Financial statements are a record of a company's financial activity.The balance sheet, income statement, and statement of cash flows are the main components of a financial statement.The shareholder's equity and assets are shown on the balance sheet.The income sheet shows the revenues, expenses, and income or loss for a specific period of time, usually a month, quarter, or year.The cash balance at the beginning of a period is shown in the statement of cash flows.The Securities Exchange Commission regulates what goes on these sheets for public companies in compliance with GAAP.If you are unfamiliar with the standards, you should hire a professional.
Step 1: Understand how the balance sheet works.
The balance sheet shows the company's assets and liabilities.The basic accounting equation is the underlying basis of the balance sheet.You can see that equity is the same as assets.The relationship is reflected in the balance sheet.Assets and liabilities are listed on the balance sheet and subtracted from each other to arrive at a figure for shareholder's equity.Balance sheets can be created using accounting software.A written list with two columns can be used to total your assets and liabilities by category.
Step 2: Do you know your assets?
Cash is one of the assets that you have on hand.The assets are usually divided into current assets and fixed assets.Current assets include the cash you have on hand and what could be done quickly.You would have accounts receivable, securities due with a year, and your inventory in this category.Pre-payments or deposits can be included, such as insurance for the next year.Property, plant, and equipment are referred to as fixed assets.These assets have a useful life of more than a year.There are intangible assets on the balance sheet.Other non-physical assets include patents, brand recognition, and copyrights.All of these assets need actual dollar figures in your balance sheet, which can be calculated exactly or estimated based on industry convention.
Step 3: All the information should be written up.
In order to write the balance sheet, you need to detail the information.To label each asset, you need to divide it into current and fixed assets.Add all of your assets together.
Step 4: Do you know your liabilities?
The company's liability is what it owes to other companies or people.It is the company's debt.The assets are divided into two categories.Current liabilities include things like lines of credit and credit cards, as well as anything owed to other companies for goods and supplies.It also includes the income and wages you've paid out to employees and taxes owed.Long-term liabilities include loans, bonds, and other debts that will be paid out over time.
Step 5: You should make a record of your debts.
You have to account for each liability in major categories, such as loans, mortgages, and so on.Divide your liabilities into current and long-term on your balance sheet.List the value of each category next to its name.To get your total, add up all your debts.
Step 6: Take your assets and liabilities into account.
The shareholder's equity is calculated by subtracting what is owed from what you have.A positive amount of equity shows that the company has been able to finance its operations with its own money, rather than relying on debt.You should have a line for your assets.You should have a line for your total liabilities below it.The shareholder's equity is shown when you subtract the second from the first.
Step 7: Increase shareholder's equity.
The shareholder's equity section is on your sheet.The shareholder's interests will be represented in this section.Common shareholder's equity categories include common stock, capital in excess of par, and retained earnings.To arrive at total shareholder's equity, sum the categories up.You can compare your total to the difference between assets and liabilities.Either you or the accountant that keeps the company's books made a mistake if the figures don't match.The assets, liabilities and shareholder's equity are all on the left side of the balance sheet.The basic accounting equation is represented in this way.
Step 8: Net sales are the first thing to start with.
Net sales are the first figure listed in a company's balance sheet.Net sales are the figure used in the income statement.Net sales are the total sales minus any allowances for lost or damaged goods.The company's "top line" is the truest representation of sales over the period.The income statement covers financial activity throughout the period in question, whether that is a month, a quarter or a year.The income statement is a reduction of net sales by various expenses faced by the company to arrive at net income, also called net profit or the bottom line.
Step 9: Make a calculation of gross profit.
Gross profit will be the first calculation on the income statement.After considering the cost of goods sold, gross profit is the company's profit.The cost of goods sold includes all materials and labor used to make them.To arrive at gross profit, subtract the amount from net sales.
Step 10: List the operating expenses of the company.
There are two major categories on the balance sheet: operating and non-operating expenses.The philosophy of operating expenses is the same as the cost of goods sold.Those expenses are related to the operations of the company.The cost of selling and advertising products, administrative costs, and wages for employees in these departments are included.It also includes general expenses, such as utilities, rent, and manager salaries.Remember that materials and manufacturing labor costs were already covered in the cost of goods sold and do not need to be counted here.There are three major categories of expenses: selling, general and administrative.To find total operating expenses, take the amount of each expense and add it to the total.Subtract operating expenses from gross profit to arrive at operating income.
Step 11: Non-operating expenses should be written down.
Non-operating expenses are the other category of expenses on the income statement.Tax expenses include interest, amortization, and depreciation.There is room in this section to record an "extraordinary gain or loss," which may arise from a massive amount of inventory theft.
Step 12: Take out your income statement.
Lay out your income statement piece by piece.Net sales are at the top.The pieces will be in sequential order.The net sales should be put on one line.Put the cost of sales under that.To get the gross profit, subtract the cost of sales from net sales.Before moving on to operating costs, skip a line.Underneath the gross profit, put the operating costs in general categories.Selling, general, and administrative costs are lumped into one, but not always.You should write the operating income that you derived from subtracting operating costs from the gross profit.Each line has the interest and taxes on it.You can subtract them from each other.It gives you more precise data.The net income is the final line.
Step 13: Start with net income.
The cash flow is an important number to the company because it establishes the actual cash you have on hand.Your income includes non-cash expenses and assets that don't affect your cash balance.You will need a completed income statement and completed balance sheets from this period and the previous period to create a statement of cash flows.The statement of cash flows is divided into three parts: operating activities, investing activities and financing activities.
Step 14: Cash flows from operating activities should be calculated.
You're looking at how much cash operations bring in.This step is different from what you did in other statements because they include non-cash items.You are focused on cash.The money you have to work with right now won't be affected by the things you add back into the net income.Start with non-cash items.The company spreads out the cost of something over time for accounting purposes.It isn't taking away from cash flow right now.You add that expense back in.There is the same thing with depreciation.It's a number that is taken away from the total amount of an asset.It's not a cash flow problem, so expense is added back in.The indirect method is used to figure out cash flow.Adding up cash flows from scratch is what the direct method entails.
Step 15: Take your cash flow in the rest of operations into account.
You need to look at other items that bring in cash.This category includes gains or losses on sales of fixed assets as this activity brings in cash.If you have sold property within the period, you need to subtract the operating costs from the gain or loss.Changes in accounts receivable need to be looked at.If accounts receivable goes down, that means the company has gained cash, and that needs to be added in.If the company has bought inventory, that signals a decrease in cash and needs to be subtracted from the cash flow.Taxes, insurance, and salaries are some of the items that can affect the cash flow.
Step 16: Cash flows from investing activities can be determined.
You need to look at how investing affects your cash flow.Long-term investments include equipment and buildings.This category focuses on where cash has gone in the current year.Money put into new equipment or buildings that will be subtracted from cash flow can be included in this step.Equipment you've sold can be added to the cash flow.Any money invested in the stock market, what you've bought and sold, and how that affects your cash are included in this step.
Step 17: Cash can be found from financing.
Financing is a third category.Money used to finance your business is the focus of this section.Cash flow can be affected by stock options and shareholders.Loans are added to your cash.The loan payments are taken out of the cash.If you issue bonds or common stock, the issue is recorded as an influx of cash, since dividends reduce your cash.
Step 18: Make a statement of cash flows.
The first thing to do is to start with the net income at the top.People reading the statement of cash flows can see where expenses are going in and out, if the three categories are separated.To get your net increase or deficiency in cash for the year, subtract and add cash as needed in each category.Add in last year's cash.If you have any left over from last year, add it to this year's cash or subtract it.The total cash resources are the amount of cash you have on hand.