Financial Statements - Preparation and Examples

Financial accounting information is conveyed through a standardized set of reports. You have already been introduced to the balance sheet. The othe fundamental financial statements are the income statement, statement of retained earnings, and statement of cash flows. There are many rules that govern the form and content of each financial statement. At the same time, those rules are not so rigid as to preclude variations in the exact structure or layout. Balance sheet can be presented as a horizontal or vertical layout, and each approach is equally acceptable. The basic form and content of each core financial statement is as follows:

INCOME STATEMENT: A summary of an entity's results of operation for a specified period of time is revealed in the income statement, as it provides information about revenues generated and expenses incurred. The difference between the revenues and expenses is identified as the net income or net loss. The income statement can be prepared using a single-step or a multiple-step approach, and might be further modified to include a number of special disclosures relating to unique items. The income statement relates to activies of a specified time period (e.g. year, quarter, month), as is clearly noted in its title:

AMERICA CORPORATION Income Statement For the Year Ending December 31, 2009
Revenues
Service to Customers	$750,000
Interest Revenue	15,000
Total Revenues		$765,000
Expenses
Salaries	$235,000
Rent	115,000
Other Operating Expenses	300,000
Total Expenses		$650,000
Net Income		$115,000

THE STATEMENT OF RETAINED EARNINGS: The balance sheets can reveal if retained earnings increase or decrease, in response to events that impact income. The retained earnings can also be reduced by dividends paid to shareholders. The statement of retained earnings provides a succint reporting of these changes in retained earnings form one period to the next. In essence, the statement is nothing more than a reconciliation or "bird's-eye view" of the bridge between the retained earnings amount appearing on two successive balance sheets:

AMERICA CORPORATION Statement of Retained Earnings For the Year Ending December 31, 2009
Retained earnings - January 1, 2009	$400,000
Plus: Net income	115,000
	$515,000
Less: Dividends	35,000
Retained earnings - December 31, 2009	$480,000

THE BALANCE SHEET: The balance sheet focuses on the accounting equation by revealing the economic resources owned by an entity and the claims against those resources (liabilities and owners' equity). The balance sheet is prepared as of a specific date, whereas the income statement and statement of retained earnings cover a period of time. Accordingly, it is sometimes said that balance sheets portray financial position (or condition) while other statements reflect results of operations. America's balance sheet is as follows:

AMERICA CORPORATION Balance Sheet December 31, 2009
Assets
Cash		$192,000
Accounts receivable		248,000
Land		450,000
Other assets		10,000
Total Assets		$900,000
Liabilities
Salaries payable	$34,000
Accounts payable	166,000
Total Liabilities		$200,000
Stockholders' Equity
Capital stock	$220,000
Retained earnings	480,000
Total Stockholders' Equity		700,000
Total Liabilities and Equity		$900,000

STATEMENT OF CASH FLOWS: The statement of cash flows details the enterprise's cash flows. This operating statement reveals how cash is generated and expended during a specific period of time. It consists of three unique sections that isolate the cash inflows and outflows attributable to (a) operating activities, (b) investing activities, and (c) financing activities. Notice that the cash provided by operations is not the same thing as net income found in the income statement. This result occurs because some items hit income and cash flows in different periods. For instance, if a companny generates income from a service provided on account, the transaction will increase income without a similar effect on cash.
Suffice it to say that the underpinnings of the statement of cash flows require a fairly complete knowledge of basic accounting. The following is the statement of cash flows for America Corporation:

AMERICA CORPORATION Statement of Cash Flows December 31, 2009
Operating activities
Cash received from customers	$720,000
Cash received from interes	15,000
Cash paid for salaries	(240,000)
Cash paid for rent	(115,000)
Cash paid for other items	(300,000)
Cash provided by operations		$80,000
Investing activities
Purchase of land		(250,000)
Financing activities
Payment of dividends		(35,000)
Decrease in Cash		($205,000)
Cash, January 1		397,000
Cash, December 31		$192,000