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Income Statement

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					Cash Flow Statement
The cash flow statement reports the
cash generated and used during the
time interval specified in its heading.
The period of time that the statement
  covers is chosen by the company.

For example, the heading may state
   "For the Three Months Ended
December 31, 2009" or "The Fiscal
 Year Ended September 30, 2009".
 The official name for the cash flow
 statement is the statement of cash
   flows. We will use both names
       throughout Accounting.

The statement of cash flows is one of
 the main financial statements. (The
  other financial statements are the
balance sheet, income statement, and
  statement of stockholders' equity.)
   The cash flow statement organizes and reports the cash
   generated and used in the following categories:

1 Operating activities   –
  .                          converts the items reported on the income statement
                                from the accrual basis of accounting to cash.

2 Investing activities   – reports the purchase and sale of long-term
   .                          investments and property, plant and equipment.
3 Financing activities   – reports the issuance and repurchase of the
  .                           company's own bonds and stock and the
                              payment of dividends.
4 Supplemental           – reports the exchange of significant items that did not
  . information               involve cash and reports the amount of income
                              taxes paid and interest paid.
     Because the income statement is
   prepared under the accrual basis of
 accounting, the revenues reported may
  not have been collected. Similarly, the
     expenses reported on the income
   statement might not have been paid.

    You could review the balance sheet
  changes to determine the facts, but the
      cash flow statement already has
integrated all that information. As a result,
   savvy business people and investors
 utilize this important financial statement.
   Here are a few ways the statement of cash flows is used.
The cash from operating activities is compared to the company's
 net income. If the cash from operating activities is consistently
   greater than the net income, the company's net income or
   earnings are said to be of a "high quality". If the cash from
 operating activities is less than net income, a red flag is raised
   as to why the reported net income is not turning into cash.
           Some investors believe that "cash is king".
The cash flow statement identifies the cash that
is flowing in and out of the company. If a
company is consistently generating more cash
than it is using, the company will be able to
increase its dividend, buy back some of its
stock, reduce debt, or acquire another
company. All of these are perceived to be good
for stockholder value.
Some financial models are based upon cash
flow.
    Matt is a college student who enjoys buying and
selling merchandise using the Internet. On January 2,
  2009, he decides to turn his hobby into a business
  called "Good Deal Co." Each month the Good Deal
  Co. will have one or two transactions. At the end of
   each month we will prepare an income statement,
 balance sheet, and a statement of cash flows for the
  current month and for the year-to-date period. The
    purpose is to show how these transactions are
          reported on the cash flow statement.
  On January 2, 2009 Matt invests $2,000 of his
personal money into his sole proprietorship, Good
   Deal Co. On January 20, Good Deal buys 14
graphing calculators for $50 per calculator—this is
  about 50% less than the selling price Matt has
          observed at the retail stores.

The total cost to Good Deal for all 14 calculators is
$700. Good Deal has no other transactions during
                     January.
  Matt prepares financial statements for his new
         business as of January 31, 2009:
          Good Deal Co.
         Income Statement
For the Month Ended January 31, 2009




      Revenues       $0
      Expenses        0

        Net Income   $0
                      Good Deal Co.
                       Balance Sheet
                      January 31, 2009

                       Liabilities &
Assets                    Owner's
                          Equity

Cash         $1,300    Liabilities       $   0


Inventory      700     Owner's Equity

                         Matt Jones,
                                          2,000
                           Capital

                         Total Liab. &
 Total
             $2,000         Owner's      $2,000
    Assets
                            Equity
                                 Good Deal Co.
                             Statement of Cash Flows
                       For the Month Ended January 31, 2009
Operating Activities
   Net Income                                        $         0
   Increase in Inventory                                 (700)
      Cash Provided (Used) in Operating Activities   (700)
Investing Activities                                 0
Financing Activities
   Investment by Owner                                2,000


Net Increase in Cash                                 1,300
Cash at the beginning of the month                         0
Cash at the end of the month                         $1,300
Good Deal's income statement for January showed no
   profit or loss, since it did not have any sales or
 expenses. However, the cash flow statement reports
  that Good Deal's operating activities resulted in a
   decrease in cash of $700. The decrease in cash
    occurred because the company increased its
          inventory by $700 during January.


The financing activities section shows an increase in
cash of $2,000 which corresponds to the increase in
    Matt Jones, Capital (Matt's investment in the
business). The net change in the Cash account from
  the owner's investment and the cash outflow for
           inventory is a positive $1,300.
 This net change of a positive $1,300 is verified at
the bottom of the cash flow statement and on the
 balance sheet. There was a $0 cash at January 1,
  but at January 31, the Cash balance is $1,300.
  For a change in assets (other than cash)—the
  change in the Cash account is in the opposite
direction. Recall that when Inventory increased by
          $700, Cash decreased by $700.
For a change in liabilities and owner's equity—the
    change in the Cash account is in the same
  direction. Recall that when the owner invested
cash in the company Cash increased and Owner's
                 Equity increased.
On February 25, 2009, Good Deal sells 10 calculators to a
nearby high school for $80 each. Matt delivers the calculators
on February 25 and gives the school an $800 invoice due by
March 10. Matt receives $800 from the school on March 8.
Matt prepared financial statements for his new business as of
February 28, 2009:
                        Good Deal Co.
                       Income Statement
               For the Month Ended Feb. 28, 2009




          Revenues                $800
          Expenses                 500
               Net Income         $300
 The income statement for the month of February
   shows revenues (or sales) of $800. Under the
      accrual basis of accounting—revenue is
    recognized when title passes (at the time of
shipment or time of delivery), not when the money
is received. Expenses (such as the cost of goods
  sold for $500) appear on the income statement
when they best match up with revenues, not when
        the expenses or goods are paid for.

 (Other expenses will also appear on the income
statement when they are used, not when they are
   paid for.) As a result of the accrual basis of
accounting, the income statement reports $300 of
net income even though there was no cash inflow
        or cash outflow during February.
                                             Statement of Cash Flows
                                      For the Month Ended February 28, 2009


Operating Activities

  Net Income                                                                  $ 300

  Increase in Accounts Receivable                                             (800)

  Decrease in Inventory                                                            500

    Cash Provided (Used) in Operating Activities                              0

nvesting Activities                                                                   0

Financing Activities

  Investment by Owner                                                                 0



Net Increase in Cash                                                          0

Cash at the beginning of the month                                                1,300
Cash at the end of the month                                                  $1,300
 As you can see above, the cash flow
  statement for the month of February
reports no change in cash. That agrees
 with the company's balance sheet that
reported Cash of $1,300 on January 31
 and will show $1,300 on February 28.

    The year-to-date net income of $300
increases the owner's equity on the balance
 sheet. Please note the connection between
 the bottom line of the year-to-date income
  statement and the change in Matt Jones,
  Capital on the balance sheet. Matt Jones,
Capital has increased from $2,000 to $2,300.
                            Good Deal Co.
                             Balance Sheet
                            February 28, 2009
Assets                          Liabilities & Owner's Equity
Cash                  $1,300    Liabilities                        $     0
Accounts Receivable   800       Owner's Equity
                                  Matt Jones, Capital (excl. net
Inventory             200                                          2,000
                                    inc.)
                                  Matt Jones, Curr Yr. Net
                                                                       300
                                    Income
                                       Total Owner's Equity         2,300
                                  Total Liabilities & Owner's
  Total Assets        $2,300                                       $2,300
                                     Equity

				
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posted:10/1/2012
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