...The retained earnings formula is a calculation that derives the balance in the retained earnings account as of the end of a reporting period. Retained earnings is that portion of the profits of a business that have not been distributed to shareholders; instead, it is retained for investments in working capital and/or fixed assets, as well as to pay down any liabilities outstanding. The calculation is: + Beginning retained earnings + Net income during the period - Dividends paid = Ending retained earnings It is also possible that a change in accounting principle will require that a company restate its beginning retained earnings balance to account for retroactive changes to its financial statements. This will alter the beginning balance portion of the formula. It is quite possible that a company will have negative retained earnings. This can be caused by the distribution of a large dividend that exceeds the balance in the retained earnings account, or by the incurrence of large losses that more than offset the normal balance in the retained earnings account. There may be pressure from investors to issue a dividend if a company has built up a large balance in its retained earnings account over time, though this argument is not necessarily valid if the company still has profitable opportunities in which it can invest the excess funds. For example, ABC International has $500,000 of net profits in its current year, pays out $150,000 for dividends, and has a beginning retained...
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...statements, retained earnings statement, and statement of cash flows are the four basic financial statements. The balance sheet reveals what a business owns and what it owes. Income statements reveal how much cash comes in and how much goes out. Retained earnings are the net income retained in the corporation. Statements of cash flow reveal how company’s exchange money with other companies and the outside world. Balance Sheets The balance sheet gives thorough figures regarding a business’s assets, liabilities, and shareholder’s equity. Assets are what the business has possession of, the company’s property that is of value, businesses both, sale, and use assets to make merchandise, and offer services to sell. Assets consist of the companies touchable property, also including cash, trademarks, investments, and patents. Examples of liabilities or a claim of creditors’ is payment of monies, to banks, rent, and payroll, to suppliers, taxes, and commitments to supply goods and services to impending consumers. Claims of owners are stockholder’s equity or capital or net worth. These are the funds that remain when a business sale off their assets and pay off its liabilities. The remaining funds belong to the shareholders. Income Statements Income statements reveal how much cash a business makes over a year as well as showing the cost, and expenditures related to making that cash. The ending income statement reflects the businesses profits and loss. An Earnings per Share...
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...because of selective reporting of economic events as well as non-comparable accounting methods and estimates, financial statements are only an approximation of reality. In addition, because of the tendency to delay accounting recognition, financial statements also tend to lag reality.” (About Financial Statements, para. 1). The four financial statements are prepared in the sequence shown, for the following reasons: Net income is computed first and is needed to determine the ending balance in retained earnings. The ending balance in retained earnings is needed in preparing the balance sheet. The cash shown on the balance sheet is needed in preparing the statement of cash flows. The four financial statements from the summarized accounting data are: 1. An income statement presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time. 2. A retained earnings statement summarizes the changes in retained earnings for a specific period of time. 3. A balance sheet reports the assets, liabilities, and stockholders’ equity of a company at a specific date. 4. A statement of cash...
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...1988). What this means is that the purpose of accounting is to identify a company’s events, record those events in chronological order, showing which accounts are impacted by each event, and then communicate/report this information to interested parties in the form of financial reports. There are four basic financial reports that are typically used to report a business’ activities: Income statement, Retained earnings statement, Balance sheet, and Statement of cash flows. Each of these reports has a separate purpose, but is also interrelated. The income statement results in the net income, or net loss, of a company by presenting the revenues first and then the expenses, over a specific time period. If the revenues are greater than the expenses, a net income is reported, if not, then a net loss is shown. The result of the income statement is transferred to the beginning balance of the retained earnings statement. Without this figure, the retained earnings statement cannot be completed. The retained earnings statement summarizes the changes that affect the amount of earnings retained over a specific time...
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...and needs of a company one must first comprehend the purpose of the four basic financial statements, how they are used by its employees and the valuable information they provide for its investors. The four basic financial statements are listed as income statements, retained earnings statements, balance sheets, and statements of cash flows. All four of these reports allow both their internal and external users to determine a wealth of information. The data collected from these reports can range from a corporation’s predicted future earnings to determining whether or not a company consists of sufficient funding to carry out its planned business operations. Breaking down the purpose for each of the four reports allows its users to gain a full comprehension regarding how these reports can be used effectively. The purpose of each of the listed financial statements is interrelated because each one supplements one another. Income statements monitor a specific period of time to determine the successes or failures of a company’s business operations. The retained earnings statement takes into consideration the same period as the income statement to show the amounts and reasons for variations in retained earnings. As a company begins any planned operation its internal users must determine if the cash they have on...
