Financial Statements

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Transferring Income Statement Data to a Balance Sheet

From the sales revenue and expenses reported in a business’s income statement, you can determine the balances of several assets and liabilities using the normative operating ratios for the business. Laying [more…]

Looking at Fixed Assets in a Balance Sheet

Virtually every business needs fixed assets — long-lived economic resources such as land, buildings, and machines — to carry on its profit-making activities. In a balance sheet, these assets typically [more…]

Breaking Down the Balance Sheet for a Business

At the end of each accounting period, you take a snapshot of your business’s condition. This snapshot — called a balance sheet — gives you a picture of where your business stands — how much it has in assets [more…]

Choosing a Format for a Balance Sheet

Companies in the United States usually choose between two common formats for their balance sheets: the Account format or the Report format. The actual line items appearing in both formats are the same; [more…]

Drawing Conclusions from Your Final Balance Sheet

You can analyze balance sheet numbers through a series of ratio tests to draw conclusions, check your cash status, and track your debt. Because these are the types of tests financial institutions and potential [more…]

Preparing an Income Statement for a Business

Before you can prepare an income statement for your business, you have to calculate Net Sales and Cost of Goods Sold using information that appears on your worksheet. Then, you can use the rest of the [more…]

Using an Income Statement to Make Business Decisions

Many business owners find it easier to make business decisions and compare their income statement trends using percentages rather than the actual numbers. Calculating these percentages is easy — you simply [more…]

Primary Financial Statements of a Business

This list gives details of the three primary financial statements in the running of a business. These statements record your business’s performance, letting you analyse and identify where you’re strong [more…]

What Is Financial Accounting?

Financial accounting involves the process of preparing financial statements for a business. This extravaganza involves three major components: accounting information, type of business entity, and user [more…]

What Are Balance Sheets and Classified Balance Sheets?

The balance sheet shows the health of a business from the day the business started operations to the specific date of the balance sheet report. The balance sheet has three sections: assets, liabilities [more…]

The Elements of an Income Statement

The income statement shows the business’s income, expenses, gains, and losses. The end product of these transactions is net income or loss. Some also call the income statement a statement of profit and [more…]

The Elements of the Statement of Cash Flows

The purpose of the statement of cash flows is to show cash sources and uses during a specific period of time — in other words, how a company brings in cash and for what costs the cash goes back out the [more…]

The Income Statement's Multiple-Step Format

The multiple-step format for the income statement provides more information than the single-step method and is the preferred format for the vast majority of publicly traded companies. A [more…]

Current and Noncurrent Assets on the Balance Sheet

Assets are resources a company owns. They consist of both current and noncurrent resources. Current assets are ones the company expects to convert to cash or use in the business within one year of the [more…]

Current and Noncurrent Liabilities on the Balance Sheet

Liabilities are claimed against the company’s assets. As with assets, these claims record as current or noncurrent. Usually, they consist of money the company owes to others. For example, the debt can [more…]

What Is a Sole Proprietorship?

A sole proprietorship is a business that has only one owner. As the individual in charge of the whole shooting match, the single owner has complete control and decision-making power over the business. [more…]

Partnership Defined in Accounting Terms

A partnership must have at least two owners, with any percentage of ownership interest (as long as the combined total isn’t more than 100!). As with the sole proprietorship, partners aren’t classified [more…]

Corporations and Equity Accounts

The major advantage to incorporation is limited liability, which means that, unless debt is personally guaranteed, no individual retains responsibility for paying off debt. Other advantages are [more…]

The Purpose of the Statement of Cash Flows

Simply put, the statement of cash flows gives the user information about the cash receipts and cash payments of the business during the accounting period. Whereas cash sources come from many different [more…]

Direct Method of Preparing the Statement of Cash Flows

If the Financial Accounting Standards Board (FASB)/ International Accounting Standards Board (IASB) proposed changes take effect, the direct method for preparing the statement of cash flows will be required [more…]

Indirect Method of Preparing the Statement of Cash Flows

When preparing the statement of cash flows using the indirect method, the operating section starts with net income from the income statement, which you adjust for any noncash items hitting the income statement [more…]

How to Figure Financial Liquidity

A business is considered to be liquid if it can cover current debt with current assets. In other words, can a company pay off its current liabilities without going to outside sources [more…]

How to Calculate Free Cash Flow

Investors are very interested in free cash flow, which is the net cash provided by operating activities minus capital expenditures and dividends. You figure free cash flow by subtracting money spent for [more…]

How to Use Prospective Effect for Accounting Changes

With the prospective effect, companies don’t recast opening balances to show the effect of the change in accounting principle. Depending on the circumstances, prospectively is okay when there’s an impracticability [more…]

Types of Accounting Errors

Nobody’s perfect. In the sometimes-harum-scarum world of GAAP interpretation and booking accounting events, mistakes do happen. And just as you do with changes in estimates, the important point is to make [more…]


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