{"id":72,"date":"2024-09-06T16:46:10","date_gmt":"2024-09-06T16:46:10","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/financial-statements-2\/"},"modified":"2024-09-16T17:45:55","modified_gmt":"2024-09-16T17:45:55","slug":"financial-statements-2","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/financial-statements-2\/","title":{"raw":"Financial Statements","rendered":"Financial Statements"},"content":{"raw":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\r\n<ul>\r\n \t<li>Differentiate among common financial statements<\/li>\r\n<\/ul>\r\n<\/section>&nbsp;\r\n\r\nGeneral purpose financial statements provide much of the information needed by external users of financial accounting. These financial statements are formal reports providing information on a company\u2019s financial position, cash inflows and outflows, and the results of operations.\r\n\r\nMany companies publish these statements in <strong>annual reports<\/strong>, also known as a 10-K or a 10-Q (quarterly report). A company's annual report contains an independent auditor\u2019s opinion as to the fairness of the financial statements, as well as information about the company\u2019s activities, products, and plans. Typically the best place to find these reports for a public company can be on their website under the Investor Relations section. Financial statements used by external entities are prepared using <strong>Generally Accepted Accounting Principles or GAAP<\/strong>. We will discuss the language of GAAP further in later sections.\r\n\r\nThere are four basic financial statements and they are prepared in the following order:\r\n<ul>\r\n \t<li>Income Statement<\/li>\r\n \t<li>Statement of Owner\u2019s Equity<\/li>\r\n \t<li>Balance Sheet<\/li>\r\n \t<li>Statement of Cash Flows<\/li>\r\n<\/ul>\r\n<h2>Income Statement<\/h2>\r\nThe income statement answers a business\u2019s most important question: How much profit is it making? It is limited to a specific period of time (a month or a year) from beginning to end. The income statement relies on the matching principle in that it only reports revenue and expenses in a specified window of time. It does not include any revenue or expenses from before or after that block of time.\r\n\r\nThe income statement is a report that lists and summarizes revenue, expense, and net income information for a period of time, usually a month or a year. It is based on the following equation:\r\n<p style=\"padding-left: 30px;\">[latex]\\text{Revenue}-\\text{Expenses}=\\text{Net income (or Net loss)}[\/latex]<\/p>\r\nRevenue is shown first. A list of expenses follows, and their total is subtracted from revenue. If the difference is positive, there is a profit or net income. If the difference is negative, there is a net loss. This loss is typically presented in parentheses to represent a negative number.\r\n\r\n<section class=\"textbox example\" aria-label=\"Example\">\r\n<div>\r\n<h3>NeatNiks<\/h3>\r\nLet's revisit Nick Frank and his cleaning business, NeatNiks.\u00a0 Here again is the completed spreadsheet we created to track Nick's cash-based transactions for the month of October:\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\">\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<th scope=\"col\">Checking Account<\/th>\r\n<th>=<\/th>\r\n<th scope=\"col\">Nick Frank, Capital<\/th>\r\n<th scope=\"col\">Nick Frank, Withdrawals<\/th>\r\n<th scope=\"col\">Service Revenue<\/th>\r\n<th scope=\"col\">Insurance Expense<\/th>\r\n<th scope=\"col\">Rent Expense<\/th>\r\n<th scope=\"col\">Supplies Expense<\/th>\r\n<th scope=\"col\">Contractor Expense<\/th>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">1-Oct<\/th>\r\n<td class=\"r\">+20,000<\/td>\r\n<td>=<\/td>\r\n<td class=\"r\">+20,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">4-Oct<\/th>\r\n<td class=\"r\">(12,000)<\/td>\r\n<td>=<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">(12,000)<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">15-Oct<\/th>\r\n<td class=\"r\">+1,500<\/td>\r\n<td>=<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">+1,500<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">25-Oct<\/th>\r\n<td class=\"r\">(2,600)<\/td>\r\n<td>=<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">(1,500)<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">(1,100)<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">26-Oct<\/th>\r\n<td class=\"r\">(1,000)<\/td>\r\n<td>=<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">(1,000)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">30-Oct<\/th>\r\n<td class=\"r\">+1,600<\/td>\r\n<td>=<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">+1,600<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">31-Oct<\/th>\r\n<td class=\"r\">(4,000)<\/td>\r\n<td>=<\/td>\r\n<td><\/td>\r\n<td class=\"r\">(4,000)<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Balance<\/th>\r\n<td class=\"r\">+3,500<\/td>\r\n<td>=<\/td>\r\n<td class=\"r\">+20,000<\/td>\r\n<td class=\"r\">(4,000)<\/td>\r\n<td class=\"r highlight\">+3,100<\/td>\r\n<td class=\"r highlight\">(1,500)<\/td>\r\n<td class=\"r highlight\">(12,000)<\/td>\r\n<td class=\"r highlight\">(1,000)<\/td>\r\n<td class=\"r highlight\">(1,100)<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nUsing the information in the trial balance, we can create our income statement, which summarizes the company's revenues and expenses.