s Important The balance sheet reports the financial position of a business at a specific point in time. Section 3The Balance Sheet Key Terms  balance sheet  report form  ratio analysis  profitability ratio  return on sales Key Terms  balance sheet  report form  ratio analysis  profitability ratio  return on sales  liquidity ratio  current ratio  current assets  current liabilities  quick ratio  liquidity ratio  current ratio  current assets  current liabilities  quick ratio

The Balance Sheet The balance sheet is a report of the balances in all asset, liability, and owner’s equity accounts at the end of the period. The Balance Sheet The balance sheet is a report of the balances in all asset, liability, and owner’s equity accounts at the end of the period. Section 3The Balance Sheet (con’t.)

The Balance Sheet (con’t.) Section 3The Balance Sheet (con’t.)

Ratio Analysis Section 3The Balance Sheet (con’t.)  Ratio analysis involves the comparison of two amounts on a financial statement and the evaluation of the relationship between these amounts.  Used to determine the financial strength, activity, or debt- paying ability of a business.  Ratio analysis involves the comparison of two amounts on a financial statement and the evaluation of the relationship between these amounts.  Used to determine the financial strength, activity, or debt- paying ability of a business.

Return on Sales Section 3The Balance Sheet (con’t.)  Determine the portion of each sales dollar that represents profit. Net Income$1,150 net income = = =.434 or 43.4% Sales$2,650 sales

Current Ratio Section 3The Balance Sheet (con’t.)  Relationship between current assets and current liabilities. Current Assets$ 37,775 Current Liabilities$11,725 Current Assets$ 37,775 Current Liabilities$11,725 =Current Ratio=3.22 or 3.2:1

Quick Ratio Section 3The Balance Sheet (con’t.)  The relationship between short term assets and current liabilities. Cash and Receivables$ 22,575 Current Liabilities$11,725 Cash and Receivables$ 22,575 Current Liabilities$11,725 =Quick Ratio=1.92:1