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...| a. 38,100 | (38,100) | 30 | (1,143,000) | | | | | | | | 3,805,500 | Total comprehensive income | $ 197,500 | $93,200 | | | 197,500 | | 9,730,500 | Retained Earnings 1/1 | $ 245,500 | $75,000 | b. 75,000 | | $245,500 | | 7,978,750 | Net income | 235,600 | 121,800 | | | 235,600 | 30 | 7,068,000 | Dividends | (100,000) | (42,600) | | a. 42,600 | (100,000) | 30 | (3,000,000) | Retained Earnings 12/31 | $ 381,100 | $ 154,200 | | | $ 381,100 | | 12,046,750 | OCI translation adjustment-1/1 | $0 | $0 | | | $ 0 | | | OCI for the year-translation adjustment | (38,100) | (28,600) | | | (38,100) | 30 | (1,143,000) | OCI translation adjustment-12/31 | $ (38,100) | $(28,600) | | | $ (38,100) | 30 | (1,143,000) | Other assets | $ 932,600 | $ 532,000 | | | $ 1,599,600 | 28.5 | 45,588,600 | Advance to P | | 84,000 | | d. 84,000 | 0 | | 0 | Investment In S | 551,600 | | | a. 26,600 b. 525,000 | 0 | | 0 | | | | | | | | | Patent | | | b. 150,000 | c. 24,000 | 126,000 | 28.5 | 3,591,000 | Payables | $ 392,200 | $ 190,400 | | | $ 582,600 | 28.5 | 16,604,100 | Advance from S | 84,000 | | d. 84,000 | | 0 | | 0 | Capital stock | 800,000 | 300,000 | b. 300,000 | | 800,000 | | 26,400,000 | Retained Earnings | 381,100 | 154,200 | | | 381,100 | | 10,978,750 | OCI | (38,100)...
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...Financials The four basic financial statements are; Balance Sheet, Income Statement, The Retained Earnings Statement and the Statement of Cash Flow. The Balance Sheet reports assets and claims to assets at a specific point in time. Claims to assets are subdivided into two categories: claims of creditors which are called liabilities and claims of owners which are called stockholders’ equity. The Income Statement shows how success or the failure of the company’s operations for a period of time. The Retained Earnings Statement shows the amounts and causes of chanes in retained earnings during the period. The time period is the same as the covered by the income statement. The Statement of Cash Flow is to provide financial information about the cash receipts and cash payments of a business for a specific period of time. This helps investors, creditors and other external users in their analysis of thhe company’s cash position, this statement reports the cash effects of the company’s operating, investing and financing activities. This statement also shows the net increase or decrease in cash during the period and the amount of cash at the end of the period. Managers use financial statements to see the performance of the company. On the income statement, managers compare sales and expenses from one period to the previous period to identify potential problem areas. Employees take a look at the income statement to maintain responsibility for managing certain expenses...
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...operations on January 1, 2004. o During its first 3 years of operations, Lee reported net income and declared dividends as follows: | Net income | Dividends declared | 2004 | $ 40,000 | $ –0– | 2005 | 125,000 | 50,000 | 2006 | 160,000 | 50,000 | o The following information relates to 2007: Income before income tax: $240,000 Prior period adjustment: understatement of 2005 depreciation expense (before taxes): $ 25,000 Cumulative decrease in income from change in inventory methods (before taxes): $35,000 Dividends declared (of this amount, $25,000 will be paid on January 15, 2008): $100,000 Effective tax rate: 40% Lee Corporation | Retained Earnings Statement | For the Year Ended December 31, 2007 | Balance, January 1, as reported | $225,000* | | Correction for depreciation error (net of $10,000 tax) | (15,000) | | Cumulative decrease in income from change in inventory methods (net of $14,000 tax) | (21,000) | | Balance, January 1, as adjusted | 189,000 | | Add: Net income | 144,000** | | | 333,000 | | Less: Dividends declared | 100,000 | | Balance, December 31 | $233,000 | | *($40,000 + $125,000 + $160,000) – ($50,000 + $50,000) **[$240,000 – (40% X $240,000)] Common stock | $500 | Treasury stock | (-$200) | Additional paid-in principle | $1000 | Shares outstanding | 375,940 | Shares authorized | 500,000 | Shares...
