FINANCIAL STATEMENTS

Financial statements refer to a specific set of reports produced in an entity's accounting

system. The objective of these reports is to provide information about the entity.
A complete set of financial statements includes 5 components.

1. Statement of Comprehensive Income

The Income Statement, also known as Profit and Loss Statement (P&L Statement), shows
the results of operations of an entity over a particular period of time. The income statement
presents the period's income and expenses and the resulting net income or loss.
Many large companies today prepare a Statement of Comprehensive Income. The
Statement of Comprehensive Income presents a company's results of operations (net
income or loss) and its other comprehensive income (OCI). If the company has no other
comprehensive income, then the contents of the Income Statement and Statement of
Comprehensive Income would be the same.
Other comprehensive income include gains and losses that cannot be reported in the
Income Statement such as revaluation surplus, translation adjustments, and unrealized
gains, for a given period. Other comprehensive income is covered in higher financial
accounting studies.

2. Statement of Changes in Capital

The Statement of Changes in Capital (or Statement of Changes in Equity) shows the
balance of the capital account at the beginning of the period, the changes that occurred
during the period, and the ending balance as a result of such changes. Capital is affected
by contributions and withdrawals of owners, income, and expenses.
The title used for this report varies depending upon the form of business ownership. It is
called Statement of Owner's Equity in sole proprietorships, Statement of Partners'
Equity in partnerships and Statement of Stockholders' Equity in corporations.

3. Statement of Financial Position

A Balance Sheet presents an entity's assets, liabilities, and capital as of a given point in
time. This report shows the entity's financial position and condition, hence, also
called Statement of Financial Position.
All asset amounts are added. All liability and capital accounts are also added. The total
amount of assets should be equal to the total amount of liabilities plus capital.

4. Statement of Cash Flows

The Statement of Cash Flows, or Cash Flow Statement, presents the beginning balance
of cash, the changes that occurred during the period, and the cash balance at the end of
the period as a result of the changes.
The cash flow statement shows the cash inflows and outflows from three activities:
operating, investing, and financing.
Operating activities pertain to transactions that are directly related to the company's main
course of business. Investing activities refer to "where the company puts its money".
These activities include long-term investments, acquisition of property, plant and
equipment; and other transactions related to non-current assets. Financing activities
include transactions in which a company acquires its funds. These include loans from
banks (long-term liabilities) and contributions from owners.

5. Notes to Financial Statements

The Notes to Financial Statements, or Supplementary Notes, provide information in

addition to those presented in the Balance Sheet, Income Statement, Statement of
Changes in Equity, and Cash Flow Statement. The notes contain disclosures required by
accounting standards, supporting computations, breakdown of line items in the face of the
financial statements, and other information that users may be interested in.

Income Statement
The Income Statement, also referred to as Profit and Loss (P&L) Statement, shows an
entity's results of operations for a particular period.
It presents an entity's revenues and expenses, and the resulting net income or net loss.
This lesson presents an Income Statement example and provides important points you
need to know in preparing and understanding the said report.
Income Statement Example
Here is a sample income statement of a service type sole proprietorship business. Let us
name the company Strauss Printing Services. All amounts are assumed and simplified for
illustration purposes.
Strauss Printing Services
Income Statement
For the Year Ended December 31, 2019

