Learn all about financial statements in just a few minutes! Fabio Ambrosio, CPA, instructor of accounting at the Central Washington University, details the income statement, statement of owner's equity, balance sheet, and statement of cash flows as a collection of the most important products companies produce during the accounting cycle.
Financial statements are one of the most important products of the accounting cycle. The financial statements that companies produce are known as the income statement, statement of owner's equity, balance sheet, and statement of cash flows.
The adjusted trial balance forms the basis for preparation of current financial statements, as it is a complete representation of the current period's financial results. The four major financial statements connect to the others to form a complete financial picture of the organization. These statements must be prepared in the following order, as each statement interrelates with the prior statement.
The income statement measures revenues and expenses and arrives at a net income or a net loss for a specific time period. Net income from the income statement flows to the statement of owner's equity. Specifically, its calculation of net income (or loss) is the most significant component that explains the change in retained earnings from one accounting period to the next.
Income Statement for Urban Bicycles
This income statement for the year ending December 31, 2017, shows service revenue minus total expense is equal to net income (shown in red), which is then also used in the Statement of Owner's Equity.
The statement of owner's equity, or statement of stockholder's equity, represents changes in owner's equity from period to period. Net income from the income statement plus additional cash investment by the owner less any withdrawals by the owner equals the increase or decrease in owner's equity. The ending owner's equity balance flows to the balance sheet.
Statement of Owner's Equity for Urban Bicycles
This statement of owner's equity for the year ending December 31, 2017, shows that the beginning owner's equity plus or minus change in owner's equity equals ending owner's equity (shown in blue). Net Income (shown in red) comes from the Income Statement.
The balance sheet represents a snapshot in time of an organization's assets, liabilities, and owner's equity. This is typically done at the end of a month, quarter, or year. The balance sheet connects with the income statement by way of retained earnings, a permanent or running total of net income of an organization over its entire history. Retained earnings is a permanent account, which is an account that is never closed but remains open and rolls forward to the next accounting period or cycle. Positive net income increases the retained earnings balance, while net losses decrease its balance. Specifically, beginning retained earnings for the current period plus net income (or less net loss) and minus dividends declared equals ending retained earnings on the balance sheet. The balance sheet also connects with the statement of cash flows. The statement of cash flows represents inflows and outflows of cash from one accounting period to the next. Ending cash on the balance sheet flows to the ending cash balance on the statement of cash flows.
Balance Sheet for Urban Bicycles
This balance sheet on December 31, 2017, shows assets equal liabilities plus owner's equity. The owner's equity (shown in blue) comes from the Statement of Owner's Equity. The cash amount (shown in red) will match the year-end cash in the statement of cash flows.
The statement of cash flows, or cash flow statement, classifies cash receipts and payments by operating, investing, and financing activities during a specific time period. Ending cash on the statement of cash flows equals the cash balance on the balance sheet.
Statement of Cash Flows for Urban Bicycles
This statement of cash flows for the year ending December 31, 2017, shows that beginning cash plus or minus cash from operating activities, investing activities, and financing activities equals ending cash (shown in red).
Financial Statement Preparation from Adjusted Trial Balance for Sky Company
Retained earnings and net income rows (shown in blue) show figures that help create the balance sheet and income statement for this company. Permanent accounts move to the balance sheet, and temporary accounts move to the income statement to generate the financial statements.