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...to understand how a company or individual is functioning in the economy. Accounting takes the financial information of an organization and it identifies records and communicates its economics to the interested parties. There are four basic financial statements. The income statement shows the revenues, expenses and income of a company over a specific period of time. The retained earnings statement summarizes the changes in earnings over a specific period of time. The balance sheet shows a report of assets, liabilities and equity for an exact point in time. The last would be the statement of cash flows which summarizes cash flows in and out of a company over a specific amount of time. The four basic financial statements are interrelated with one another. They should be prepared in a specific sequence. Net income, which is the income statement, is completed first. The net income is needed to help determine the ending balance in retained earnings. The retained earnings statement provides information if there was an increase or decrease during the specific period of time. The end balance from the retained earnings statement is used to prepare the balance sheet. This is where the basic accounting equation, Assets equal Liabilities plus Equity, is used to calculate the balance sheet. The balance sheet gives the company’s financial situation for a specific period of time. From the balance sheet we then take the cash shown to prepare the statement of cash flows. The statement of cash...
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...incorrectly record a cash inventory purchase as $20,000 instead of $2,000, debit or increase cash and credit or decrease inventory by $18,000 ($20,000 - $2,000) each to reverse the error. “Correct a prior-period inventory error. For example, if the previous year's ending inventory was understated by $1 million, then the beginning inventory and retained earnings balances for the current year also are understated by $1 million” (Basu, 1999-2013). Debit inventory and credit retained earnings by $1 million each to reverse the prior-period error. You then need to count the inventory correctly in the current year and there should be no inventory-related errors on your financial statements for this year and going forward. Restate prior-period financial statements. The cost of goods sold and net income accounts on the income statement and the inventory and retained earnings accounts on the balance sheet may need to be changed. “Write disclosure notes describing the nature and impact of the inventory error. Write one disclosure note for the current period to describe the correction to the beginning inventory and beginning retained earnings balances. Write a second disclosure note...
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...are the income statement, the retained earnings statement, the balance sheet and the statement of cash flows. While each of these reports is very important in its own regard, they are also intermingled and depend on each other to represent a complete unbiased view of an organizations financial situation. The income statement reports revenues and expenditures for the given period of time. This report is important because it will show net income or net loss for a given period of time. However, not all monies received are considered revenue and not all monies put out are considered expenditures. For example money received from selling or issuing stocks are not considered revenue. The same holds true for dividends, they are not considered expenditures. This period of time can vary from organization to organization. Most reports are shown on a quarterly and annual basis. When the income statement is properly prepared will produce the company's net income. This amount is then transferred to the retained earnings statement. The retained earnings statement shows the income that is retained by the organization. This report not only shows changes but also the reason for said changes. This allows all interested parties to see and understand if there is a significant variation from the previous report. This report is also given for a specific period of time. When the retained earnings statement is completed accurately it totals the amount of retained earnings. This amount is then transferred...
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...Checkpoint: Financial Statements Christine Jennings XACC/290 Pamela Zanzucchi January 17, 2013 The four basic financial statements are the income statement, retained earnings statement, balance sheets and statements of cash flow. The information that these reports provide to employees, managers, and investors can range from a large group of information such as, if a company is financially able to fund the company operations and pay their debts on time. These reports can also tell a company’s predicted future earnings. Each of these reports are as important as another because they work together to show employees and investors different financial parts of a company. An income statement keeps track of a certain period of time in order to monitor the successes and failures of a company. If a company has a significant amount of failures the company will be able to know why they experienced these failures because of these financial statements. The retained earnings statement also keeps track of a certain time period to track the amounts and different variations in retained earnings. The statement of cash flow provides financial statistics on the cash receipts and disbursements of the company. This will allow the company to be able to determine if they can cover the daily or monthly cost of operations with the amount of money on hand. When a company compiles all the information from these other financial statements, they will create the balance sheet. All of these reports...
