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Analyzing and Preparing Financial

Statements for Business Success

There are many parts to the accounting cycle. Preparing thefinancial statements is a very important part of this cycle.Financial statements are used to evaluate a company's progress, aswell as estimate future performance.

There are four main financial statements that GAAP (generallyaccepted accounting principles) requires companies to publish atthe end of their accounting period. These accounts are the incomestatement,statementof retainedearnings,statementof cashflows,statement,statementof retainedearnings,statementof cashflows,and balance sheet. The three statements most introductoryaccounting classes cover are the income statement, statement ofretained earnings, and balance sheet. The statements are done in aspecific order because you need to do some before you can doothers. Using these three examples, the income statement comesfirst, statement of retained earnings second, and the balance sheetlast.

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The income statement is used to calculate a company's net income or netloss. A company with a net income has made money during that accountingperiod. A net loss is the opposite, in that a company has lost money duringthe period. In basic accounting courses, you are taught thatto set-up theincome statement by creating a three-line heading. This heading consists ofthe name of the company on the first line, income summary on the second,and for the period ending, then the date.

The next statement is the statement of retained earnings. This statementallowsyou to look athow retainedearningshaschangedovertheperiod. Theallowsyou to look athow retainedearningshaschangedovertheperiod. Thenet income or net loss is also shown in this statement as an increase ordecrease to the retained earnings account. This is why the income statementhas to be done before the statement of retained earnings can be done. Anotheritem that shows on the statement is the dividends account. Dividends are theamount of profits a company has made that is being paid out to thecompany's stockholders. The statement starts with the company's beginningretained earnings balance at the start of the period. Next isthe addition of thecompany's net income, or the subtraction of the company's net loss. Lastly isthe subtraction of the amount of dividends the company is paying out duringthe period. This gives the ending balance of retained earnings for the period.

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The last financial statement is the balance sheet that showsall the accounttotals for the permanent accounts for a company. All temporary accountsshould be closed out properly before beginning the balance sheet.Temporary accounts are accounts that are used for the periodthen reset to azero balance at the end of a period. Expenses, revenues, and dividends areall temporary accounts in a business. Permanent accounts are those likecash, accounts receivable, and accounts payable. The balance sheet totalsthese account balances in two sections. First is all the asset accounts whichare comprised of accounts like cash, accounts receivable, prepaid insurance,accumulated depreciation accounts, supplies on hand, etc.These accountbalancesaretotalledat thebottomof thesheetor in totalsrow dependingonbalancesaretotalledat thebottomof thesheetor in totalsrow dependingonhow the balance sheet is set up. The liabilities and equity accounts aregrouped together. These accounts consist of accounts payable, notespayable, unearned revenue, capital stock, retained earnings, which is whythe statement of retained earnings is done before the balance sheet, and otheraccounts belonging to these groups. The liabilities accounts are totalledalong with the equity accounts and then added together. Oncethese totalsare found the total assets are compared to the total liabilities and equity.These totals should equal, if not, then there is a problem with the accounttotals or calculations that were done.

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