FINANCIAL STATEMENTS FOR A SOLE PROPRIETORSHIP Chapter 9

Financial Statements  Financial statements – Summarize the changes resulting from transactions during an acct’g period.  Primary Financial statements  Income statement  Balance Sheet  Other Financial statements  Statement of changes in Owner’s Equity  Statement of Cash Flows

The Income Statement  Income statement – Reports the net income or net loss for a specific period of time.  4 Sections  Heading, Revenue, Expenses, Net Income (Loss)  If 2 or more revenue sources  Use left column first  Total Revenue in right column  Revenue – Expenses = Net Income (Loss)

Statement of Changes in O.E.  Statement of changes in owner’s equity – Summarizes changes in the capital account  Start with Beginning Capital  Capital Balance on worksheet – investments for the period.  Add: Investments and Net Income (if applicable) Subtotal  Less: Withdrawals and Net Loss (if applicable)  Ending Capital (will be used on Balance Sheet)

Balance Sheet  Balance Sheet – A report of the balances in the permanent accounts at the end of the period.  A.K.A. a statement of financial position  On a particular date  Proves Assets = Liabilities + Owner’s Equity  Report Form – Listing sections one under the other

Statement of Cash Flows  Statement of Cash Flows – summarizes all cash transactions.  Cash took in  Sources of cash  Cash paid out  Uses of cash  More on this in Chapter 19  See page 570

Ratio Analysis (Profitability)  Ratio Analysis – Process of evaluating the relationship between various amounts on the financial statements.  Profitability Ratios – Used to evaluate earnings performance  Return on sales: Net Income / Total Sales

Ratio Analysis (Liquidity)  Liquidity – the ease with which an asset can be converted to cash.  Current assets – Used up or converted to cash during the normal operating cycle.  Cash, Receivables, Supplies  Current liabilities – Debts that must be paid within the next accounting period.  Working capital – Amount the CA exceeds CL  Working Capital = Current Assets – Current Liabilities

Ratio Analysis (Liquidity)  Liquidity Ratio – Measure of the ability to pay current debts  Current Ratio – Measures the relationship between current assets and current liabilities Current Assets / Current Liabilities  Quick Ratio – Measures the relationship between short- term assets and current liabilities (Cash + Receivables) / Current Liabilities