Financial Statement Analysis: How to Make a Financial Statement

How to Make a Financial Statement

Financial Statements are used to find the financial health of a company or of an individual. Financial statements for companies and firms are usually prepared by Certified Public Accountants (CPAs). It does not hurt to understand what goes into the work for a financial statement to give you a good idea of your company's financial health. There are four basic statements to be considered, Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of cash flow.
The Balance Sheet also referred to as statement of financial position or condition, reports on Assets (anything of value), liabilities (anything owed to others) and Owner's equity. (anything paid in capital and retained earnings) A Balance Sheet only gives you a point in time.
This is an example of a balance sheet is:
Joe's Hotdogs Balance Sheet 1/01/09
Cash $5,000
All other assets $55,000
Total assets $60,000
Liabilities and owners' equity
Liabilities $1,500
Owner's Equity
Paid in capital $50,000
Retained earnings $0
Total owner's equity $8,500
Total liabilities and owners' equity $60,000
Formula for the balance sheet is Assets = Liabilities + Owner's Equity. (note the totals of the Assets = the total of Liabilities plus owners' equity) In this example let's take a look at the net worth of this company. Net worth is simply Net Assets = Assets - Liabilities or Net Assets = Owners' equity. A positive net worth means you have more assets than you have debts. A negative net worth means you have more debts than you have things of worth. This company has $60,000 in Assets and $1,500 in Liabilities which would give the company a net worth of $58,500.
The Income statement also known as Profit and Loses statement is a list all of your revenues and expenses. This can be for a week, month, or year based on the period of time you are trying to prepare your financial statement for. A balance sheet is a point in time whereas the income statement is period of time. So for our example let's do an income statement for a year.
Joe's Hotdogs Income Statement for '09
Revenues $17,500
Expenses $4,000
Total $13,500
Income statement show your Net income, Net Income = Revenues - Expenses. In this example the Revenues $17,500 and the Expenses $4,000 so the Net Income was $13,500.
Statement of Retained Earnings explains the changes in a company's retained earnings over the reporting period. This report is for a period of time and we will make a Statement of Retained earnings for the year of 2009 for Joe's Hotdogs.
Joe's hotdogs
Statement of Changes in Owners' Equity
For the year ended 12/31/09
Paid in Capital
Beginning Balance $50,000
Additional Paid In Capital $0
Balance as of 12/31/09 $50,000
Retained Earnings changes:
Beginning Balance $58,500
Net income for the year $13,500
(Less)Dividends ($5,000)
Ending Balance $67,000
Total owners' equity $117,000
In this example there was no changes in the Paid in Capital it kept the original value of $50,000. Retained Earning changes = Ending Balance = Beginning Balance + Net income - Dividends. The Beginning Balance comes off the first Balance Sheet and the Net income comes off our Income statement for the period. Dividends are a distribution of earning to the owners of a corporation, for our example the company paid out $5,000. Our total change of owners' equity was $117,000.
Statement of cash flows reports on a company's cash flow activities particularly on its operating, investing and financing activities for a period of time.
Joe's Hotdogs
Statement of Cash Flows
For year ending 12/31/09
Cash provided (used) by:
Operating activities $(5,000)
Investing activities $(2,000)
Financing activities $10,000
Net change in cash $3,000
The firm had $5,000 in operating activities and $2,000 in investing activates but financed $10,000 giving them a net change of $3,000 cash for the year. We can then take the beginning balance of cash from our Balance sheet and get our ending balance for cash $5,000 + $2,000 = $7,000.
These are the four primary statements in which a CPA would use for the company to make a financial statement. The purpose for all of this is to provide information about the financial position, performance and changes in financial position of an enterprise to help make financial decisions.