Service Revenue $ 160,000

Less: Expenses
Salaries Expense $ 40,000
Supplies Expense 26,100
Rent Expense 20,500
Utilities Expense 11,300
Depreciation Expense 5,000 102,900
Net Income $ 57,100
Explanation and Pointers
1. An income statement shows the net income or net loss of a business. This is
achieved by deducting all expenses from all income.
2. A typical income statement starts with a heading which consists of three lines.
The first line presents the name of the company; the second describes the title
of the report; and the third states the period covered in the report.
3. Notice that the third line is worded "For the Year Ended..." This means that the
income statement presents information for a specific span of time. In the above
example, the period covers 1 year that ends on December 31, 2019. Hence, the
amounts presented in the report are income and expenses from January 1,
2019 to December 31, 2019.
4. Income accounts are presented before expenses. In the above statement, the
income account is Service Revenue. Other income accounts for service type
businesses include Professional Fees, Rent Income, Tuition Fees, etc.
5. Expenses are presented after the income accounts. It is a good practice to
arrange expenses according to amount (largest to smallest). Some users who
are interested in the company's expenses are concerned about the size of each
expense. Arranging the expenses from largest to smallest results in a more
useful and organized report. Nonetheless, Miscellaneous Expense or Sundry
Expense is presented last.
6. If income exceeds expenses, there is a net income. If expenses exceed
income, there is a net loss. Notice how computations are presented. A single
line is drawn every time an amount is computed. The resulting amount
is double-ruled when it is no longer followed by any operation. For
example, $57,100 (net income).
7. The income statement complies with the accrual basis of accounting. Income
is recognized when earned regardless of when collected. Expenses are
recognized when incurred regardless of when paid.
This means that income and expenses presented in the income statement have
been earned and incurred, respectively. Nonetheless, it does not mean that they
have all been collected or paid.
8. International accounting standards suggest that companies should present
other comprehensive income in their financial statements. A Statement of
Comprehensive Income shows the contents of an income statement followed
by a list of "other comprehensive income".
9. Other comprehensive income includes gains and losses that cannot be
reported as profit and loss, such as unrealized gains and losses, and
revaluation surplus. This is taken up in higher financial accounting studies.
10. When the company does not have other comprehensive income, the contents
of the income statement and the statement of comprehensive income are the
same. In any case, international accounting standards favor the use of the title
"Statement of Comprehensive Income".
Statement of Comprehensive Income
Here's a sample Statement of Comprehensive Income, which includes other
comprehensive income. This topic is taken up in higher accounting so you need not worry
about it yet.
Strauss Printing and Publishing, Inc.
Statement of Comprehensive Income
For the Year Ended December 31, 2019

Service Revenue $ 160,000

Less: Expenses
Salaries Expense $ 40,000
Supplies Expense 26,100
Rent Expense 20,500
Utilities Expense 11,300
Depreciation Expense 5,000 102,900
Net Income $ 57,100
Other Comprehensive Income
Revaluation Surplus $ 20,000
Unrealized Translation Gain 10,200 30,200
Total Comprehensive Income $ 87,300

This lesson presents the Statement of Owner's Equity (or Statement of Changes in
Owner's Equity) along with important points you need to know in preparing and
understanding this report.
A Statement of Owner's Equity shows the changes in the capital account due to
contributions, withdrawals, and net income or net loss.
Capital is increased by owner contributions and income, and decreased
by withdrawals and expenses.
The Statement of Owner's Equity, which is prepared for the sole proprietorship type of
business, shows the movement in capital as a result of those four elements.

Statement of Owner's Equity Example

Here is a sample Statement of Owner's Equity of a service type sole

proprietorship business, Strauss Printing Services. All amounts are assumed and
simplified for illustration purposes.
Assume that the company started the year 2019 with $100,000 capital. During the year,
the owner made $10,000 additional contributions and $20,000 total withdrawals. The
Statement of Owner's Equity would look like this:
Strauss Printing Services
Statement of Owner's Equity
For the Year Ended December 31, 2019

Strauss, Capital – beginning $ 100,000

Add: Additional Contributions 10,000
Net Income 57,100
Total $ 167,100
Less: Strauss, Drawings 20,000
Strauss, Capital – ending $ 147,100

