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The balance sheet, sometimes referred to as the statement of financial position, is a summary of the financial balances of the organization. A standard balance sheet has three parts:
A balance sheet is often described as a snapshot of a company's financial condition. Of all the basic financial statements, the balance sheet is the only one that applies to a single point in time at the end of a business year.
EXAMPLE
Below is a sample balance sheet for a fictitious company, the ABC Company.Here we see assets in the first section, with current assets listed first. Those are the ones that can be converted into cash very quickly in the short term, in less than a year, and they include cash, accounts receivable, what your customers owe you, inventory, prepaid expenses, and any short-term investments that you have.
The next subsection of assets is long-term assets or fixed assets. This includes longer-term investments, property, plant, and equipment, real estate less the depreciation, and any intangible assets as well. There's also a subsection for other assets like taxes. These assets are all totaled under the line item "Total Assets."
Now let's take a look at the liability section. Just as the current assets are listed first in the asset section, the current liabilities are listed first in the liability section. They include accounts payable, bills that you owe, short-term loans, income taxes you have to pay, and other accrued salaries and wages that have been expensed by the company but haven't been paid yet, along with any unearned revenue. Next are the long-term liabilities, which would include any long-term debt or deferred taxes.
Finally, the last section is the owner's equity. It includes the owner's original investment in the company plus any retained earnings. Those are net profits that have been earned over the life of the company. Together the owner's equity and the liabilities equal the total assets, so the balance sheet balances.
The income statement shows how the revenue is transformed into income. This statement has many names, including:
The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.
EXAMPLE
Let's take a look at this sample income statement for XYZ Retailers.The top section shows revenue, which includes sales; in this statement, sales represent a total of $250,000. We then subtract the cost of goods sold from this dollar amount. We figure this out by the change in the inventory, which gives us the gross profit. To the gross profit, we can add any other operating revenue not directly related to the business, such as rent or other commissions we might have received. This gives us the total revenue.
The expenses section shows cash outflows, or any "using up" of assets or incurring of liabilities during the reporting period, from delivering your products, goods, or services or carrying out any other activities that are part of the major operations.
The first expenses listed are for selling, general and administrative expenses, often called SGA. SGA represents all the expenses needed to sell the products:
The last section shows non-operating expenses, like financing costs, income tax expenses, or other irregular items.
At the bottom, we show the net profit – the EBIT, or earnings before interest and taxes. For XYZ Company, $60,000 represents the net profit and it is called the bottom line. The bottom line is the net income that is calculated after subtracting all of these expenses from revenue. Since it is the last line of the income statement, it is usually informally called the bottom line and it's important to investors because it is the profit for the period, usually for the year, that represents the profit that is attributable to the shareholders.
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