{"id":9865,"date":"2023-10-24T18:36:09","date_gmt":"2023-10-24T18:36:09","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/quantitativereasoning\/?post_type=chapter&p=9865"},"modified":"2024-10-18T21:00:50","modified_gmt":"2024-10-18T21:00:50","slug":"finance-and-accounting-learn-it-3","status":"web-only","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/quantitativereasoning\/chapter\/finance-and-accounting-learn-it-3\/","title":{"raw":"Finance and Accounting: Learn It 3","rendered":"Finance and Accounting: Learn It 3"},"content":{"raw":"

Financial Statements<\/h2>\r\n

Financial statements<\/strong> are reports that summarize and communicate information obtained from day-to-day bookkeeping activities. After all of the income and expenses of the business have been recorded, financial accountants prepare financial statements in the following order:<\/p>\r\n

    \r\n\t
  1. Income Statement<\/li>\r\n\t
  2. Statement of Retained Earnings\u2014also called Statement of Owner's Equity<\/li>\r\n\t
  3. The Balance Sheet<\/li>\r\n\t
  4. The Statement of Cash Flows<\/li>\r\n<\/ol>\r\n

    Understand Financial Statements<\/h3>\r\n

    In order to get a better understanding of financial statements, what they communicate to the users of accounting information, and how the statements are connected, we will use the final balances as of January 31, 20XX for a fictitious delivery-service company, Metro Courier Inc. Just as a financial accountant would do, we will use these figures to prepare the company's financial statements required by GAAP.\u00a0<\/span>Let's look at Metro Courier's financial information and prepare some financial statements.<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Balance of Accounts for Metro Courier Inc. as of January 31, 20XX<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
    Item<\/th>\r\nItem Type<\/th>\r\nDollar Amount<\/th>\r\n<\/tr>\r\n
    Cash<\/td>\r\nAsset<\/td>\r\n[latex]$ 66,800[\/latex]<\/td>\r\n<\/tr>\r\n
    Accounts Receivable<\/td>\r\nAsset<\/td>\r\n[latex]$ 5,000[\/latex]<\/td>\r\n<\/tr>\r\n
    Supplies<\/td>\r\nAsset<\/td>\r\n[latex]$ 500[\/latex]<\/td>\r\n<\/tr>\r\n
    Prepaid rent<\/td>\r\nAsset<\/td>\r\n[latex]$ 1,800[\/latex]<\/td>\r\n<\/tr>\r\n
    Equipment<\/td>\r\nAsset<\/td>\r\n[latex]$ 5,500[\/latex]<\/td>\r\n<\/tr>\r\n
    Truck<\/td>\r\nAsset<\/td>\r\n[latex]$ 8,500[\/latex]<\/td>\r\n<\/tr>\r\n
    Accounts Payable<\/td>\r\nLiability<\/td>\r\n[latex]$ 200[\/latex]<\/td>\r\n<\/tr>\r\n
    Common Stock<\/td>\r\nEquity<\/td>\r\n[latex]$ 30,000[\/latex]<\/td>\r\n<\/tr>\r\n
    Retained Earnings (beginning balance)<\/td>\r\nEquity<\/td>\r\n[latex]$ 0[\/latex]<\/td>\r\n<\/tr>\r\n
    Service Revenue<\/td>\r\nRevenue<\/td>\r\n[latex]$ 60,000[\/latex]<\/td>\r\n<\/tr>\r\n
    Salary Expense<\/td>\r\nExpense<\/td>\r\n[latex]$ 900[\/latex]<\/td>\r\n<\/tr>\r\n
    Utilities Expense<\/td>\r\nExpense<\/td>\r\n[latex]$ 1,200[\/latex]<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

    Income Statement<\/h3>\r\n

    The income statement<\/strong>, sometimes called an earnings statement<\/strong> or profit and loss statement<\/strong>, reports the profitability of a business organization for a stated period of time.<\/em> In accounting, we measure profitability for a period, such as a month or year, by comparing the revenues earned with the expenses incurred to produce these revenues. The income statement contains the following:<\/p>\r\n

