Financial Statements

After a few months, the transactions recorded by a bookkeeper will accumulate, making it difficult for management to sort out what is going on. To simplify the picture, accountants prepare financial statements that summarize the transactions. Three of the most important are the balance sheet, the income statement, and the statement of cash flow.

The Balance Sheet. A balance sheet, also known as a statement of financial position, is a kind of "snapshot" of where a company is, financially speaking, at one moment in time. It includes all the elements in the accounting equation, showing the balance between assets on the one hand and liabilities and owner's equity on the other. Figure 1 is a balance sheet for Sweet Dreams Ice Cream, Inc., a small corporation that makes ice cream and sells it through its own shop.

But no business can stand still while its financial condition is being examined. A business may make hundreds of transactions of various kinds every working day. Even during a holiday, office fixtures grow older and decrease in value, and interest on savings accounts accumulates. Yet the accountant must set up a balance sheet so that managers and other interested parties can evaluate the business's financial position as if it were static.

Accordingly, every company prepares a balance sheet at least once a year, most often at the end of the calendar year, covering from January 1 to December 1. However, many business and government bodies use a fiscal year, which may be any 12 consecutive months. For example, a business may choose a fiscal year that runs from June 1 to May 31 because its peak selling season ends in May. Some companies prepare a balance sheet more often than once a year, perhaps at the end of each month or quarter.

The Income Statement. The income statement reflects the results of operations over a period of time, typically one year. If the balance sheet is a "snapshot," the income statement is a "movie". It summarizes all revenues (or sales), the amounts that have been or are to be received from customers for goods or services delivered to them, and all expenses, the costs that have arisen in generating revenues. It then subtracts expenses from revenues to show the actual profit or loss of a company, a figure known as net income – profit or the "bottom line." Figure 2 is an income statement for Sweet Dreams Ice Cream, Inc.

Figure 1

Sweet Dreams Ice Cream, Inc.

Balance Sheet

December 31, 200…

ASSETS Current Assets Cash Marketable securities Accounts receivable Less: Allowances for uncollectible accounts Notes receivable Merchandise inventory Prepaid expenses TOTAL CURRENT ASSETS Fixed Assets Factory equipment Less: Accumulated amortization Leasehold improvements Less: Accumulated amortization TOTAL FIXED ASSETS Intangible Assets Organization costs Trademark Goodwill TOTAL INTANGIBLE ASSETS TOTAL ASSETS LIABILITIES AND SHAREHOLDERS EQUITY Current Liabilities Accounts payable Note payable (short-term) Salaries payable Taxes payable TOTAL CURRENT LIABILITIES Long-Term Liabilities Long-term note payable @ 12% TOTAL LIABILITIES Shareholders' Equity Common stock, 10,000 shares Retained earnings Beginning of the year Current year TOTAL SHAREHOLDERS' EQUITY TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$19,780 ____430 $64,919 __11,706 $77,030 __14,308 $26,460 _36,800

$22,790 4,200 19,350 21,500 12,685 ___4,400 $53,213 _62,722 $ 420 6,405 __5,000 $23,790 15,115 7,452 __6,318 $43,000 _63,260

$84,925 115,935 __11,825 $212,685 $52,675 _53,750 $106,425 $106,260 $212,685

Figure 2

Sweet Dreams Ice Cream, Inc.