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 Prepared1. Income Statement2. Balance Sheet3. The Statement of Changes in Owner’s Equity4. Cash Flows

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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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Income Statement

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Reporting a Loss

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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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Statement of Change in Owner’s Equity

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

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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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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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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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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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Ratio Analysis• 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

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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