Financial Accounting | Financial Statements and Business Structures

Financial Accounting

Financial Statements and Business Structures

Overview

This topic reviews the purpose, format, and interrelationships of the core financial statements—Income Statement, Balance Sheet, and Statement of Cash Flows—as well as the basic types of business structures and how they influence reporting.

Key Concepts and Structures

Income Statement: Shows revenues and expenses over a period to determine net income or loss.
Balance Sheet: Snapshot of assets, liabilities, and owner’s equity at a specific point in time.
Statement of Cash Flows: Reports cash inflows and outflows from operating, investing, and financing activities.
Statement of Retained Earnings: Summarizes changes in retained earnings over time.
Single-Step vs. Multi-Step Income Statement:
- Single-step: Revenues – Expenses = Net Income
- Multi-step: Separates operating income from nonoperating items
Sole Proprietorship: One owner, easy to form, unlimited liability
Partnership: Two or more owners, shared liability and profit
Corporation: Separate legal entity, limited liability, double taxation
LLC: Limited liability with pass-through taxation

Step-by-Step Example

Problem: A company reports revenues of $80,000 and expenses of $45,000. What is its net income, and how does it appear on the income statement?

Step 1: Calculate net income:

Net Income = Revenues - Expenses = 80,000 - 45,000 = 35,000

Step 2: Income Statement Format:

  Income Statement (Single-Step)
  ----------------------------------
  Revenues:
    Sales Revenue       $80,000

  Expenses:
    Total Expenses      $45,000

  Net Income            $35,000

Quick Tip

The income statement covers a period of time (e.g., month, quarter, year), while the balance sheet is a snapshot on a single date.