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...and the difference between each one of them, as well as which one is of most interest to investors, creditors, and management. The four statements are balance sheet, income statement, earning statement, and the statement of cash flow. A brief description of each statement will be provided according to its importance and use. The Balance Sheet Known as the most critical statement because it simply exposes what the business owns and owes. In other words the company’s points of power and weakness. It also shows the difference between the two which is known as the owners interest. What the company owns is called assets, and assets includes properties, lands, vehicles, inventory items, basically anything touchable including cash money. The balance sheet is organized similar to the equation: Assets = Liabilities + Shareholder’s equity, where assets are on the left of the sheet and liabilities on the right as well as shareholder’s equity (Walther, 2011). Balance sheet normally reflects a period of time and by the end of the reporting period owners are educated on what they own and owe. Liabilities on this sheet show current and long-term as they are listed based on due dates (Cagan, 2006). The Income Statement The elements of Income statement is revenue, expenses, and net income or net earnings. It gives a clear image to the accountant or owner of the business performance in terms of revenue, sales, and profit for an accounting period that is normally 1 year. The equation for...
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...Problem 14 Year 9 income statements P Company S Company Sales 630,000 340,000 Interest income 1,850 Investment income 15,339 Gain on sale of land 7,000 Total revenues 652,339 341,850 Cost of sales 485,000 300,000 Interest expense 17,000 Selling and admin. expense 50,000 20,000 Income tax expense 34,000 8,740 Total expenses 586,000 328,740 Net income 66,339 13,110 Bonds payable – P Company Issued Jan. 1, Year 2 200,000 (a) Discount Jan. 1, Year 2 10,000) Amortized – Years 2 to 8 (10,000 / 10 ( 7) (7,000) – to July 1, Year 9 (1,000 ( ½) (500) 2,500 Balance, July 1, Year 9 197,500 (b) Discount amortization July to Dec., Year 9 500 Balance, Dec. 31, Year 9 198,000 Investment in bonds – S Company Par value July 1, Year 9 40,000 Purchase discount, July 1, Year 9 (40,000 – 38,750) 1,250) Amortized, Year 9 (1,250 / 2½ ( ½) (250) (c) 1,000 Balance, Dec. 31, Year 9 39,000 Cost of intercompany bonds July 1, Year 9 38,750 Par value 40,000 Gain on bond – S Company (before tax) 1,250 (d) Par value, July 1, Year 9 40,000 Book value ((b) 197,500 ( 20%) 39,500 Loss on bonds – P Company (before tax) 500 (e) Gain to entity, July 1, Year 9 ((d) 1,250 – (e) 500) 750 (f) Before tax 40% tax After tax Entity Gain July 1, Year 9 (f) 750 300 450 Interest elimination gain Year 9* 150 60 90 (g) Balance gain Dec. 31, Year 9 600 240 360 (h) P Company Gain...
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...Financial Statements Dave Hall ACC/290 Lisa Henderson September 16, 2013 Financial Statements In any business, the financial statements are the backbone of the financial accounting reporting within the business. The four financial statements include the income statement, balance sheet, retained earnings statement and the statement of cash flows (Kimmel, Weygandt & Kieso, 2010). These four statements provide a summary picture of the overall financial health of the company, for the period of time reported, to both internal (managers and employees) and external customers (investors and creditors). The internal and external customers can use the company’s reported financial information to make informed decisions such as investing in the company and loaning funds or providing credit to the company. Income Statement The income statement, also referred to as the profit and loss (P&L) statement, reflects how much money a business has made over a period of time (D&B, 2013). The time period reflected may be monthly, quarterly, semi-annually or annually, and is stated as such in the header of the income statement. The data within the income statement includes revenues (from the sale of the company’s products) and expenses (salaries, rent, depreciation, supplies, etc…). To calculate net income for the time period, expenses are subtracted from revenues, thus totaling net income. The income statement is very important to both internal customers (managers and employees)...
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