Understanding Financial Statements

The financial statements shown on the next several pages are for a sole proprietorship, which is a business owned by an individual. Corporate financial statements are slightly different. The four basic financial statements are the income statement, statement of owner's equity, balance sheet, and statement of cash flows. The income statement, statement of owner's equity, and statement of cash flows report activity for a specific period of time, usually a month, quarter, or year. The balance sheet reports balances of certain elements at a specific time. All four statements have a three‐line heading in the following format:



Income statement. The income statement, which is sometimes called the statement of earnings or statement of operations, is prepared first. It lists revenues and expenses and calculates the company's net income or net loss for a period of time. Net income means total revenues are greater than total expenses. Net loss means total expenses are greater than total revenues. The specific items that appear in financial statements are explained later.

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


 | Revenues |   | 
 |     Lawn Cutting Revenue |   | $845
 | Expenses |   | 
 |     Wages Expense | $280 | 
 |     Depreciation Expense | 235 | 
 |     Insurance Expense | 100 | 
 |     Interest Expense | 79 | 
 |     Advertising Expense | 35 | 
 |     Gas Expense | 30 | 
 |     Supplies Expense | 25  | 
 |       Total Expenses |   | 784
 | Net Income |   | $ 61 

Statement of owner's equity. The statement of owner's equity is prepared after the income statement. It shows the beginning and ending owner's equity balances and the items affecting owner's equity during the period. These items include investments, the net income or loss from the income statement, and withdrawals. Because the specific revenue and expense categories that determine net income or loss appear on the income statement, the statement of owner's equity shows only the total net income or loss. Balances enclosed by parentheses are subtracted from unenclosed balances. 

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 shows the balance, at a particular time, of each asset, each liability, and owner's equity. 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 |   | 
 | Current Assets |   | 
 |     Cash |   | $ 6,355
 |     Accounts Receivable |   | 200
 |     Supplies |   | 25
 |     Prepaid Insurance |   | 1,100 
 |       Total Current Assets |   | 7,680
 | Property, Plant, and Equipment |   | 
 |     Equipment | $18,000 | 
 |     Less: Accumulated Depreciation | (235)  | 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 tracks the movement of cash during a specific accounting period. It assigns all cash exchanges to one of three categories—operating, investing, or financing—to calculate the net change in cash and then reconciles the accounting period's beginning and ending cash balances. As its name implies, the statement of cash flows includes items that affect cash. Although not part of the statement's main body, significant non‐cash items must also be disclosed. 

According to current accounting standards, operating cash flows may be disclosed using either the direct or the indirect method. The direct method simply lists the net cash flow by type of cash receipt and payment category. For purposes of illustration, the direct method appears below. 

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 Operating Activities | (595) 
 | Cash Flows from Investing Activities | 
 |     Purchases of Equipment | (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 

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