External: no paycheck from the company
Internal: paycheck from the company
The income statement reports the success or profitability of the
company’s operations over a specific period (see Alternative
Terminology). For example, Soft byte Inc.’s income statement is
dated “For the Month Ended September 30, 2022.” It is
prepared from the data appearing in the revenue and expense
columns of Illustration 1.9. The heading of the statement
identifies the company, the type of statement, and the time
period covered by the statement.
ALTERNATIVE TERMINOLOGY
The income statement is sometimes referred to as the
statement of operations, earnings statement, or profit and loss
statement.
Alternative Terminology notes present synonymous terms that
you may come across in practice.
,The income statement lists revenues first, followed by
expenses. Finally, the statement shows net income (or net loss).
When revenues exceed expenses, net income results. When
expenses exceed revenues, a net loss results.
Although practice varies, we have chosen in our illustrations
and homework solutions to list expenses in order of magnitude.
(We will consider alternative formats for the income statement
in later chapters.)
Note that the income statement does not include investment
and dividend transactions between the stockholders and the
business in measuring net income. For example, as explained
earlier, the cash dividend from Soft byte Inc. was not regarded
as a business expense. This type of transaction is considered a
reduction of retained earnings, which causes a decrease in
stockholders’ equity.
Retained Earnings Statement
Soft byte Inc.’s retained earnings statement reports the
changes in retained earnings for a specific period of time. The
time period is the same as that covered by the income
statement (“For the Month Ended September 30, 2022”). Data
for the preparation of the retained earnings statement comes
from the retained earnings columns of the tabular summary
(Illustration 1.9) and from the income statement (Illustration
1.10).
,The first line of the statement shows the beginning retained
earnings amount. Then come net income and dividends. The
retained earnings ending balance is the final amount on the
statement. The information provided by this statement
indicates the reasons why retained earnings increased or
decreased during the period. If there is a net loss, it is deducted
with dividends in the retained earnings statement.
Balance Sheet
Soft byte Inc.’s balance sheet reports the assets, liabilities, and
stockholders’ equity at a specific date (September 30, 2022).
The company prepares the balance sheet from the column
headings and the month-end data shown in the last line of the
tabular summary (Illustration 1.9).
Observe that the balance sheet lists assets at the top, followed
by liabilities and stockholders’ equity. Total assets must equal
total liabilities and stockholders’ equity. Soft byte Inc. reports
only one liability, Accounts Payable, on its balance sheet. In
most cases, there will be more than one liability. When two or
more liabilities are involved, a customary way of listing is as
shown in Illustration 1.11.
The primary purpose of a statement of cash flows is to provide
financial information about the cash receipts and cash
payments of a company for a specific period of time (see
Helpful Hint). To help investors, creditors, and others in their
, analysis of a company’s cash position, the statement of cash
flows reports the cash effects of a company’s operating,
investing, and financing activities. In addition, the statement
shows the net increase or decrease in cash during the period,
and the amount of cash at the end of the period.
•Each transaction must affect two or more accounts to keep
the basic accounting equation in balance.
•Recording done by debiting at least one account and crediting
at least one other account.
•Debits must equal Credits.
If the sum of Debit entries are greater than the sum of Credit
entries, the account will have a debit balance.
Internal: paycheck from the company
The income statement reports the success or profitability of the
company’s operations over a specific period (see Alternative
Terminology). For example, Soft byte Inc.’s income statement is
dated “For the Month Ended September 30, 2022.” It is
prepared from the data appearing in the revenue and expense
columns of Illustration 1.9. The heading of the statement
identifies the company, the type of statement, and the time
period covered by the statement.
ALTERNATIVE TERMINOLOGY
The income statement is sometimes referred to as the
statement of operations, earnings statement, or profit and loss
statement.
Alternative Terminology notes present synonymous terms that
you may come across in practice.
,The income statement lists revenues first, followed by
expenses. Finally, the statement shows net income (or net loss).
When revenues exceed expenses, net income results. When
expenses exceed revenues, a net loss results.
Although practice varies, we have chosen in our illustrations
and homework solutions to list expenses in order of magnitude.
(We will consider alternative formats for the income statement
in later chapters.)
Note that the income statement does not include investment
and dividend transactions between the stockholders and the
business in measuring net income. For example, as explained
earlier, the cash dividend from Soft byte Inc. was not regarded
as a business expense. This type of transaction is considered a
reduction of retained earnings, which causes a decrease in
stockholders’ equity.
Retained Earnings Statement
Soft byte Inc.’s retained earnings statement reports the
changes in retained earnings for a specific period of time. The
time period is the same as that covered by the income
statement (“For the Month Ended September 30, 2022”). Data
for the preparation of the retained earnings statement comes
from the retained earnings columns of the tabular summary
(Illustration 1.9) and from the income statement (Illustration
1.10).
,The first line of the statement shows the beginning retained
earnings amount. Then come net income and dividends. The
retained earnings ending balance is the final amount on the
statement. The information provided by this statement
indicates the reasons why retained earnings increased or
decreased during the period. If there is a net loss, it is deducted
with dividends in the retained earnings statement.
Balance Sheet
Soft byte Inc.’s balance sheet reports the assets, liabilities, and
stockholders’ equity at a specific date (September 30, 2022).
The company prepares the balance sheet from the column
headings and the month-end data shown in the last line of the
tabular summary (Illustration 1.9).
Observe that the balance sheet lists assets at the top, followed
by liabilities and stockholders’ equity. Total assets must equal
total liabilities and stockholders’ equity. Soft byte Inc. reports
only one liability, Accounts Payable, on its balance sheet. In
most cases, there will be more than one liability. When two or
more liabilities are involved, a customary way of listing is as
shown in Illustration 1.11.
The primary purpose of a statement of cash flows is to provide
financial information about the cash receipts and cash
payments of a company for a specific period of time (see
Helpful Hint). To help investors, creditors, and others in their
, analysis of a company’s cash position, the statement of cash
flows reports the cash effects of a company’s operating,
investing, and financing activities. In addition, the statement
shows the net increase or decrease in cash during the period,
and the amount of cash at the end of the period.
•Each transaction must affect two or more accounts to keep
the basic accounting equation in balance.
•Recording done by debiting at least one account and crediting
at least one other account.
•Debits must equal Credits.
If the sum of Debit entries are greater than the sum of Credit
entries, the account will have a debit balance.