      \r\n\t
    • Revenues<\/strong> are the inflows of cash resulting from the sale of products or providing services to customers. We measure revenues by the prices agreed on between the business and customer.<\/li>\r\n\t
    • Expenses<\/strong> are the costs incurred to produce revenues. In other words, expenses are costs of doing business (typically identified as accounts with the word \u201cexpense\u201d).<\/li>\r\n\t
    • Net Income = Revenues \u2212 Expenses. \u00a0<\/strong>Net income is often called the earnings<\/strong> of the company. When expenses exceed revenues, the business has a net loss.\u00a0<\/strong><\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Metro Courier Inc.\u00a0\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
      Income Statement\u00a0\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
      Month Ended January 31, 20XX \u00a0<\/strong><\/td>\r\n<\/tr>\r\n
      Revenue:<\/strong><\/td>\r\n<\/tr>\r\n
      Service Revenue<\/td>\r\n[latex]$ 60,000[\/latex]<\/td>\r\n<\/tr>\r\n
      Total Revenues<\/td>\r\n[latex]$ 60,000[\/latex]<\/td>\r\n<\/tr>\r\n
      Expenses:<\/strong><\/td>\r\n<\/tr>\r\n
      Salary Expense<\/td>\r\n[latex]$ 900[\/latex]<\/td>\r\n<\/tr>\r\n
      Utility Expense<\/td>\r\n[latex]$ 1,200[\/latex]<\/td>\r\n<\/tr>\r\n
      Total Expenses<\/td>\r\n[latex]$ 2,100[\/latex]<\/td>\r\n<\/tr>\r\n
      Net Income ([latex]$60,000 - 2,100[\/latex])<\/strong><\/td>\r\n$ 57,900<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n
      [ohm2_question height=\"400\"]8602[\/ohm2_question]<\/section>\r\n

      The net income from the income statement will be used in the statement of owner's equity, also called statement of retained earnings.<\/p>\r\n

      Statement of Retained Earnings<\/h3>\r\n

      The statement of owner's equity<\/strong> or statement of retained earnings, <\/strong>explains the changes in retained earnings between two balance sheet dates. We start with beginning retained earnings (in our example, the business began in January, so we start with a zero balance) and add any net income (or subtract net loss) from the income statement. Next, we subtract any dividends declared (or any owner withdrawals in a partnership or sole-proprietor) to get the ending balance in retained earnings (or capital for non-corporations).<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Metro Courier Inc.<\/strong>\u00a0<\/strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
      Statement of Retained Earnings<\/strong>\u00a0<\/strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
      Month Ended January 31, 20XX<\/strong>\u00a0<\/strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
      Beginning Retained Earnings, Jan 1<\/td>\r\n[latex]$\u00a0 \u00a00[\/latex]<\/td>\r\n<\/tr>\r\n
      Net income from month (from income statement)<\/td>\r\n[latex]$ 57,900[\/latex]<\/td>\r\n<\/tr>\r\n
      Total increase<\/td>\r\n[latex]$ 57,900[\/latex]<\/td>\r\n<\/tr>\r\n
      Dividends (or withdrawals for non-corporations)<\/td>\r\n[latex]\u00a0\u2013 $0[\/latex]<\/td>\r\n<\/tr>\r\n
      Ending Retained Earnings, January 31<\/strong><\/td>\r\n$ 57,900<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n
      [ohm2_question height=\"400\"]8603[\/ohm2_question]<\/section>\r\n

      The ending balance we calculated for retained earnings (or capital) is then reported on the balance sheet.<\/p>","rendered":"

      Financial Statements<\/h2>\n

      Financial statements<\/strong> are reports that summarize and communicate information obtained from day-to-day bookkeeping activities. After all of the income and expenses of the business have been recorded, financial accountants prepare financial statements in the following order:<\/p>\n

        \n
      1. Income Statement<\/li>\n
      2. Statement of Retained Earnings\u2014also called Statement of Owner’s Equity<\/li>\n
      3. The Balance Sheet<\/li>\n
      4. The Statement of Cash Flows<\/li>\n<\/ol>\n

