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Basic Financial Statements -- General Review
The purpose of this page is to illustrate how a simple business transaction impacts each financial statement. The page begins with a sample format for the basic financial statments as a brief overview. The next section lists 10 business transactions that serve as the basis for this example. The last portions of this page summarizes the three financial statements following each business transaction.
Format of Basis Financial Statements
Balance Sheet
Balance Sheet for XYZ, Inc; September 30, 20XX |
Assets |
Liabilities |
Cash |
??? |
Operating loan |
??? |
Equipment |
??? |
Mortgage |
??? |
Accounts receivable |
??? |
. |
. |
Land |
??? |
Total Liabilities |
??? |
.. |
. |
. |
. |
Total Assets |
??? |
Net Worth (Equity) |
??? |
Income Statement
Income Statement for XYZ, Inc. July 1, 20XX to Sept. 30, 20XX
|
Income (Revenue) |
. |
Revenue; product A |
??? |
Revenue; product B |
??? |
. |
. |
. |
. |
. |
. |
Total Income |
??? |
. |
. |
Cost (Expenses) |
. |
Input supplies |
??? |
Utilities |
??? |
Labor (wages) |
??? |
Repairs and Maintenance |
??? |
. |
. |
Total Cost |
??? |
. |
. |
Net Income (Profit or Loss) |
??? |
Cash Flow Statement
Cash Flow Statement for XYZ, Inc. July 1, 20XX to Sept. 30, 20XX
|
. |
July |
August |
September |
October |
Beginning cash balance |
?? |
????? |
. |
. |
Cash Inflow |
. |
. |
. |
. |
Cash sale |
??? |
. |
. |
. |
Owner Contribution |
??? |
. |
. |
. |
Loan borrowed |
??? |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Available |
??? |
. |
. |
. |
. |
. |
. |
. |
. |
Cash Outflow |
. |
. |
. |
. |
Supplies |
???? |
. |
. |
. |
Labor (Wages) |
???? |
. |
. |
. |
Utilities |
???? |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Loan principal paid |
???? |
. |
. |
. |
Interest on loan |
???? |
. |
. |
. |
Total Cash Needs |
???? |
. |
. |
. |
. |
. |
. |
. |
. |
Ending cash balance |
????? |
. |
. |
. |
. |
. |
. |
. |
. |
The following list is a series of business transactions intended to illustrate how each transaction impacts each financial statement. Assume this is a new business so the first transaction is the owner depositing cash in a new checking account for the recently created business. The following sections suggest what each financial statement would report if they were prepared immediately after each business transaction. The purpose of the example is to illustrate how each transaction is reported on the financial statements.
BS means balance sheet, CF means cash flow statement, and IS means income statement.
- Start a business with $100,000
- BS – 100,000 cash; 100,000 asset; no debt; 100,000 equity
- CF – 100,000 cash inflow
- IS – no income
- Buy input inventory for $30,000 cash
- CF – 30,000 outflow
- BS – 70,000 cash and 30,000 inventory of input, 100,000 asset; no debt, 100,000 equity
- IS – no expense
- 3. Use 2/3 of inventory ($20,000) to produce a product worth $25,000
- CF – none
- BS – 70,000 cash; inventory of input at 10,000; inventory of product at 25,000; 105,000 in asset; no debt; 105,000 equity
- IS – 25,000 produce and 20,000 cost; 5,000 gain
- Sell $15,000 of product for cash
- CF – 15,000 cash inflow
- BS – 85,000 cash, 10,000 product inventory, 10,000 input inventory; 105,000 asset; no debt; 105,000 equity
- IS – no income or expense
- Borrow $50,000
- CF – 50,000 cash inflow
- BS -- 135,000 cash; 10,000 product inventory; 10,000 input inventory; 155,000 asset; 50,000 debt; 105,000 equity
- IS – no transaction
- Buy land for $40,000
- CF – 40,000 cash outflow
- BS – 95,000 cash; 10,000 product inventory; 10,000 input inventory; 40,000 land; 155,000 asset; 50,000 debt; 105,000 equity
- IS – no cost
- Buy input inventory for $50,000 cash
- CF – 50,000 cash outflow
- BS – 45,000 cash; 10,000 product inventory; 60,000 input inventory; 40,000 land; 155,000 asset; 50,000 debt; 105,000 equity
- IS – no cost
- Produce product with 2/3 of inventory ($40,000) worth $50,000
- CF – none
- BS – 45,000 cash; 60,000 product inventory; 20,000 input inventory; 40,000 land; 165,000 asset; 50,000 debt; 115,000 equity
- IS – 50,000 produce with 40,000 cost; 10,000 gain
- Pay $5,000 in wages
- CF – 5,000 outflow
- BS – 40,000 cash; 60,000 product inventory; 20,000 input inventory; 40,000 land; 160,000 asset; 50,000 debt; 110,000 equity
- IS – 5,000 cost
- Sell $10,000 worth of inventory for only $8,000
- CF – 8,000 inflow
- BS – 48,000 cash; 50,000 product inventory; 20,000 input inventory; 40,000 land; 158,000 asset; 50,000 debt; 108,000 equity
- IS – 2,000 negative adjustment on income statement
After transaction 1 -- start a business with $100,000 cash
Balance Sheet for XYZ, Inc; Date not specified in this example |
Assets |
Liabilities |
Cash |
100,000 |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Liabilities |
0 |
. |
. |
. |
. |
Total Assets |
100,000 |
Net Worth (Equity) |
100,000 |
Income Statement for XYZ, Inc.
