Financial Statements for a Sole Proprietorship Why It’s Important Financial statements provide the essential financial information necessary for sound management decisions. Financial statements provide information to owners and managers about how the business is changing as a result of operations. Why It’s Important Financial statements provide the essential financial information necessary for sound management decisions. Financial statements provide information to owners and managers about how the business is changing as a result of operations.

The Seventh Step in the Accounting Cycle: Financial Statements The primary financial statements prepared for a sole proprietorship are the income statement and the balance sheet. A third statement, the statement of changes in owner’s equity, is also often prepared. The Seventh Step in the Accounting Cycle: Financial Statements The primary financial statements prepared for a sole proprietorship are the income statement and the balance sheet. A third statement, the statement of changes in owner’s equity, is also often prepared.

The Income Statement The income statement reports the net income or net loss for the period. The income statement communicates important details about profitability to a business owner The Income Statement The income statement reports the net income or net loss for the period. The income statement communicates important details about profitability to a business owner

The Income Statement with multiple revenue accounts and a Net Loss

The Statement of Changes in Owner’s Equity One way to evaluate how a business is performing is by tracking the increase or decrease in owner’s equity. The statement of changes in owner’s equity summarizes changes in the owner’s capital account as a result of business transactions during the period. The Statement of Changes in Owner’s Equity One way to evaluate how a business is performing is by tracking the increase or decrease in owner’s equity. The statement of changes in owner’s equity summarizes changes in the owner’s capital account as a result of business transactions during the period.

Preparing The Statement of Changes in Owner’s Equity The information to prepare this statement is found in three places: Preparing The Statement of Changes in Owner’s Equity The information to prepare this statement is found in three places:  the work sheet  the work sheet  the income statement  the income statement  the owner’s capital account in the general ledger  the owner’s capital account in the general ledger

Statement of Changes in Owner’s Equity with Net Loss

Preparing The Statement of Changes in Owner’s Equity

The Balance Sheet The balance sheet is a report of the balances in all asset, liability, and owner’s equity accounts at the end of the period. The balance sheet reports the financial position of a business at a specific point in time. The Balance Sheet The balance sheet is a report of the balances in all asset, liability, and owner’s equity accounts at the end of the period. The balance sheet reports the financial position of a business at a specific point in time.

The Balance Sheet The balance sheet represents the basic accounting equation; thus, the assets section total must equal the total of the liabilities and owner’s equity sections. Assets = Liabilities + Owner’s Equity Assets = Liabilities + Owner’s Equity

The Balance Sheet Remember: The capital amount is the updated amount; from the Statement of Changes in Owner’s Equity

Headings on Financial Statements or Statement of Changes in Owner’s Equity

Ratio Analysis  Ratio analysis involves the comparison of two amounts on a financial statement and the evaluation of the relationship between these amounts.  Used to determine the financial strength, activity, or debt- paying ability of a business.  Ratio analysis involves the comparison of two amounts on a financial statement and the evaluation of the relationship between these amounts.  Used to determine the financial strength, activity, or debt- paying ability of a business.

Profitability Ratios Used to evaluate the earnings performance of the business during the accounting period. Return on Sales Profitability Ratios Used to evaluate the earnings performance of the business during the accounting period. Return on Sales

 Allows business owners to examine the portion of each sales dollar that represents profit. Net Income$1,150 net income = = =.434 or 43.4% Sales$2,650 sales

Liquidity Ratios A measure of the ability of a business to pay its current debts as they become due and to provide for unexpected needs of cash. Current Ratio Quick Ratio Current Assets – those used up or converted to cashing during the normal operating cycle of the business Current Liabilities – debts of the business that must be paid within the next accounting period Liquidity Ratios A measure of the ability of a business to pay its current debts as they become due and to provide for unexpected needs of cash. Current Ratio Quick Ratio Current Assets – those used up or converted to cashing during the normal operating cycle of the business Current Liabilities – debts of the business that must be paid within the next accounting period

Current Ratio  Relationship between current assets and current liabilities Current Assets$22,575 Current Liabilities$11,725 Current Assets$22,575 Current Liabilities$11,725 =Current Ratio=1.92 or 1.9:1  A 2:1 ratio is considered favorable

Quick Ratio  The relationship between short- term assets and current liabilities. Cash and Receivables$ 22,575 Current Liabilities$11,725 Cash and Receivables$ 22,575 Current Liabilities$11,725 =Quick Ratio=1.92:1  A 1:1 ratio is considered adequate