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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.

  1. 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
  2. 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. 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
  4. 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
  5. 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
  6. 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
  7. 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
  8. 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
  9. 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
  10. 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

   

Email: David.Saxowsky@ndsu.edu

This material is intended for educational purposes only. It is not a substitute for competent professional advice. Seek appropriate advice for answers to your specific questions.

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