10. The Heading (Cont.) For the Year Ended June 30, 20-- One year For the Quarter Ended March 30, 20-- One quarter For the Month Ended October 31, 20-- One month Wording of Date Line Reporting Period
Financial statements provide the essential financial information necessary for sound management decisions. The income statement communicates important details about profitability to a business owner.
Financial statements are prepared to summarize changes resulting from business transactions that occur during an accounting period. The preparation of the financial statements is the seventh step in the accounting cycle.
The financial statements may be handwritten or typed but most often are prepared on a computer.
The income statement reports the net income or net loss for the period. The main purpose of the income statement is to provide a report of revenue earned and the expenses incurred over a specific period of time.
Like the work sheet heading the heading of an income statement has three parts
When preparing an income statement heading, be sure to follow the wording and capitalization shown in the figure. The wording on the date line is especially important. The reporting period will vary from business to business and must be clearly identified.
After the heating enter the revenue for the period. The income statement section of the work sheet is the information source used in preparing the income statement. See figure 9-4 on page 207.
After total revenue is entered
The income statement is complete. If the amount shown on the worksheet doe not equal the amount on the income statement there is an error.
See figure 9-5 page 208 for help in how to report net loss
One way to evaluate how a company 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 owners’ capital account as a result of business transactions during the period. This state is prepared at the end of the period. It is a supporting document of the balance sheet.
The balance sheet reports the financial position of the business at a specific point in time.
The balance sheet is a report of the balances in all assets, liabilities and owner equity account at the end of the period. These accounts are called permanent accounts The main purpose of the balance sheet is to provide a record of assets of the business and a summary of the claims against those assets on a specific date.
Remember unlike the Income statement the balance sheet is the business at a specific point in time.
The balance sheet is prepared in report form, the balance sheet accounts are shown one under the other.
This percentage show that for each dollar of sales/revenue $.43 is profit.
The current ratio is the relationship between current assets and current liabilities. Current assets are those that can convert to cash during the normal business cycle. They are cash in bank, accounts receivable and supplies. Current liabilities are debt of the business that must be paid within the next accounting period like accounts payable. A quick ratio measures the relationship between short-term assets and current liability. Short term assets are those that can be quickly converted to cash. It is computed by dividing total cash and receivable by total current liabilities. A ratio of 2:1 or higher is considered favorable by creditors.
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