Examples of an Accounting Financial Statement
Every business has an accountant who prepares financial statements on a regular basis. Management, creditors and stockholders use these statements to gauge the performance of the company and make projections about future results. The primary financial reports are: the profit and loss statement, balance sheet and statement of cash flow.
To see what these statements look like, start with the financial data from ABC Corp. Using this information, you can figure out how to prepare several examples of financial statements:
- Sales: $3,200,000
- Cost of goods sold: $1,920,000
- Gross Profit: $1,280,000
- Administrative overhead: $875,000
- Profit before interest and taxes: $405,000
- Interest: $32,000
- Taxes: $128,00
- Depreciation: $57,000
- Net profits: $188,000
- Cash: $60,000
- Accounts receivable: $357,000
- Inventory: $530,000
- Fixed assets: $1,200,000
- Total assets: $2,147,000
- Accounts payable: $385,000
- Short-term bank loans: $130,000
- Long-term debt: $550,000
- Equity: $1,082,000
Profit and Loss Statement
A profit and loss statement, or income statement, sums up a company’s revenues, expenses and costs incurred over a specific period. It shows a company’s ability or inability to make a profit by increasing revenues or reducing costs of operations. The profit and loss statement is the one report that usually receives the most attention – after all, the goal of every business is to make a profit.
The top line of the P&L statement shows the company’s total revenues. This figure includes revenues from all sources and nets out any discounts given to customers.
The next section contains the cost of goods sold. This category includes the costs of raw materials, direct labor used in production of products or services, shipping costs for materials and supplies, and overhead. Overhead expenses include costs related to manufacturing facilities. These are expenses such as supervisory labor costs, water, electricity, and insurance for buildings and equipment.
The expenses recorded in cost of goods sold match the sales of product and services reported in revenues. Subtracting the cost of goods sold from total revenues produces the gross profit margin.
Gross profits are used to cover overhead expenses and, hopefully, leave a net profit. Typical overhead expenses are as follows:
- Administrative salaries
- Advertising
- Insurance
- Permits and licenses
- Office rent
- Telephone
- Supplies
- Legal fees
- Accounting fees
- Travel costs
Subtracting overhead expenses from the gross profit leaves the earnings before deductions for interest, taxes, depreciation and amortization, also known as EBITDA. A profit and loss statement is presented in this format to highlight the profitability of a company’s operations before deductions for the financial costs and tax consequences.
The net profit is the result after deducting cost of goods sold, overhead, interest and taxes. The following is an example of the P&L statement for ABC Corp.:
- Revenues: $3,200,000
- Cost of goods sold: $1,920,000
- Gross profit: $1,280,000
- Administrative overhead: $875,000
- EBITDA: $405,000
- Interest: $32,000
- Taxes: $128,000
- Depreciation: $57,000
- Net profits: $188,000
Balance Sheet
A balance sheet is a list of a company’s assets and liabilities on a specific date. Unlike the P&L, which is a summary of expenses over a period of time, the balance sheet is a picture of the company’s condition at a specific point in time.
Assets and liabilities are separated on the balance into short- and long-term accounts. Short-term assets include cash on hand, accounts receivable and inventory. Goods in inventory may be further separated into the amount of raw materials, work in progress, and finished goods ready for sale and shipping. Long-term assets are real estate, buildings, equipment and investments. Total assets must always equal total liabilities. Short-term liabilities are bank loans, accounts payable, accrued expenses, sales tax payable and payroll taxes payable. Long-term liabilities are debts payable in more than one year. These included long-term bonds and leases. The equity portion of the balance sheet has all the company’s investor contributions and the accumulated retained earnings. Stockholder investments include common and preferred stock.
The balance sheet for ABC Corp. would look like the following:
Assets
- Cash: $60,000
- Accounts receivable: $357,000
- Inventory: $530,000
- Total current assets: $947,000
- Fixed assets: $1,200,000
- Total assets: $2,147,000
Liabilities
- Accounts payable: $365,000
- Short-term bank loans: $130,000
- Accrued expenses: $20,000
- Total current liabilities: $515,000
- Long-term debt: $550,000
- Equity: $1,082,000
- Total liabilities: $2,147,000
Cash Flow Statement
A cash flow statement summarizes the cash and cash equivalents that come into and go out of a company’s business operations. While profits are important, a company needs cash to pay its bills. The cash flow statement gives investors a view of how financially solid a company is, and it shows creditors how much cash the business has available to pay its debts and fund its operations.
Cash flow has three components:
- Cash from operations
- Cash from investing activities
- Cash from changes in financial structure
The cash flow statement is different from the income statement and balance sheet because it only records cash activities from operations. It considers movements of cash such as payments of interest, taxes, wages, rents and suppliers. Cash inflows are the receipts from sales of goods and services. This statement does not include sales made on credit or the future collection of accounts receivable.
Investing activities are any uses of cash for changes in the company’s investments. These include the purchase and sale of assets such as equipment and buildings or long-term securities. Changes in short-term assets, like marketable securities, are recorded on the cash flow statement. Cash flow from financing activities includes payments on outstanding loan balances or receipts from new loans or bonds. Payments of dividends to shareholders and stock repurchases are recorded as cash outflows.
The construction of a cash flow statement starts with the company’s profits and then makes adjustments for changes in current assets, investing activities and financing. Note that depreciation is a non-cash item and is added back to net earnings in the cash flow statement.
Following is an example of the cash flow statement for ABC Corp.:
- Net profits: $245,000
- Additions:
- Depreciation: $57,000
- Decrease in accounts receivable: $65,000
- Increase in accounts payable: $18,000
- Subtractions:
- Increase in inventory: ($76,000)
- Net cash flow from operations: $309,000
- Investing activities
- Purchase of equipment: ($193,000)
- Financing
- Proceeds of loan: $158,000
- Cash flow for the year: $274,000
Types of Financial Statements
Financial statements prepared by accountants are classified as either audited or unaudited. An audited financial statement signifies that the accountant has verified virtually every transaction and account on the company’s books. Cash balances are checked by obtaining statements from the bank. Accounts receivable are confirmed by asking customers to verify the balances owed. For inventory, the accountants check purchase orders and receipts, and physically count the raw materials and stock on the premises. Government regulations require all publicly traded companies to prepare audited financial statements. The statements must comply with Generally Accepted Accounting Principles and be certified by independent accountants.
Unaudited statements, on the other hand, use the financial information presented by the company. The accountants gather the information and prepare the financial statements, but they do not verify or confirm any of the figures. These are known as compilations and are examples of financial reports prepared on an interim basis. Accountants do not express an opinion on unaudited statements. These types of statements are used for the timely release of information, because certified statements take much longer to prepare. Although accountants do not express an opinion on the accuracy of the data in unaudited statements, they are required to notify management if they find misleading or erroneous information.
Financial statements follow standard presentation formats and apply GAAP to assure consistency. This makes it easier for creditors, investors and management to analyze the statements and make comparisons over time to other companies.
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