Financial Statements

Financial statements are prepared immediately after the adjusted trial balance. Knowing how to record transactions, make adjusting entries, and create trial balances gives you a greater under‐standing of the information financial statements contain.

Income statement. The income statement, which is sometimes called the statement of earnings or statement of operations, lists all revenue and expense account balances and shows the company's net income or net loss for a particular period of time. This statement may be prepared using a single‐step or multiple‐step format. The single‐step format puts revenue and expense accounts into separate groups. Then, total expenses are subtracted from total revenues to determine the net income or loss.

The Greener Landscape Group Income Statement For the Month Ended April 30,20X2

Revenues

    Lawn Cutting Revenue

$845

Expenses

    Wages Expense

$280

    Depreciation Expense–Vehicles

200

    Insurance Expense

100

    Interest Expense

79

    Depreciation Expense–Equipment

35

    Advertising Expense

35

    Gas Expense

30

    Supplies Expense

25

      Total Expenses

784

Net Income

$ 61

The multiple‐step format uses the same accounts and balances but separates the cost of services provided from operating expenses and also includes a category for other types of income and expense.

The Greener Landscape Group Income Statement For the Month Ended April 30,20X2

Revenues

    Lawn Cutting Revenue

$845

Cost of Services Provided

    Wages Expense

$280

    Depreciation Expense–Vehicles

200

    Insurance Expense

100

    Depreciation Expense–Equipment

35

    Gas Expense

30

      Total Cost of Services Provided

645

Gross Profit

200

Operating Expenses

    Advertising Expense

35

    Supplies Expense

25

      Total Operating Expenses

60

Operating Income

140

Other Income/(Expense), Net

    Interest Expense

(79)

Net Income

$ 61

Companies may use slightly different categories for expenses, but the overall structure for this type of income statement is essentially the same. For example, merchandising companies include a category for the cost of goods sold, and many companies break operating expenses into two subcategories: selling expenses and general and administrative expenses

Statement of owner's equity. The statement of owner's equity shows activity in the owner's equity accounts for a particular period of time. The capital account's opening balance is followed by a list of increases and decreases, and the account's closing balance is calculated from this information. Increases include investments made by the owner and net income. Decreases include owner withdrawals and net loss. Since the income statement already shows all revenue and expense account balances, only the company's net income or loss appears on this statement.

The Greener Landscape Group Statement of Owner's Equity For the Month Ended April 30,20X2

J. Green, Capital, April 1

$ 0

Additions

    Investments

$15,000

    Net Income

61

15,061

Withdrawals

(50)

J. Green, Capital, April 30

$15,011

Balance sheet. The balance sheet lists the asset, liability, and owner's equity balances at a specific time. It proves that the accounting equation (Assets = Liabilities + Owner's Equity) is in balance. The ending balance on the statement of owner's equity is used to report owner's equity on the balance sheet.

The Greener Landscape Group Balance Sheet April 30,20X2

Assets

    Cash

$ 6,355

    Accounts Receivable

200

    Supplies

25

    Prepaid Insurance

1,100

    Vehicles

$15,000

    Less: Accumulated Depreciation

(200)

    Equipment

3,000

    Less: Accumulated Depreciation

(35)

17,765

      Total Assets

$25,445

Liabilities and Owner's Equity

Liabilities

    Accounts Payable

$ 50

    Wages Payable

80

    Interest Payable

79

    Unearned Revenue

225

    Notes Payable

10,000

      Total Liabilities

10,434

Owner's Equity

    J. Green, Capital

15,011

      Total Liabilities and Owner's Equity

$25,445

To aid readers, most companies prepare a classified balance sheet, which categorizes assets and liabilities. The standard asset categories on a classified balance sheet are current assets; property, plant, and equipment; long‐term investments; and intangible assets. Liabilities are generally divided into current liabilities and long‐term liabilities.

The Greener Landscape Group Balance Sheet April 30,20X2

ASSETS

Current Assets

    Cash

$ 6,355

    Accounts Receivable

200

    Supplies

25

    Prepaid Insurance

1,100

      Total Current Assets

7,680

Property, Plant, and Equipment

    Vehicles

$15,000

    Less: Accumulated Depreciation

(200)

$14,800

    Vehicles

3,000

    Less: Accumulated Depreciation

(35)

2,965

17,765

      Total Assets

$25,445

LIABILITIES AND OWNER'S EQUITY

Current Liabilities

    Accounts Payable

$ 50

    Wages Payable

80

    Interest Payable

79

    Unearned Revenue

225

      Total Current Liabilities

434

Long-Term Liabilities

    Notes Payable

10,000

      Total Liabilities

10,434

Owner's Equity

    J. Green, Capital

15,011

      Total Liabilities and Owner's Equity

$25,445

Statement of cash flows. The statement of cash flows places all cash exchanges into one of three categories—operating, investing, or financing—to calculate the net change in cash during the accounting period. Operating cash flows arise from day‐to‐day business operations such as inventory purchases, sales revenue, and payroll expenses. Note that interest and dividends received from long‐term assets (investing activities) and interest payments for long‐term loans (financing activities) appear on the income statement, so they would appear as operating cash flows on the statement of cash flows. Income taxes are also included with operating cash flows. Investing cash flows relate to cash exchanges involving long‐term assets, such as the purchase or sale of land, buildings, equipment, or long‐term investments in another company's stock or debt. Financing cash flows involve changes in long‐term liabilities and owner's equity. Examples include the receipt or early retirement of long‐term loans, the sale or repurchase of stock, and the payment of dividends to shareholders.

The Greener Landscape Group Statement of Cash Flows For the Month Ended April 30,20X2

Cash Flows from Operating Activities

    Cash from Customers

$ 870

    Cash to Employees

(200)

    Cash to Suppliers

(1,265)

      Cash Flow Used by Used by Operating Activities

(595)

Cash Flows from Investing Activities

    Purchase of Vehicle

(5,000)

    Purchase of Equipment

(3,000)

      Cash Flow Used by Investing Activities

(8,000)

Cash Flows from Financing Activities

    Investment by Owner

15,000

    Withdrawal by Owner

(50)

      Cash Flow Provided by Financing Activities

14,950

Net Increase in Cash

6,355

Beginning Cash, April 1

0

Ending Cash, April 30

$ 6,355

As its name implies, this statement focuses on cash flows rather than income. For example, the $870 Mr. Green receives from customers includes unearned revenues and excludes accounts receivable. At the bottom of the statement, the net increase or decrease in cash is used to reconcile the accounting period's beginning and ending cash balances. Significant noncash transactions likely to impact cash flow in other accounting periods must also be disclosed, but this does not occur in the body of the statement. The footnote in the illustration shows one way to accomplish such disclosures.

According to current accounting standards, operating cash flows may be disclosed using either the direct or the indirect method. The direct method simply lists operating cash flows by type of cash receipt and payment. The direct method is straightforward and easy to interpret, but only a small percentage of companies actually use this method. The indirect method reports operating cash flows by listing the company's net income or loss and then adjusting this figure because net income is not calculated on the cash basis.