\r\n\r\n<\/div>\r\n<\/div>\r\n<\/section><section class=\"textbox interact\" aria-label=\"Interact\">The interactive activity below contains the last row of our spreadsheet (the \"Balance\" row with the totals for each category).\u00a0 See if you can figure out where the various column totals go in the income statement.<span style=\"font-family: 'Public Sans', -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen-Sans, Ubuntu, Cantarell, 'Helvetica Neue', sans-serif;\">Drag the totals from the Balance row of the spreadsheet to the appropriate places in the Income Statement.<\/span><iframe src=\"https:\/\/lumenlearning.h5p.com\/content\/1292375340970680188\/embed\" width=\"1088\" height=\"637\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\" aria-label=\"Income Statement\"><\/iframe>\r\n<script src=\"https:\/\/lumenlearning.h5p.com\/js\/h5p-resizer.js\" charset=\"UTF-8\"><\/script><\/section>&nbsp;\r\n\r\nHere is the completed Income Statement for NeatNiks for October:\r\n<table class=\"fin-table acctstatement fw\"><caption>NeatNiks\r\nIncome Statement\r\nFor the month ending October 31, 20XX<\/caption>\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Revenues: <\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Service Revenue<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">$3,100<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Expenses:<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Insurance<\/td>\r\n<td class=\"r\">1,500<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Rent<\/td>\r\n<td class=\"r\">12,000<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Supplies<\/td>\r\n<td class=\"r\">1,000<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contractors<\/td>\r\n<td class=\"r\">1,100<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th colspan=\"2\" scope=\"row\">\u00a0 \u00a0 \u00a0 Total Expenses<\/th>\r\n<td class=\"r\">15,600<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Net Income (loss)<\/th>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span> $(12,500)\u00a0<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe income statement is a report on operations for a period of time (often a full year, but in this case, we just reported for a month).\r\n\r\nAn income statement can also be called a\u00a0<strong>statement of earnings<\/strong>\u00a0or a <strong>profit and loss (P&amp;L)<\/strong>.\r\n<h2>Statement of Owner\u2019s Equity<\/h2>\r\nThe second statement, the statement of owner\u2019s equity, summarizes the increases and decreases in the owner\u2019s equity. According to our cash-basis income statement above, the business lost $12,500. We also know that the owner put in $20,000 at the beginning of the month and took out $4,000 at the end of the month.\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\">Checking Account<\/th>\r\n<td>=<\/td>\r\n<th scope=\"col\">Nick Frank, Capital<\/th>\r\n<th scope=\"col\">Nick Frank, Withdrawals<\/th>\r\n<th scope=\"col\">Service Revenue<\/th>\r\n<th scope=\"col\">Insurance Expense<\/th>\r\n<th scope=\"col\">Rent Expense<\/th>\r\n<th scope=\"col\">Supplies Expense<\/th>\r\n<th scope=\"col\">Contractor Expense<\/th>\r\n<\/tr>\r\n<tr>\r\n<td class=\"r\">+3,500<\/td>\r\n<td>=<\/td>\r\n<td class=\"r highlight\">+20,000<\/td>\r\n<td class=\"r highlight\">(4,000)<\/td>\r\n<td class=\"r highlight\">+3,100<\/td>\r\n<td class=\"r highlight\">(1,500)<\/td>\r\n<td class=\"r highlight\">(12,000)<\/td>\r\n<td class=\"r highlight\">(1,000)<\/td>\r\n<td class=\"r highlight\">(1,100)<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nLet's use this information to create a statement of owner's equity:\r\n<table class=\"fin-table acctstatement fw\"><caption>NeatNiks\r\nStatement of Owner's Equity\r\nFor the month ended October 31, 20XX<\/caption>\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Nick Frank, Capital, October 1, 20XX<\/td>\r\n<td class=\"r\">$0<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Owner contributions<\/td>\r\n<td class=\"r\">20,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net income\/(loss) for the month<\/td>\r\n<td class=\"r\">(12,500)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>7,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Owner withdrawals<\/td>\r\n<td class=\"r\">(4,000)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Nick Frank, Capital, October 31, 20XX<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$3,500<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nLike the income statement, the statement of owner\u2019s equity also reports a period of time (in this case the month of October).