Preparation and Analysis of Basic Financial Statements: Income Statement, Statement of Stockholders' Equity, and Balance Sheet

Preparation of Financial Statements for XYZ Corporation

Introduction

This study guide covers the preparation and analysis of three fundamental financial statements for XYZ Corporation: the Income Statement, Statement of Stockholders' Equity, and Balance Sheet. These statements are essential tools in Financial Accounting for summarizing a company's financial performance and position at the end of an accounting period.

Income Statement

Purpose and Structure

The Income Statement reports a company's revenues and expenses over a specific period, showing the resulting Net Income. It helps stakeholders assess profitability and operational efficiency.

• Revenues: Total income earned from business operations ($250,000).

• Expenses: Costs incurred to generate revenues, including salaries, rent, supplies, mortgage, and miscellaneous operating expenses.

• Net Income: The difference between total revenues and total expenses.

Formula:

$\text{Net Income} = \text{Total Revenues} - \text{Total Expenses}$

Example Calculation:

• Revenues: $250,000

• Expenses: Salaries ($80,000) + Rent ($30,000) + Miscellaneous ($20,000) = $130,000

• Net Income: $250,000 - $130,000 = $120,000 (Note: The handwritten solution uses $100,000, which may include other expenses. Always sum all listed expenses for accuracy.)

Application: The income statement is used by investors and management to evaluate profitability and make decisions about future operations.

Statement of Stockholders' Equity

Purpose and Structure

The Statement of Stockholders' Equity shows changes in equity accounts, including Common Stock and Retained Earnings, over the accounting period.

• Common Stock: Represents owners' investments in the company.

• Retained Earnings: Accumulated net income not distributed as dividends.

• Dividends: Earnings distributed to shareholders, reducing retained earnings.

Formula for Retained Earnings:

$\text{Ending Retained Earnings} = \text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends}$

Example Table:

	Common Stock	Retained Earnings
Beginning of the Year	$50,000	$0
Contributions	$0	$0
Net Income		$100,000
Dividends		($45,000)
End of the Year	$50,000	$55,000

Application: This statement helps users understand how equity changes due to company performance and owner transactions.

Balance Sheet

Purpose and Structure

The Balance Sheet presents the company's financial position at a specific date, listing Assets, Liabilities, and Stockholders' Equity. It follows the fundamental accounting equation:

$\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$

• Assets: Economic resources owned by the company (e.g., cash, supplies, equipment, building).

• Liabilities: Obligations owed to outsiders (e.g., accounts payable, mortgage).

• Stockholders' Equity: Owners' claims on assets after liabilities are settled.

Example Table:

Assets	Liabilities	Stockholders' Equity
Cash: $15,000 Supplies: $10,000 Equipment: $30,000 Building: $200,000 Total Assets: $255,000	Accounts Payable: $50,000 Mortgage: $100,000 Total Liabilities: $150,000	Common Stock: $50,000 Retained Earnings: $55,000 Total Stockholders' Equity: $105,000

Application: The balance sheet is used to assess liquidity, solvency, and capital structure.

Additional info: The handwritten notes emphasize separating building and mortgage as distinct items on the balance sheet, which is a key accounting practice for clarity.

Summary Table: Key Financial Statement Relationships

Statement	Main Purpose	Key Components	Formula
Income Statement	Measures profitability over a period	Revenues, Expenses, Net Income	$\text{Net Income} = \text{Revenues} - \text{Expenses}$
Statement of Stockholders' Equity	Shows changes in equity accounts	Common Stock, Retained Earnings, Dividends	$\text{Ending Retained Earnings} = \text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends}$
Balance Sheet	Reports financial position at a point in time	Assets, Liabilities, Stockholders' Equity	$\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$

Conclusion

Understanding how to prepare and interpret the Income Statement, Statement of Stockholders' Equity, and Balance Sheet is fundamental in financial accounting. These statements provide a comprehensive view of a company's financial health and are essential for decision-making by management, investors, and creditors.