{"id":48,"date":"2015-03-18T22:43:58","date_gmt":"2015-03-18T22:43:58","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=48"},"modified":"2015-07-17T13:20:02","modified_gmt":"2015-07-17T13:20:02","slug":"financial-statements","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/financial-statements\/","title":{"raw":"Financial Statements","rendered":"Financial Statements"},"content":{"raw":"Financial statements are how companies communicate their story.\u00a0 Thanks to GAAP, there are four basic financial statements everyone must prepare\u00a0. Together they represent the profitability and strength of a company. The financial statement that reflects a company\u2019s profitability is the income statement<\/strong>. The statement of retained earnings - also called statement of owners equity<\/strong> shows the change in retained earnings between the beginning and end of a period (e.g. a month or a year). The balance sheet<\/strong> reflects a company\u2019s solvency and financial position.\u00a0 The statement of cash flows\u00a0<\/strong>shows the cash inflows and outflows for a company over a period of time.\r\n\r\nThere are several accounting activities that happen before financial statements are prepared. Financial statements are prepared in the following order:\r\n
    \r\n\t
  1. Income Statement<\/li>\r\n\t
  2. Statement of Retained Earnings - also called Statement of Owners' Equity<\/li>\r\n\t
  3. The Balance Sheet<\/li>\r\n\t
  4. The Statement of Cash Flows<\/li>\r\n<\/ol>\r\nThe following video summarizes the four financial statements required by GAAP.\r\n\r\nhttps:\/\/www.youtube.com\/watch?v=dqOCRIcapoI\r\n\r\nRemember the transaction analysis we were working on for Metro Courier?\u00a0 Let's use those numbers to prepare the financial statements for Metro Courier Inc.\u00a0 The final balances for January were:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Cash<\/td>\r\nAsset<\/td>\r\n$ 66,800<\/td>\r\n<\/tr>\r\n
    Accounts Receivable<\/td>\r\nAsset<\/td>\r\n$ 5,000<\/td>\r\n<\/tr>\r\n
    Supplies<\/td>\r\nAsset<\/td>\r\n$ 500<\/td>\r\n<\/tr>\r\n
    Prepaid rent<\/td>\r\nAsset<\/td>\r\n$ 1,800<\/td>\r\n<\/tr>\r\n
    Equipment<\/td>\r\nAsset<\/td>\r\n$ 5,500<\/td>\r\n<\/tr>\r\n
    Truck<\/td>\r\nAsset<\/td>\r\n$ 8,500<\/td>\r\n<\/tr>\r\n
    Accounts Payable<\/td>\r\nLiability<\/td>\r\n$ 200<\/td>\r\n<\/tr>\r\n
    Common Stock<\/td>\r\nEquity<\/td>\r\n$ 30,000<\/td>\r\n<\/tr>\r\n
    Retained Earnings<\/td>\r\nEquity<\/td>\r\n$ 0<\/td>\r\n<\/tr>\r\n
    Service Revenue<\/td>\r\nRevenue<\/td>\r\n$ 60,000<\/td>\r\n<\/tr>\r\n
    Salary Expense<\/td>\r\nExpense<\/td>\r\n$ 900<\/td>\r\n<\/tr>\r\n
    Utilities Expense<\/td>\r\nExpense<\/td>\r\n$ 1,200<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n

    Income Statement<\/h3>\r\nThe income statement<\/strong>, sometimes called an earnings statement or profit and loss statement, reports the profitability of a business organization for a stated period of time.<\/em> In accounting, we measure profitability for a period, such as a month or year, by comparing the revenues earned with the expenses incurred to produce these revenues.\u00a0 This is the first<\/em> financial statement prepared as you will need the information from this statement for the remaining statements.\u00a0 The income statement contains:\r\n