\r\n\r\nIf there are multiple owners and investors, or if the company is publicly traded, this statement is likely to have a different name, such as the <strong>statement of stockholders\u2019 equity<\/strong>.\r\n<h2>Balance Sheet<\/h2>\r\nThe third statement is the balance sheet, which shows the total assets against total liabilities and owner\u2019s equity. We haven\u2019t recorded any liabilities (debt) yet, so our balance sheet is pretty simple:\r\n<table class=\"fin-table acctstatement\"><caption>NeatNiks\r\nBalance Sheet\r\nAs of October 31, 20XX<\/caption>\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td colspan=\"2\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Assets<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash<\/td>\r\n<td class=\"r\">$3,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Assets<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single line<\/span>\r\n$3,500<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"2\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"2\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Liabilities<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Liabilities<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single line<\/span>$-<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"2\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"2\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Owner\u2019s Equity<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r\">3,500<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<tfoot>\r\n<tr>\r\n<td class=\"line-none\">Total Liabilities and Owner\u2019s Equity<\/td>\r\n<td class=\"r\"><span class=\"u-sr-only\">Single line<\/span>\r\n$3,500\r\n<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tfoot>\r\n<\/table>\r\nUnlike the two previous statements, the balance sheet is a snapshot\u2014a single moment in time\u2014rather than the records of a period of time. It is the financial position of the business at the very end of the last day of the reporting period. In this case, it was at the end of October\u2014so 11:59:59PM on October 31st.\r\n\r\nOnce business resumes on November 1st, all the numbers on the balance sheet will change as well, and we\u2019ll start a new income statement and a new statement of owner\u2019s equity to report November transactions.\r\n\r\nThe balance sheet can also be called the <strong>statement of financial position<\/strong>.\r\n<h2>Statement of Cash Flows<\/h2>\r\nSince this whole analysis was based on cash transactions, our statement of cash flows won\u2019t be any different than our income statement above.\r\n<table class=\"fin-table acctstatement\"><caption>NeatNiks\r\nStatement of Cash Flows\r\nFor the month ended October 31, 20XX<\/caption>\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Revenues:<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Service Revenue<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">$ 3,100<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Expenses<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Insurance<\/td>\r\n<td class=\"r\">1,500<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Rent<\/td>\r\n<td class=\"r\">12,000<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Supplies<\/td>\r\n<td class=\"r\">1,000<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contractors<\/td>\r\n<td class=\"r\">1,100<\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Expenses<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>15,600<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net Income (loss)<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$(12,500)<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWhen we start working with the accrual basis of accounting, we\u2019ll revisit this topic and dive in deeper.\r\n\r\nLike the income statement and the statement of owner's equity, the statement of cash flows reports a period of time (in this case the month of October).\r\n\r\n<section class=\"textbox tryIt\" aria-label=\"Try It\">[ohm2_question hide_question_numbers=1]25101[\/ohm2_question]<\/section>","rendered":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\n<ul>\n<li>Differentiate among common financial statements<\/li>\n<\/ul>\n<\/section>\n<p>&nbsp;<\/p>\n<p>General purpose financial statements provide much of the information needed by external users of financial accounting. These financial statements are formal reports providing information on a company\u2019s financial position, cash inflows and outflows, and the results of operations.