Verifying Financial Statements

The financial statements shown on the next several pages are for a sole proprietorship, which is a business owned by an individual. Corporate financial statements are slightly different. The four basic financial statements are the income statement, statement of owner's equity, balance sheet, and statement of cash flows. The income statement, statement of owner's equity, and statement of cash flows report activity for a specific period of time, usually a month, quarter, or year. The balance sheet reports balances of certain elements at a specific time. All four statements have a three‐line heading in the following format:

Income statement. The income statement, which is sometimes called the statement of earnings or statement of operations, is prepared first. It lists revenues and expenses and calculates the company's net income or net loss for a period of time.Net income means total revenues are greater than total expenses. Net lossmeans total expenses are greater than total revenues. The specific items that appear in financial statements are explained later.

The Greener Landscape Group Income Statement For the Month Ended April 30, 20X2

Revenues
Lawn Cutting Revenue		$845
Expenses
Wages Expense	$280
Depreciation Expense	235
Insurance Expense	100
Interest Expense	79
Advertising Expense	35
Gas Expense	30
Supplies Expense	25
Total Expenses		784
Net Income		$ 61

Statement of owner's equity. The statement of owner's equity is prepared after the income statement. It shows the beginning and ending owner's equity balances and the items affecting owner's equity during the period. These items include investments, the net income or loss from the income statement, and withdrawals. Because the specific revenue and expense categories that determine net income or loss appear on the income statement, the statement of owner's equity shows only the total net income or loss. Balances enclosed by parentheses are subtracted from unenclosed balances.

The Greener Landscape Group Statement of Owner's Equity For the Month Ended April 30, 20X2

J. Green, Capital, April 1		$ 0
Additions
Investments	$15,000
Net Income	61	15,061
Withdrawals		(50)
J. Green, Capital, April 30		$ 15,011

Balance sheet. The balance sheet shows the balance, at a particular time, of each asset, each liability, and owner's equity. It proves that the accounting equation(Assets = Liabilities + Owner's Equity) is in balance. The ending balance on the statement of owner's equity is used to report owner's equity on the balance sheet.

The Greener Landscape Group Balance Sheet April 30, 20X2

ASSETS
Current Assets
Cash		$ 6,355
Accounts Receivable		200
Supplies		25
Prepaid Insurance		1,100
Total Current Assets		7,680
Property, Plant, and Equipment
Equipment	$18,000
Less: Accumulated Depreciation	(235)	17,765
Total Assets		$25,445
LIABILITIES AND OWNER'S EQUITY
Current Liabilities
Accounts Payable		$ 50
Wages Payable		80
Interest Payable		79
Unearned Revenue		225
Total Current Liabilities		434
Long-Term Liabilities
Notes Payable		10,000
Total Liabilities		10,434
Owner's Equity
J. Green, Capital		15,011
Total Liabilities and Owner's Equity		$25,445

Statement of cash flows. The statement of cash flows tracks the movement of cash during a specific accounting period. It assigns all cash exchanges to one of three categories—operating, investing, or financing—to calculate the net change in cash and then reconciles the accounting period's beginning and ending cash balances. As its name implies, the statement of cash flows includes items that affect cash. Although not part of the statement's main body, significant non‐cash items must also be disclosed.

According to current accounting standards, operating cash flows may be disclosed using either the direct or the indirect method. The direct method simply lists the net cash flow by type of cash receipt and payment category. For purposes of illustration, the direct method appears below.

The Greener Landscape Group Statement of Cash Flows For the Month Ended April 30, 20X2

Cash Flows from Operating Activities
Cash from Customers	$ 870
Cash to Employees	(200)
Cash to Suppliers	(1,265)
Cash Flow Used by Operating Activities	(595)
Cash Flows from Investing Activities
Purchases of Equipment	(8,000)
Cash Flows from Financing Activities
Investment by Owner	15,000
Withdrawal by Owner	(50)
Cash Flow Provided by Financing Activities	14,950
Net Increase in Cash	6,355
Beginning Cash, April 1	0
Ending Cash, April 30	$6,355