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Financial Statements

Financial Statements. Balance Sheet Income Statement Owner’s Equity Statement. Balance Sheet and Income Statement (Financial Statements). The Balance Sheet and the Income Statement are financial statements Balance Sheet : Details the condition of the business on a specific date

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Financial Statements

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  1. Financial Statements • Balance Sheet • Income Statement • Owner’s Equity Statement.

  2. Balance Sheet and Income Statement (Financial Statements) • The Balance Sheet and the Income Statement are financial statements • Balance Sheet: Details the condition of the business on a specific date • Income Statement: Details revenue and expense transactions over a specific time • Balance Sheet: Assets, Liabilities and Owner’s Equity • Provides a “snapshot” of the financial condition of a business at a given point in time. • Remember - Accounting Equation must always be in balance. • Assets = Liabilities + Owner’s Equity (Owners Equity represents the Net Worth of the owner).

  3. Balance Sheet and Income Statement (Financial Statements) (continued) • Income Statement: Revenues & Expenses • Provides information related to the amount of Revenues and Expenses incurred for a given period of time (fiscal period). • One month in the case of the sample case • (Revenue minus Expenses = Net Income (profit) or Net Loss) • Question: Who is interested in reviewing these financial statements and why? • Financial statements are often reviewed by and distributed to: • Owners, Creditors, Investors, Managers, and sometimes Customers. • Should always be presented in a professional format.

  4. Case Development-Step 14: Balance Sheet & Income Statement • Use the completed eight-column worksheet to prepare the Balance Sheet and Income Statement • See completed Balance Sheet & Income Statement solutions

  5. Statement of Owner’s Equity • Reflects the changes to the equity in the business over a given period of time. • Essential elements • <Owner Name>, Capital balance from the beginning of the fiscal period • Add Net Income (subtract a loss) • Subtract withdrawals made by the owner • Add additional investments made by the owner

  6. Case Development-Step 15: Owner’s Equity Statement • Use the completed eight-column worksheet to prepare the Owner’s Equity Statement • See completed Owner’s Equity Statement solutions

  7. Case Development-Step 16: Review & Critique • Review the completed financial statements. • Is this business a good candidate for a business loan? • Why / why not? • Would you invest your savings into this business? • What else needs to be known? • Determine missing transactions not accounted for. • Discuss “Vertical” and “Horizontal” analysis. • Vertical: Each amount on a financial statement as a percentage of another item. Allows comparison to other businesses. • Horizontal: Compares financial statements across fiscal periods. Is also referred to as “Trend Analysis.”

  8. SUMMARY • Understanding the basics of double entry accounting will help you with future entrepreneurial plans or business projects. • We hope this project enables you with a better grasp of financial management – the backbone of any effective business plan. The End

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