<\/p>\n<p>Many companies publish these statements in <strong>annual reports<\/strong>, also known as a 10-K or a 10-Q (quarterly report). A company&#8217;s annual report contains an independent auditor\u2019s opinion as to the fairness of the financial statements, as well as information about the company\u2019s activities, products, and plans. Typically the best place to find these reports for a public company can be on their website under the Investor Relations section. Financial statements used by external entities are prepared using <strong>Generally Accepted Accounting Principles or GAAP<\/strong>. We will discuss the language of GAAP further in later sections.<\/p>\n<p>There are four basic financial statements and they are prepared in the following order:<\/p>\n<ul>\n<li>Income Statement<\/li>\n<li>Statement of Owner\u2019s Equity<\/li>\n<li>Balance Sheet<\/li>\n<li>Statement of Cash Flows<\/li>\n<\/ul>\n<h2>Income Statement<\/h2>\n<p>The income statement answers a business\u2019s most important question: How much profit is it making? It is limited to a specific period of time (a month or a year) from beginning to end. The income statement relies on the matching principle in that it only reports revenue and expenses in a specified window of time. It does not include any revenue or expenses from before or after that block of time.<\/p>\n<p>The income statement is a report that lists and summarizes revenue, expense, and net income information for a period of time, usually a month or a year. It is based on the following equation:<\/p>\n<p style=\"padding-left: 30px;\">[latex]\\text{Revenue}-\\text{Expenses}=\\text{Net income (or Net loss)}[\/latex]<\/p>\n<p>Revenue is shown first. A list of expenses follows, and their total is subtracted from revenue. If the difference is positive, there is a profit or net income. If the difference is negative, there is a net loss. This loss is typically presented in parentheses to represent a negative number.<\/p>\n<section class=\"textbox example\" aria-label=\"Example\">\n<div>\n<h3>NeatNiks<\/h3>\n<p>Let&#8217;s revisit Nick Frank and his cleaning business, NeatNiks.\u00a0 Here again is the completed spreadsheet we created to track Nick&#8217;s cash-based transactions for the month of October:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<tbody>\n<tr>\n<td><\/td>\n<th scope=\"col\">Checking Account<\/th>\n<th>=<\/th>\n<th scope=\"col\">Nick Frank, Capital<\/th>\n<th scope=\"col\">Nick Frank, Withdrawals<\/th>\n<th scope=\"col\">Service Revenue<\/th>\n<th scope=\"col\">Insurance Expense<\/th>\n<th scope=\"col\">Rent Expense<\/th>\n<th scope=\"col\">Supplies Expense<\/th>\n<th scope=\"col\">Contractor Expense<\/th>\n<\/tr>\n<tr>\n<th scope=\"row\">1-Oct<\/th>\n<td class=\"r\">+20,000<\/td>\n<td>=<\/td>\n<td class=\"r\">+20,000<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">4-Oct<\/th>\n<td class=\"r\">(12,000)<\/td>\n<td>=<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">(12,000)<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">15-Oct<\/th>\n<td class=\"r\">+1,500<\/td>\n<td>=<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">+1,500<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">25-Oct<\/th>\n<td class=\"r\">(2,600)<\/td>\n<td>=<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">(1,500)<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">(1,100)<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">26-Oct<\/th>\n<td class=\"r\">(1,000)<\/td>\n<td>=<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">(1,000)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">30-Oct<\/th>\n<td class=\"r\">+1,600<\/td>\n<td>=<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">+1,600<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">31-Oct<\/th>\n<td class=\"r\">(4,000)<\/td>\n<td>=<\/td>\n<td><\/td>\n<td class=\"r\">(4,000)<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Balance<\/th>\n<td class=\"r\">+3,500<\/td>\n<td>=<\/td>\n<td class=\"r\">+20,000<\/td>\n<td class=\"r\">(4,000)<\/td>\n<td class=\"r highlight\">+3,100<\/td>\n<td class=\"r highlight\">(1,500)<\/td>\n<td class=\"r highlight\">(12,000)<\/td>\n<td class=\"r highlight\">(1,000)<\/td>\n<td class=\"r highlight\">(1,100)<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Using the information in the trial balance, we can create our income statement, which summarizes the company&#8217;s revenues and expenses.<\/p>\n<\/div>\n<\/div>\n<\/section>\n<section class=\"textbox interact\" aria-label=\"Interact\">The interactive activity below contains the last row of our spreadsheet (the &#8220;Balance&#8221; row with the totals for each category).\u00a0 See if you can figure out where the various column totals go in the income statement.