Time period not specified in this example |
Income (Revenue) |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Income |
0 |
. |
. |
Cost (Expenses) |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cost |
0 |
. |
. |
Net Income (Profit or Loss) |
0 |
Cash Flow Statement for XYZ, Inc.
Time period not specified in this example |
. |
Time period not Specified |
. |
Beginning cash balance |
0 |
Cash Inflow |
. |
Owner Contribution |
100,000 |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Available |
100,000 |
. |
. |
Cash Outflow |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Needs |
0 |
. |
. |
Ending cash balance |
100,000 |
. |
. |
After transaction 2 -- Purchase input inventory for $30,000 cash
Balance Sheet for XYZ, Inc; Date not specified in this example |
Assets |
Liabilities |
Cash |
70,000 |
. |
. |
Input inventory |
30,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Liabilities |
0 |
. |
. |
. |
. |
Total Assets |
100,000 |
Net Worth (Equity) |
100,000 |
Income Statement for XYZ, Inc.
Time period not specified in this example |
Income (Revenue) |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Income |
0 |
. |
. |
Cost (Expenses) |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cost |
0 |
. |
. |
Net Income (Profit or Loss) |
0 |
Cash Flow Statement for XYZ, Inc.
Time period not specified in this example |
. |
Time period not Specified |
. |
Beginning cash balance |
0 |
Cash Inflow |
. |
Owner Contribution |
100,000 |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Available |
100,000 |
. |
. |
Cash Outflow |
. |
Purchased input |
30,000 |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Needs |
30,000 |
. |
. |
Ending cash balance |
70,000 |
. |
. |
After transaction 3 -- Use 2/3 of input inventory to produce product worth $25,000
Balance Sheet for XYZ, Inc; Date not specified in this example |
Assets |
Liabilities |
Cash |
70,000 |
. |
. |
Input inventory |
10,000 |
. |
. |
Product inventory |
25,000 |
. |
. |
. |
. |
Total Liabilities |
0 |
. |
. |
. |
. |
Total Assets |
105,000 |
Net Worth (Equity) |
105,000 |
Income Statement for XYZ, Inc.
Time period not specified in this example |
Income (Revenue) |
. |
Product produced |
25,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Income |
25,000 |
. |
. |
Cost (Expenses) |
. |
Input used |
20,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cost |
20,000 |
. |
. |
Net Income (Profit or Loss) |
5,000 |
Cash Flow Statement for XYZ, Inc.
Time period not specified in this example |
. |
Time period not Specified |
. |
Beginning cash balance |
0 |
Cash Inflow |
. |
Owner Contribution |
100,000 |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Available |
100,000 |
. |
. |
Cash Outflow |
. |
Purchased input |
30,000 |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Needs |
30,000 |
. |
. |
Ending cash balance |
70,000 |
. |
. |
After transaction 4 -- Sell $15,000 of product for cash
Balance Sheet for XYZ, Inc; Date not specified in this example |
Assets |
Liabilities |
Cash |
85,000 |
. |
. |
Input inventory |
10,000 |
. |
. |
Product inventory |
10,000 |
. |
. |
. |
. |
Total Liabilities |
0 |
. |
. |
. |
. |
Total Assets |
105,000 |
Net Worth (Equity) |
105,000 |
Income Statement for XYZ, Inc.
Time period not specified in this example |
Income (Revenue) |
. |
Product produced |
25,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Income |
25,000 |
. |
. |
Cost (Expenses) |
. |
Input used |
20,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cost |
20,000 |
. |
. |
Net Income (Profit or Loss) |
5,000 |
Cash Flow Statement for XYZ, Inc.