Explanation and Pointers

1. A Statement of Owner's Equity (SOE) shows the owner's capital at the start of
the period, the changes that affect capital, and the resulting capital at the end
of the period. It is also known as "Statement of Changes in Owner's Equity".
2. A typical SOE starts with a heading which consists of three lines. The first line
shows the name of the company; second the title of the report; and third the
period covered.
3. The title of the report is Statement of Owner's Equity. This is used for sole
proprietorships. For partnerships, the title used is "Statement of Partners'
Equity" and for corporations, "Statement of Stockholders' Equity".
4. Notice that the third line is worded "For the Year Ended..." This means that the
SOE presents information for a specific span of time. In the above example,
the period covers 1 year that ends on December 31, 2019. Hence, the amounts
presented pertain to changes to owner's equity from January 1, 2019 to
December 31, 2019.
5. The capital account used in the illustration is Strauss, Capital. The capital
account used would vary from company to company.
6. Income increases capital. Expenses decrease it. Net income is equal to income
minus expenses. Hence, net income would increase the capital account. If
expenses exceed income, there is a net loss. In such case, net loss will
decrease the capital account.
7. Notice that the net income above, $ 57,100, is the bottom-line amount in the
company's Income Statement.
8. Strauss, Drawings represents the total withdrawals made by the owner during
the period. The owner made $ 20,000 total drawings. This amount is deducted
to get the capital balance.
9. The Statement of Owner's Equity example above shows that the company
has $147,100 in capital as a result of the following: $100,000 balance at the
beginning of the year, plus $10,000 owner's contributions during the year, plus
$57,100 net income, and minus $20,000 withdrawals.
10. Good accounting form suggests that a single line is drawn every time an amount
is computed (it signifies that a mathematical operation has been completed).
The bottom-line amount is double-ruled, i.e. $ 147,100.
 Statement of Financial Position

A balance sheet shows the financial position or condition of a company as of a certain

date. It is also called Statement of Financial Position.
Financial position pertains to the resources owned and controlled by the
company (assets), and the claims against them (liabilities and capital).
Hence, if you have a report that presents a company's assets, liabilities and capital, then
you are probably looking at a company's balance sheet.
This lesson shows what a Balance Sheet looks like and provides some points you need
to know about this financial report.
Balance Sheet Example
Moving on from our previous illustrations, here is a sample balance sheet for Strauss
Printing Services, a service type sole proprietorship business.
All amounts are assumed and simplified for illustration purposes.
Strauss Printing Services
Statement of Financial Position
As of December 31, 2019

ASSETS
Current Assets:
Cash $ 21,000
Accounts Receivable 16,000
Prepaid Expenses 4,500 $ 41,500
Non-current Assets:
Property, Plant and Equipment 145,000
Total Assets $ 186,500

LIABILITIES AND OWNER'S EQUITY

Current Liabilities:
Accounts Payable $ 8,400
Rent Payable 8,000 $ 16,400
Non-current Liability:
Loans Payable 23,000
Strauss, Capital 147,100
Total Liabilities and Owner's Equity $ 186,500

Explanation and Pointers

1. A Balance Sheet shows the financial position or condition of the company; thus,
it is also called "Statement of Financial Position".
2. A typical balance sheet starts with a heading which consists of three lines. The
first line presents the name of the company; the second describes the title of
the report; and the third states the date of the report.
 3. Notice that the third line is worded "As of..." Unlike the other components of the
financial statements which cover a span of time ("For the period ended.."), the
balance sheet presents information as of a certain date (at a specific point in
time). In the above example, the contents of the balance sheet pertain to the
financial condition of the company on December 31, 2019.
4. A balance sheet summarizes the assets, liabilities, and capital of a company.
Assets refer to properties owned and controlled by the company. Liabilities are
obligations to creditors, lenders, etc. And capital represents the portion left for
the owners of the business after all liabilities are paid. For detailed lessons
about assets, liabilities and capital, check out the Elements of Accounting.
5. Assets and liabilities are classified as either current or non-current. Current
assets are properties that will be converted into cash within 12 months or within
the operating cycle of the business. Current liabilities are due within 12 months
or within the operating cycle. Non-current assets and non-current liabilities are
those that do not meet the above qualifications.
6. "Total assets" and "total liabilities and capital" should always be equal.
7. The capital amount, $147,100 for Strauss, Capital, was actually taken from
the Statement of Owner's Equity.
8. The balance sheet may be presented in two forms: account form and report
form. In account form, assets are presented on the left side while liabilities and
capital are presented on the right. In report form, assets are presented first and
then followed by liabilities and capital. The example above is presented using
the report form.
9. Good accounting form suggests that a single line is drawn every time an amount
is computed. It signifies that a mathematical operation has been completed. The
"total assets" and "total liabilities and capital" amounts are double-ruled.

