Financial Statements for a Sole
Proprietorship
Chpt 9
Financial Statements
• Financial Statements – summarize the
changes resulting from business transactions
that occur during an accounting period.
• There are 4 Financial Statements Prepared
1.
2.
3.
4.
Income Statement
Balance Sheet
The Statement of Changes in Owner’s Equity
Cash Flows
Pg 220
The Income Statement
• Income Statement reports the net income or
net loss for a specific period of time.
– Sometimes called a profit-and-loss statement
• Sections of the report
– Heading
– Revenue for the period
– Expenses for the period
– The net income or loss for the period
Pg 221
Income Statement
Pg 222
Reporting a Loss
Pg 223
Statement of Changes in Owner’s
Equity
• Summarizes changes in the owner’s capital
account as a result of business transactions that
occur during the period
• Sections of the report
–
–
–
–
–
–
–
Heading (3 lines answering Who, What, When)
Beginning Capital, date
Add: investments by Owner + net income
Total increase in capital
Subtotal
Less: Withdrawals by Owner
Ending Capital, date
Pg 225
Statement of Change in Owner’s
Equity
Pg 226
Statement of Change in Owner’s
Equity showing a Net Loss
pg228
Getting Beginning Capital
• For a Statement of Owner’s Equity report on
an existing business, the beginning number
may not match the number on the worksheet.
The best way to find the beginning balance is
to go to the date on the beginning of the
period in the ledger and take the number
from there
Pg 228
The Balance Sheet
• Balance Sheet is a report of the balances in the
permanent accounts at the end of a period.
(Assets, Liabilities, Owner’s Capital)
– What the business owns
– What the business owes
– What the business is worth
• Sometimes called a Statement of Financial
Position
• It uses the Worksheet and Statement of Change
in Owner’s Equity
Pg 231
Preparing a Balance Sheet
• Fill in the heading (Who, What, When)
– Date is a single date in time not for period ending
• Copy Assets and Liabilities as they appear in the
worksheet
• Total Assets and Liabilities
• Take Owner’s Equity from the Statement of Change in
Owner’s Equity
• Add Liabilities and Owner’s Equity
• Compare Total Assets to Total Liabilities and Owner’s
Equity.
• If the same double rule.
Pg 232
Pg 233
Statement of Cash Flows
• The Statement of Cash Flows summarizes the
following information:
– The amount of cash the business took in
– The source of the cash
– The amount of cash the business paid out
– The uses of the cash
Pg 234
Ratio Analysis
Pg 235
• Profitability Ratios – Used to evaluate the earning
performance of the business during an accounting period.
– Return on Sales $1,150 (net income)/$2,650 (sales) = .434 or
43.3%
• Liquidity Measures – The ease of converting assets to
cash
– Current assets – those used up or converted to cash during
the normal operating cycle of the business (AR, Cash,
Supplies)
– Current liabilities – debt of the business that must be paid
within the next accounting period
– Working Capital – the amount by which current assets exceed
current liabilities
Current Assets – Current Liabilities = Working Capital
Ratio Analysis 2
• Liquidity Ratio – the ability of a business to pay its
current debts as they become due and to provide
for unexpected needs of cash
– Current Ratio – relationship between current assets
and current liabilities
• Current Assets/Current Liabilities = Current Ratio
• $22,575/$11,725 = 1.92 or 1.9:1
• A ratio of 2:1 or higher is considered favorable by creditors
– Quick Ratio – relationship between short-term assets
(cash and A/R) and current liabilities.
• Cash and Receivables/Current Liabilities = Quick Ratio
• $22,575/$11,725 = 1.92:1