1. Financial Statements for a Sole Proprietorship
Chpt 9

2. 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
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3. 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
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4. Income Statement
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5. Reporting a Loss
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6. 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
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7. Statement of Change in Owner’s Equity
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8. Statement of Change in Owner’s Equity showing a Net Loss
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9. 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
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10. 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
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11. 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.
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12. Pg 233

13. 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
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14. Current Assets – Current Liabilities = Working Capital
Ratio Analysis
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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

15. 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