Chapter 7 Financial Statements for Proprietorship 7 1

Chapter 7 Financial Statements for Proprietorship

7. 1 Preparing an Income Statement

Reporting Financial Info �Financial Accounting- Area of accounting that focuses on reporting information to external users � External users of financial info- bankers, creditors, customers, government agencies, and stockholders �Managerial Accounting-Area of accounting that focuses on reporting information to internal users � Internal users- company managers and officers

�All financial info must be reported for good business decisions to be made �Concept: Full Disclosure-Financial statements contain ALL info to understand a business’s financial condition �Concept: Accounting Period Cycle for statements �Concept: Going Concern- expectation that a business will continue

Income Statement �Income Statement-Reports financial info over a specific period of time �Shows concept: Matching Expenses with Revenue �Heading �Revenue �Expenses �Net Income or Net Loss

�Heading: Business Name Income Statement For Month Ended: Date

Analyzing an Income Statement �Analyze relationships with sales to: � Total Expenses � Net Income �Financial Ratios- A comparison between two components of financial info. �Ratio Analysis- The calculation and interpretation of a financial ratio �Sales/Sales �Total Expenses/Sales �Net Income or Loss/Sales

�Vertical Analysis- Reporting an amount on a financial statement as a % of another item on the same financial statement. �Return on Sales (ROS)- Ratio of net income to total sales

7. 2 Preparing a Balance Sheet

Preparing a Balance Sheet �A balance sheet reports financial info on a specific date, indicating the financial condition of a business �Four Sections: � Heading � Assets � Liabilities � Owner’s Equity Business Name Balance Sheet Date

�Assets = Liabilities + Owner’s Equity Section: Beginning Owner’s Equity +Net Income or – Net Loss - Drawing Ending Owner’s Equity