Financial Statements Introduction to Business

Also referred to as the statement of financial position, a company’s balance sheet provides information on what the company is worth from a book value perspective. The balance sheet is broken into three categories and provides summations of the company’s assets, liabilities, and shareholders’ equity on a specific date. Since this whole analysis was based on cash transactions, our statement of financial statements are typically prepared in the following order cash flows won’t be any different than our income statement above. Using the information in the trial balance, we can create our income statement, which summarizes the company’s revenues and expenses. Prepare your cash flow statement last because it takes information from all of your other financial statements. Your income statement gives you insight into your company’s income and expenses.

Cash from operations includes any changes made in cash accounts receivable, depreciation, inventory, and accounts payable. These transactions also include wages, income tax payments, interest payments, rent, and cash receipts from the sale of a product or service. As you know by now, the income statement breaks down all of your company’s revenues and expenses.

Statement of Owner’s Equity

Business owners use another financial report—statement of retained earnings—less frequently. Larger companies might produce a variety of other financial statements. Closing entries transfer the balances from the revenue and expense accounts into Retained Earnings in preparation for the new month. The goal of journalizing, posting to the ledgers, and preparing the trial balance is to gather the information necessary to produce the financial statements. The time period concept requires companies produce the financial statements on a regular basis over the same time interval, such as a month or year.

As was just stated, the typical accounting cycle is a year, a month, or perhaps a quarter. Once the current cycle is completed, the same recording and reporting activities are then repeated in the next period of time of equal length. The operating portion shows cash received from making sales as part of the company’s operations during that period. It also shows the operating cash outflows that were spent to make those sales. Generally, a comprehensive analysis of the balance sheet can offer several quick views.

Example of a Cash Flow Statement

This information ties back to a balance sheet for the same period; the ending balance on the change of equity statement equals the total equity reported on the balance sheet. Review every entry and reconcile all data, matching your records with bank statements and other external documents. Double-check your math for gross profit, make sure your recorded income is right, and confirm that what you’ve written down for debts and taxes matches up.

• These statements are fundamental for assessing a company’s financial health, enabling informed decision-making, and identifying areas for growth and improvement.
• Therefore, key ratios used for analyzing the income statement include gross margin, operating margin, and net margin as well as tax ratio efficiency and interest coverage.
• The statement of cash flows classifies cash receipts and disbursements as operating, investing, and financing cash flows.
• The problem is that the $500 in June became a part of the July running total.
• Other income could include gains from the sale of long-term assets such as land, vehicles, or a subsidiary.