Statement of Cash Flows

A Statement of Cash Flows (or Cash Flow Statement) shows the movement in
the Cash account of a company.
It presents cash inflows (receipts) and outflows (payments) in the three activities of
business: operating, investing, and financing.
Accountants follow the accrual basis in measuring income and expenses.
However, some users are particularly interested in the cash transactions of the company;
hence the need to present a Statement of Cash Flows.
This lesson takes a look at the Statement of Cash Flows and provides some important
points in understanding it.
Statement of Cash Flows Example
Here is a sample cash flow statement for Strauss Printing Services, a service type sole
proprietorship business.
All amounts are assumed and simplified for illustration purposes.
Strauss Printing Services
Statement of Cash Flows
For the Year Ended December 31, 2019

Cash Flow from Operating Activities:

Cash received from customers $ 146,000
Cash paid for expenses (81,000)
Cash paid to suppliers (47,500) $ 17,500
Cash Flow from Investing Activities:
Cash paid to acquire additional equipment (20,300)
Cash Flow from Financing Activities:
Cash received from investment of owner $ 10,000
Cash received from bank loan 50,000
Cash paid for bank loan – partial payment (27,000)
Cash paid to owner – withdrawal (20,000) 13,000
Net Increase (Decrease) in Cash for the Year $ 10,200
Add: Cash – January 1, 2019 10,800
Cash – December 31, 2019 $ 21,000

Explanation and Pointers

1. Statement of Cash Flows presents the inflows and outflows of cash in the
different activities of the business, the net increase or decrease in cash, and the
resulting cash balance at the end of the period. Cash inflows refer to receipts
of cash while cash outflows to payments or disbursements.
2. A typical cash flow statement starts with a heading which consists of three lines.
The first line presents the name of the company; the second describes the title
of the report; and the third states the period covered in the report.
3. Notice that the third line is worded "For the Year Ended..." This means that the
information included in the report covers a span of time. In the illustration above,
the report presents inflows and outflows of cash for 1 year, i.e. from January 1
to December 31, 2019.
4. Cash inflows and outflows are classified in three activities: operating, investing,
and financing.
5. Operating activities refer to the main operations of the company such as
rendering of professional services, acquisition of inventories and supplies,
selling of inventories for merchandising and manufacturing concerns, collection
of accounts, payment of accounts to suppliers, and others. Generally, operating
activities refer to those that involve current assets and current liabilities.
6. Investing activities may be summed up as: "where the company puts its money
for long-term purposes", such as acquisition of property, plant and equipment;
and investment in long-term securities. Selling these properties are also
considered investing activities. In general, investing activities include
transactions that involve non-current assets.
7. Financing activities refer to: "where the company gets its funds", such as
investment of the owner/s, and cash proceeds from bank loan and other long-
term payables. The payment of such items (i.e. withdrawal of owner/s and
payment of loans) are also financing activities. Generally, financing activities
include those that affect non-current liabilities and capital.
8. All inflows are presented in positive figures while all outflows in negative (in
parentheses).
9. After inflows and outflows are presented, the net increase or decrease in cash
is computed. Then it is added to the beginning balance of cash to get the
balance at the end. Easy, right? In simple sense, this report presents the cash
balance at the beginning of the period, the changes during the period, and
the resulting balance at the end of the period.
10. Notice that the cash balance at the end, $ 21,000, is the same as the cash
balance presented in the company's Balance Sheet.
11. Good accounting form suggests that a single line is drawn every time an amount
is computed. It signifies that a mathematical operation has been completed. The
computed balance at the end of the report is double-ruled.