Analyzing and Preparing Financial Statements for Business Success

by Losangeles Cpa LosangelesCpa

There are many parts to the accounting cycle. Preparing the financial statements is a very important part of this cycle. Financial statements are used to evaluate a company's progress, as well as estimate future performance.

There are four main financial statements that GAAP (generally accepted accounting principles) requires companies to publish at the end of their accounting period. These accounts are the income statement, statement of retained earnings, statement of cash flows, and balance sheet. The three statements most introductory accounting classes cover are the income statement, statement of retained earnings, and balance sheet. The statements are done in a specific order because you need to do some before you can do others. Using these three examples, the income statement comes first, statement of retained earnings second, and the balance sheet last.

The income statement is used to calculate a company's net income or net loss. A company with a net income has made money during that accounting period. A net loss is the opposite, in that a company has lost money during the period. In basic accounting courses, you are taught that to set-up the income statement by creating a three-line heading. This heading consists of the name of the company on the first line, income summary on the second, and for the period ending, then the date.

The next statement is the statement of retained earnings. This statement allows you to look at how retained earnings has changed over the period. The net income or net loss is also shown in this statement as an increase or decrease to the retained earnings account. This is why the income statement has to be done before the statement of retained earnings can be done. Another item that shows on the statement is the dividends account. Dividends are the amount of profits a company has made that is being paid out to the company's stockholders. The statement starts with the company's beginning retained earnings balance at the start of the period. Next is the addition of the company's net income, or the subtraction of the company's net loss. Lastly is the subtraction of the amount of dividends the company is paying out during the period. This gives the ending balance of retained earnings for the period.

The last financial statement is the balance sheet that shows all the account totals for the permanent accounts for a company. All temporary accounts should be closed out properly before beginning the balance sheet. Temporary accounts are accounts that are used for the period then reset to a zero balance at the end of a period. Expenses, revenues, and dividends are all temporary accounts in a business. Permanent accounts are those like cash, accounts receivable, and accounts payable. The balance sheet totals these account balances in two sections. First is all the asset accounts which are comprised of accounts like cash, accounts receivable, prepaid insurance, accumulated depreciation accounts, supplies on hand, etc. These account balances are totalled at the bottom of the sheet or in totals row depending on how the balance sheet is set up. The liabilities and equity accounts are grouped together. These accounts consist of accounts payable, notes payable, unearned revenue, capital stock, retained earnings, which is why the statement of retained earnings is done before the balance sheet, and other accounts belonging to these groups. The liabilities accounts are totalled along with the equity accounts and then added together. Once these totals are found the total assets are compared to the total liabilities and equity. These totals should equal, if not, then there is a problem with the account totals or calculations that were done.


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