1. The Income Statement Balance Sheet –The financial condition of the company on a certain date (a snapshot on that date) –What is OWNED and what is OWED –The format is the Fundamental Accounting Equation Income Statement –The financial performance of the company over a period of time (the accounting period) –Changes in Revenue accounts and Expense accounts (profit or loss over the period) –The format is Revenues - Expenses = Profit (Loss)

3. Revenues and Gross Profit REVENUES – COGS = GROSS PROFIT

4. Operating Expenses Operating Expenses are those expenses required for general operation of a business Gross Profit – Total Operating Expenses = Operating Profit

5. Other Income and Expenses  Net Income =  Retained Earnings

6. Asset + - = Liabilities - + Owners’ Equity -+ + A = L + OE -+-+ +- INVESTED CAPITALRETAINED EARNINGS EXPENSES REVENUES

7. Accrual vs. Cash Basis Accrual accounting records Revenues and Expenses WHEN THEY OCCUR regardless of when cash is paid. –Revenues are recorded when goods or services are delivered. –Expenses are recorded when the goods or services are received. –Revenues and Expenses are better matched to the same accounting period. Cash Basis accounting records Revenues and Expenses WHEN CASH is exchanged. –Cash Basis is most common in small businesses and our personal lives.

8. Who Can Use the Cash Method? Although the IRS allows all businesses to use the accrual method of accounting, most small businesses can instead use the cash method for tax purposes. The cash method can offer more flexibility in tax planning because you can sometimes time your receipt of revenue or payments of expenses to shift these items from one tax year to another. However, some businesses must use the accrual method: corporations that are not S corporations and partnerships that have at least one corporation (other than an S corporation) as a shareholder. There are some exceptions to these restrictions — the cash method is available for farming businesses and entities (including corporations) with average annual gross receipts of less than five million dollars for all prior years. Tax shelters may never use the cash method. If your business has inventories, you must use the accrual method, at least for sales and merchandise purchases.