        Understand Financial Statements<\/h3>\n

        In order to get a better understanding of financial statements, what they communicate to the users of accounting information, and how the statements are connected, we will use the final balances as of January 31, 20XX for a fictitious delivery-service company, Metro Courier Inc. Just as a financial accountant would do, we will use these figures to prepare the company’s financial statements required by GAAP.\u00a0<\/span>Let’s look at Metro Courier’s financial information and prepare some financial statements.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
        Balance of Accounts for Metro Courier Inc. as of January 31, 20XX<\/th>\n<\/tr>\n<\/thead>\n
        Item<\/th>\nItem Type<\/th>\nDollar Amount<\/th>\n<\/tr>\n
        Cash<\/td>\nAsset<\/td>\n[latex]$ 66,800[\/latex]<\/td>\n<\/tr>\n
        Accounts Receivable<\/td>\nAsset<\/td>\n[latex]$ 5,000[\/latex]<\/td>\n<\/tr>\n
        Supplies<\/td>\nAsset<\/td>\n[latex]$ 500[\/latex]<\/td>\n<\/tr>\n
        Prepaid rent<\/td>\nAsset<\/td>\n[latex]$ 1,800[\/latex]<\/td>\n<\/tr>\n
        Equipment<\/td>\nAsset<\/td>\n[latex]$ 5,500[\/latex]<\/td>\n<\/tr>\n
        Truck<\/td>\nAsset<\/td>\n[latex]$ 8,500[\/latex]<\/td>\n<\/tr>\n
        Accounts Payable<\/td>\nLiability<\/td>\n[latex]$ 200[\/latex]<\/td>\n<\/tr>\n
        Common Stock<\/td>\nEquity<\/td>\n[latex]$ 30,000[\/latex]<\/td>\n<\/tr>\n
        Retained Earnings (beginning balance)<\/td>\nEquity<\/td>\n[latex]$ 0[\/latex]<\/td>\n<\/tr>\n
        Service Revenue<\/td>\nRevenue<\/td>\n[latex]$ 60,000[\/latex]<\/td>\n<\/tr>\n
        Salary Expense<\/td>\nExpense<\/td>\n[latex]$ 900[\/latex]<\/td>\n<\/tr>\n
        Utilities Expense<\/td>\nExpense<\/td>\n[latex]$ 1,200[\/latex]<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

        Income Statement<\/h3>\n

        The income statement<\/strong>, sometimes called an earnings statement<\/strong> or profit and loss statement<\/strong>, reports the profitability of a business organization for a stated period of time.<\/em> In accounting, we measure profitability for a period, such as a month or year, by comparing the revenues earned with the expenses incurred to produce these revenues. The income statement contains the following:<\/p>\n

          \n
        • Revenues<\/strong> are the inflows of cash resulting from the sale of products or providing services to customers. We measure revenues by the prices agreed on between the business and customer.<\/li>\n
        • Expenses<\/strong> are the costs incurred to produce revenues. In other words, expenses are costs of doing business (typically identified as accounts with the word \u201cexpense\u201d).<\/li>\n
        • Net Income = Revenues \u2212 Expenses. \u00a0<\/strong>Net income is often called the earnings<\/strong> of the company. When expenses exceed revenues, the business has a net loss.\u00a0<\/strong><\/li>\n<\/ul>\n\n\n\n\n\n\n\n\n\n\n\n\n\n
          Metro Courier Inc.\u00a0\u00a0<\/strong><\/td>\n<\/tr>\n
          Income Statement\u00a0\u00a0<\/strong><\/td>\n<\/tr>\n
          Month Ended January 31, 20XX \u00a0<\/strong><\/td>\n<\/tr>\n
          Revenue:<\/strong><\/td>\n<\/tr>\n
          Service Revenue<\/td>\n[latex]$ 60,000[\/latex]<\/td>\n<\/tr>\n
          Total Revenues<\/td>\n[latex]$ 60,000[\/latex]<\/td>\n<\/tr>\n
          Expenses:<\/strong><\/td>\n<\/tr>\n
          Salary Expense<\/td>\n[latex]$ 900[\/latex]<\/td>\n<\/tr>\n
          Utility Expense<\/td>\n[latex]$ 1,200[\/latex]<\/td>\n<\/tr>\n
          Total Expenses<\/td>\n[latex]$ 2,100[\/latex]<\/td>\n<\/tr>\n
          Net Income ([latex]$60,000 - 2,100[\/latex])<\/strong><\/td>\n$ 57,900<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n