<span style=\"font-family: 'Public Sans', -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen-Sans, Ubuntu, Cantarell, 'Helvetica Neue', sans-serif;\">Drag the totals from the Balance row of the spreadsheet to the appropriate places in the Income Statement.<\/span><iframe loading=\"lazy\" src=\"https:\/\/lumenlearning.h5p.com\/content\/1292375340970680188\/embed\" width=\"1088\" height=\"637\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\" aria-label=\"Income Statement\"><\/iframe><br \/>\n<script src=\"https:\/\/lumenlearning.h5p.com\/js\/h5p-resizer.js\" charset=\"UTF-8\"><\/script><\/section>\n<p>&nbsp;<\/p>\n<p>Here is the completed Income Statement for NeatNiks for October:<\/p>\n<table class=\"fin-table acctstatement fw\">\n<caption>NeatNiks<br \/>\nIncome Statement<br \/>\nFor the month ending October 31, 20XX<\/caption>\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Revenues: <\/strong><\/td>\n<\/tr>\n<tr>\n<td>Service Revenue<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">$3,100<\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Expenses:<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Insurance<\/td>\n<td class=\"r\">1,500<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Rent<\/td>\n<td class=\"r\">12,000<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Supplies<\/td>\n<td class=\"r\">1,000<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Contractors<\/td>\n<td class=\"r\">1,100<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<th colspan=\"2\" scope=\"row\">\u00a0 \u00a0 \u00a0 Total Expenses<\/th>\n<td class=\"r\">15,600<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Net Income (loss)<\/th>\n<td class=\"r\"><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span> $(12,500)\u00a0<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The income statement is a report on operations for a period of time (often a full year, but in this case, we just reported for a month).<\/p>\n<p>An income statement can also be called a\u00a0<strong>statement of earnings<\/strong>\u00a0or a <strong>profit and loss (P&amp;L)<\/strong>.<\/p>\n<h2>Statement of Owner\u2019s Equity<\/h2>\n<p>The second statement, the statement of owner\u2019s equity, summarizes the increases and decreases in the owner\u2019s equity. According to our cash-basis income statement above, the business lost $12,500. We also know that the owner put in $20,000 at the beginning of the month and took out $4,000 at the end of the month.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<tbody>\n<tr>\n<th scope=\"col\">Checking Account<\/th>\n<td>=<\/td>\n<th scope=\"col\">Nick Frank, Capital<\/th>\n<th scope=\"col\">Nick Frank, Withdrawals<\/th>\n<th scope=\"col\">Service Revenue<\/th>\n<th scope=\"col\">Insurance Expense<\/th>\n<th scope=\"col\">Rent Expense<\/th>\n<th scope=\"col\">Supplies Expense<\/th>\n<th scope=\"col\">Contractor Expense<\/th>\n<\/tr>\n<tr>\n<td class=\"r\">+3,500<\/td>\n<td>=<\/td>\n<td class=\"r highlight\">+20,000<\/td>\n<td class=\"r highlight\">(4,000)<\/td>\n<td class=\"r highlight\">+3,100<\/td>\n<td class=\"r highlight\">(1,500)<\/td>\n<td class=\"r highlight\">(12,000)<\/td>\n<td class=\"r highlight\">(1,000)<\/td>\n<td class=\"r highlight\">(1,100)<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>Let&#8217;s use this information to create a statement of owner&#8217;s equity:<\/p>\n<table class=\"fin-table acctstatement fw\">\n<caption>NeatNiks<br \/>\nStatement of Owner&#8217;s Equity<br \/>\nFor the month ended October 31, 20XX<\/caption>\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Nick Frank, Capital, October 1, 20XX<\/td>\n<td class=\"r\">$0<\/td>\n<\/tr>\n<tr>\n<td>Owner contributions<\/td>\n<td class=\"r\">20,000<\/td>\n<\/tr>\n<tr>\n<td>Net income\/(loss) for the month<\/td>\n<td class=\"r\">(12,500)<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>7,500<\/td>\n<\/tr>\n<tr>\n<td>Owner withdrawals<\/td>\n<td class=\"r\">(4,000)<\/td>\n<\/tr>\n<tr>\n<td>Nick Frank, Capital, October 31, 20XX<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$3,500<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Like the income statement, the statement of owner\u2019s equity also reports a period of time (in this case the month of October).<\/p>\n<p>If there are multiple owners and investors, or if the company is publicly traded, this statement is likely to have a different name, such as the <strong>statement of stockholders\u2019 equity<\/strong>.