Time period not specified in this example |
. |
Time period not Specified |
. |
Beginning cash balance |
0 |
Cash Inflow |
. |
Owner Contribution |
100,000 |
Cash sales |
15,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Available |
115,000 |
. |
. |
Cash Outflow |
. |
Purchased input |
30,000 |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Needs |
30,000 |
. |
. |
Ending cash balance |
85,000 |
. |
. |
After transaction 5 -- Borrow $50,000
Balance Sheet for XYZ, Inc; Date not specified in this example |
Assets |
Liabilities |
Cash |
135,000 |
Loan |
50,000 |
Input inventory |
10,000 |
. |
. |
Product inventory |
10,000 |
. |
. |
. |
. |
Total Liabilities |
50,000 |
. |
. |
. |
. |
Total Assets |
155,000 |
Net Worth (Equity) |
105,000 |
Income Statement for XYZ, Inc.
Time period not specified in this example |
Income (Revenue) |
. |
Product produced |
25,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Income |
25,000 |
. |
. |
Cost (Expenses) |
. |
Input used |
20,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cost |
20,000 |
. |
. |
Net Income (Profit or Loss) |
5,000 |
Cash Flow Statement for XYZ, Inc.
Time period not specified in this example |
. |
Time period not Specified |
. |
Beginning cash balance |
0 |
Cash Inflow |
. |
Owner Contribution |
100,000 |
Cash sales |
15,000 |
Loan proceeds |
50,000 |
. |
. |
. |
. |
. |
. |
Total Cash Available |
165,000 |
. |
. |
Cash Outflow |
. |
Purchased input |
30,000 |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Needs |
30,000 |
. |
. |
Ending cash balance |
135,000 |
. |
. |
After transaction 6 -- Buy land for $40,000 cash
Balance Sheet for XYZ, Inc; Date not specified in this example |
Assets |
Liabilities |
Cash |
95,000 |
Loan |
50,000 |
Input inventory |
10,000 |
. |
. |
Product inventory |
10,000 |
. |
. |
Land |
40,000 |
Total Liabilities |
50,000 |
. |
. |
. |
. |
Total Assets |
155,000 |
Net Worth (Equity) |
105,000 |
Income Statement for XYZ, Inc.
Time period not specified in this example |
Income (Revenue) |
. |
Product produced |
25,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Income |
25,000 |
. |
. |
Cost (Expenses) |
. |
Input used |
20,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cost |
20,000 |
. |
. |
Net Income (Profit or Loss) |
5,000 |
Cash Flow Statement for XYZ, Inc.
Time period not specified in this example |
. |
Time period not Specified |
. |
Beginning cash balance |
0 |
Cash Inflow |
. |
Owner Contribution |
100,000 |
Cash sales |
15,000 |
Loan proceeds |
50,000 |
. |
. |
. |
. |
. |
. |
Total Cash Available |
165,000 |
. |
. |
Cash Outflow |
. |
Purchased input |
30,000 |
Purchased land |
40,000 |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Needs |
70,000 |
. |
. |
Ending cash balance |
95,000 |
. |
. |
After transaction 7 -- Buy input inventory for $50,000 cash
Balance Sheet for XYZ, Inc; Date not specified in this example |
Assets |
Liabilities |
Cash |
45,000 |
Loan |
50,000 |
Input inventory |
60,000 |
. |
. |
Product inventory |
10,000 |
. |
. |
Land |
40,000 |
Total Liabilities |
50,000 |
. |
. |
. |
. |
Total Assets |
155,000 |
Net Worth (Equity) |
105,000 |
Income Statement for XYZ, Inc.
Time period not specified in this example |
Income (Revenue) |
. |
Product produced |
25,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Income |
25,000 |
. |
. |
Cost (Expenses) |
. |
Input used |
20,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cost |
20,000 |
. |
. |
Net Income (Profit or Loss) |
5,000 |
Cash Flow Statement for XYZ, Inc.
Time period not specified in this example |
. |
Time period not Specified |
. |
Beginning cash balance |
0 |
Cash Inflow |
. |
Owner Contribution |
100,000 |
Cash sales |
15,000 |
Loan proceeds |
50,000 |
. |
. |
. |
. |
. |
. |
Total Cash Available |
165,000 |
. |
. |
Cash Outflow |
. |
Purchased input |
30,000 |
Purchased land |
40,000 |
Purchased input |
50,000 |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Needs |
120,000 |
. |
. |
Ending cash balance |
45,000 |
. |
. |
After transaction 8 -- Produce product with 2/3 of input inventory ($40,000) worth $50,000
Balance Sheet for XYZ, Inc; Date not specified in this example |
Assets |
Liabilities |
Cash |
45,000 |
Loan |
50,000 |
Input inventory |
20,000 |
. |
. |
Product inventory |
60,000 |
. |
. |
Land |
40,000 |
Total Liabilities |
50,000 |
. |
. |
. |
. |
Total Assets |
165,000 |
Net Worth (Equity) |
115,000 |
Income Statement for XYZ, Inc.
