Financial Statements
Financial statements are used to make a business decision based on a report of monetary information. Below are financial statements and examples of the statements on the right. The numerical examples on the right are for Company A that received a contribution in the amount of $35,000 from James to start the company. In the first month of operating in January 2021 the company purchased $350 equipment by credit card, paid $30,000 for land for future office site, made $1,900 in cash profits for their services of accounting, company paid $100 on the accounts payable for their equipment, paid $400 for office rent with $100 utilities, and company paid cash dividends back to investor James in the amount of $1,200.
1) Income Statement
An income statement is the earnings of a business for a period of time. So, to find the net income we subtract the total revenue from the total expenses. A net loss would be a negative result.
2) Retained Earnings
A statement of retained earnings details changes of the retained earnings for a specific period of time. This information is useful to show how much net income or loss the owner has for profit/loss. The retained earnings can be used to be reinvested into the company, pay debts, or the owner can take profit as personal income. If the owner takes these as personal income this will reduce the company earnings and are considered dividends paid out from the profit of the company.
In this example we see that the owner has taken money out of the company as a dividend.
3) Balance Sheet
A balance sheet shows the health of an organization as a snapshot in time. It is a statement of the assets, liabilities, and shareholders' equity. This will show what the company owns (assets) and what the company owes (liabilities). The overall formula for this is:
Assets = Liabilities + Shareholders' Equity
The balance sheet can be used to calculate financial ratios. Some of these ratios are debt-to-equity ratio and acid test ratio. Balance sheets are more static representation and is a snap shot in time. A more dynamic view of the organization's finances would be a cash flow statement.
4) Cash Flow Statement
Cash flow statement shows the amount of money going into the organization (positive) and the amount of money going out of the organization (negative). Not all financial transactions will be recorded here just ones involving cash receipts.
Cash that will be recorded are in three sections:
1) Operations: this involves the cash receipts for services and payments for expenses. In this section, accounts receivable will not be a cash account since cash was not received yet by the company.
2) Investment: this involves cash for purchasing/buying property/land or equipment. These types of purchases are typically called capital expenditures. When these occur there might be a large reduction in cash flow, which can be considered good from an investor perspective since the company is expecting growth.
3) Financing: this involves cash between the company and its owners / creditors. An organization that is paying back a loan will have cash recorded in this section. If the organization is currently paying money back to the creditor due to this loan the number will be negative.