<\/p>\n<h2>Balance Sheet<\/h2>\n<p>The third statement is the balance sheet, which shows the total assets against total liabilities and owner\u2019s equity. We haven\u2019t recorded any liabilities (debt) yet, so our balance sheet is pretty simple:<\/p>\n<table class=\"fin-table acctstatement\">\n<caption>NeatNiks<br \/>\nBalance Sheet<br \/>\nAs of October 31, 20XX<\/caption>\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td colspan=\"2\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Assets<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Cash<\/td>\n<td class=\"r\">$3,500<\/td>\n<\/tr>\n<tr>\n<td>Total Assets<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single line<\/span><br \/>\n$3,500<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td colspan=\"2\"><\/td>\n<\/tr>\n<tr>\n<td colspan=\"2\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Liabilities<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Total Liabilities<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single line<\/span>$-<\/td>\n<\/tr>\n<tr>\n<td colspan=\"2\"><\/td>\n<\/tr>\n<tr>\n<td colspan=\"2\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Owner\u2019s Equity<\/strong><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r\">3,500<\/td>\n<\/tr>\n<\/tbody>\n<tfoot>\n<tr>\n<td class=\"line-none\">Total Liabilities and Owner\u2019s Equity<\/td>\n<td class=\"r\"><span class=\"u-sr-only\">Single line<\/span><br \/>\n$3,500<br \/>\n<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tfoot>\n<\/table>\n<p>Unlike the two previous statements, the balance sheet is a snapshot\u2014a single moment in time\u2014rather than the records of a period of time. It is the financial position of the business at the very end of the last day of the reporting period. In this case, it was at the end of October\u2014so 11:59:59PM on October 31st.<\/p>\n<p>Once business resumes on November 1st, all the numbers on the balance sheet will change as well, and we\u2019ll start a new income statement and a new statement of owner\u2019s equity to report November transactions.<\/p>\n<p>The balance sheet can also be called the <strong>statement of financial position<\/strong>.<\/p>\n<h2>Statement of Cash Flows<\/h2>\n<p>Since this whole analysis was based on cash transactions, our statement of cash flows won\u2019t be any different than our income statement above.<\/p>\n<table class=\"fin-table acctstatement\">\n<caption>NeatNiks<br \/>\nStatement of Cash Flows<br \/>\nFor the month ended October 31, 20XX<\/caption>\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Revenues:<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Service Revenue<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">$ 3,100<\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Expenses<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Insurance<\/td>\n<td class=\"r\">1,500<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Rent<\/td>\n<td class=\"r\">12,000<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Supplies<\/td>\n<td class=\"r\">1,000<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Contractors<\/td>\n<td class=\"r\">1,100<\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr>\n<td>Total Expenses<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>15,600<\/td>\n<\/tr>\n<tr>\n<td>Net Income (loss)<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$(12,500)<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>When we start working with the accrual basis of accounting, we\u2019ll revisit this topic and dive in deeper.<\/p>\n<p>Like the income statement and the statement of owner&#8217;s equity, the statement of cash flows reports a period of time (in this case the month of October).<\/p>\n<section class=\"textbox tryIt\" aria-label=\"Try It\"><iframe loading=\"lazy\" id=\"ohm25101\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=25101&theme=lumen&iframe_resize_id=ohm25101&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><\/section>\n","protected":false},"author":6,"menu_order":17,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Financial Statements\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"part":55,"module-header":"- Select Header -","content_attributions":[{"type":"original","description":"Financial Statements","author":"Joseph Cooke","organization":"Lumen Learning","url":"","project":"","license":"cc-by","license_terms":""}],"internal_book_links":[],"video_content":null,"cc_video_embed_content":{"cc_scripts":"","media_targets":[]},"try_it_collection":null,"_links":{"self":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/72"}],"collection":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/users\/6"}],"version-history":[{"count":9,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/72\/revisions"}],"predecessor-version":[{"id":1085,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/72\/revisions\/1085"}],"part":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/parts\/55"}],"metadata":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/72\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/media?parent=72"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=72"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/contributor?post=72"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/license?post=72"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}