Time period not specified in this example |
Income (Revenue) |
. |
Product produced |
25,000 |
Product produced |
50,000 |
. |
. |
. |
. |
. |
. |
Total Income |
75,000 |
. |
. |
Cost (Expenses) |
. |
Input used |
20,000 |
Input used |
40,000 |
. |
. |
. |
. |
. |
. |
Total Cost |
60,000 |
. |
. |
Net Income (Profit or Loss) |
15,000 |
Cash Flow Statement for XYZ, Inc.
Time period not specified in this example |
. |
Time period not Specified |
. |
Beginning cash balance |
0 |
Cash Inflow |
. |
Owner Contribution |
100,000 |
Cash sales |
15,000 |
Loan proceeds |
50,000 |
. |
. |
. |
. |
. |
. |
Total Cash Available |
165,000 |
. |
. |
Cash Outflow |
. |
Purchased input |
30,000 |
Purchased land |
40,000 |
Purchased input |
50,000 |
. |
. |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Needs |
120,000 |
. |
. |
Ending cash balance |
45,000 |
. |
. |
After transaction 9 -- Pay $5,000 in wages
Balance Sheet for XYZ, Inc; Date not specified in this example |
Assets |
Liabilities |
Cash |
40,000 |
Loan |
50,000 |
Input inventory |
20,000 |
. |
. |
Product inventory |
60,000 |
. |
. |
Land |
40,000 |
Total Liabilities |
50,000 |
. |
. |
. |
. |
Total Assets |
160,000 |
Net Worth (Equity) |
110,000 |
Income Statement for XYZ, Inc.
Time period not specified in this example |
Income (Revenue) |
. |
Product produced |
25,000 |
Product produced |
50,000 |
. |
. |
. |
. |
. |
. |
Total Income |
75,000 |
. |
. |
Cost (Expenses) |
. |
Input used |
20,000 |
Input used |
40,000 |
Wages paid |
5,000 |
. |
. |
. |
. |
Total Cost |
65,000 |
. |
. |
Net Income (Profit or Loss) |
10,000 |
Cash Flow Statement for XYZ, Inc.
Time period not specified in this example |
. |
Time period not Specified |
. |
Beginning cash balance |
0 |
Cash Inflow |
. |
Owner Contribution |
100,000 |
Cash sales |
15,000 |
Loan proceeds |
50,000 |
. |
. |
. |
. |
. |
. |
Total Cash Available |
165,000 |
. |
. |
Cash Outflow |
. |
Purchased input |
30,000 |
Purchased land |
40,000 |
Purchased input |
50,000 |
Wages paid |
5,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Needs |
125,000 |
. |
. |
Ending cash balance |
40,000 |
. |
. |
After transaction 10 -- sell $10,000 of product inventory for only $8,000 cash
Balance Sheet for XYZ, Inc; Date not specified in this example |
Assets |
Liabilities |
Cash |
48,000 |
Loan |
50,000 |
Input inventory |
20,000 |
. |
. |
Product inventory |
50,000 |
. |
. |
Land |
40,000 |
Total Liabilities |
50,000 |
. |
. |
. |
. |
Total Assets |
158,000 |
Net Worth (Equity) |
108,000 |
Income Statement for XYZ, Inc.
Time period not specified in this example |
Income (Revenue) |
|
Product produced |
25,000 |
Product produced |
50,000 |
Adjust value of product |
-2,000 |
. |
. |
. |
. |
Total Income |
73,000 |
. |
. |
Cost (Expenses) |
. |
Input used |
20,000 |
Input used |
40,000 |
Wages paid |
5,000 |
. |
. |
. |
. |
Total Cost |
65,000 |
. |
. |
Net Income (Profit or Loss) |
8,000 |
Cash Flow Statement for XYZ, Inc.
Time period not specified in this example |
. |
Time period not Specified |
. |
Beginning cash balance |
0 |
Cash Inflow |
. |
Owner Contribution |
100,000 |
Cash sales |
15,000 |
Loan proceeds |
50,000 |
Cash sales |
8,000 |
. |
. |
. |
. |
Total Cash Available |
173,000 |
. |
. |
Cash Outflow |
. |
Purchased input |
30,000 |
Purchased land |
40,000 |
Purchased input |
50,000 |
Wages paid |
5,000 |
. |
. |
. |
. |
. |
. |
. |
. |
Total Cash Needs |
125,000 |
. |
. |
Ending cash balance |
48,000 |
. |
. |
Consider each transaction as individual steps and recognize how they impact the financial statements.
Last Updated
September 30, 2008
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