Balance Sheet & Income Statement Sole Proprietorship Balance Sheet • The easiest type of busin ess to form ·It is unincorporated and owned by one person • This individu al has all the rights to all the profi ts and assumes all the firm's liabilities • Therc is unlimited li ability TIP: Files Schedule C for tax purposes • Reports the company's resources (assets) and how those resources were funded (liabilities and shareholders' equity) on a particular date (end of the quarter or fiscal year) • Also called the Statement of Financial Position, • Basically, the balance sheet gives a view of the firm 's financial condition at a point in time TIP: Liabilities & equity are the means of financing assets Partnership • An agreement between two or more people in a joint busin ess • Gener al par tners are responsible for th e operations of the business and are personally liable for the liabilities • Limited partners are limited to their investment TIP: Files Form 1065 for tax purposes Assets • Represent the company 's resources • To qualify as an asset, the following requirements apply: I company must own the resource resource must be of value resource must have a quantifiable (measurable) cost Corporation Liabilities • A separate legal entity that is distin ct/;,ol1J the persons who own it • Courts view a corporation as an "artificial person." • It can: · owe debts · pay taxes · be sued • It has limited liabilities and ease of ownership transfer TIP: Files Form 1120 for tax purposes • Represent what the company owes to others • To qualify as a liability, the following requirements apply: I must be quantifiable (measurable) occurrence must be probable Shareholders' Equity • Represents sources offunds through: I equity investment(s) or retained earnings (what the company has earned through operations since its inception) S-Corporation • Sometim es called "Subchapter S," as it is a tax concept • The IRS will allow most corporations with I 00 or fewer shareholders to enjoy the benefits of incorporation without being taxed as if they were partnerships TIP: Files Form 11205 for tax purposes Valuation Limited Liability Company (LLC) Income Statement • Currently the historical cost regime is the guiding principl e under generally accepted accounting principles (GAAP) • However, th e concept offair value, as the supcrior method of valuation , is ga ining momentum • An LLC has characteristics of a corporation as it offers some of the benefits ofa corp orat/on , particularly the limitation of an owner's liability • It is al so deemed a separate legal entity • LLCs are preferred because they combine the limited liability protection of a corporation and the pass-throu gh taxation of a partn ership TIP: Forms fil e d for tax purposes vary • Demonstrates how much a company earns over a specific time period • /t associates the custs alld exp enses with the earning o./Ih ctf ,.e venue • Also called: Consolidated Statement of" Earnings Profit and Loss Statement (P&L) Statement of Revenues and Expenses • The major components of the income statement are: revenues expenses gains losses Financial Markets Revenues Purpose of the Financial Ma rkets • Actual or expected inflows of cash or other assets, OR reductions in liabilities, • A means of raising ca pi tal for a firm 's capital investments or for new start-ups • Thi s is accompli shed vi a the issu ance of stocks and bonds resulting fro/11 producing, delivering, entity 's central operations Prim ary vs Secondary Markets Or providing gooc!.l· Or sen 'ices constituting an Expenses Pr imary Market • The market in which sec urities are sold by the company, • Primary market includcs: · public and private place ments of securities · U.S Securities & Exchange COJ1lmiss ion (SEC) registration · underwriters • In thi s market, the fi r m raises capital Seconda ry M arket • The market in which securities that have already been issued are traded among investors • Secondary market includes: · stock exchanges (e.g , New York Stock Exchange'- NY SE) · over-th e-cou nter (OTC) market (e.g , NASDAQ) • Actual or expected outflows of cash or oth er assets, O R incurring liabilities, resultingfrom producing, delivering, Or p roviding goods Or ser vices consritlltillg all enti(Y:I' central operatiom Gains • Increases in equity or net assets from peripheral or incident al activiti es of an entity and from all other transactions except those resulting from revenues or investments by shareholders or owners TIP: Basically, net cash inflows that are NQ.I a direct re sult of the firm's line of business Losses • Decreases in equity or net assets from peripheral or incidental activities of an entity and from all other transaction s except those resulting frum cx pcns ... Financial Forecasting • In dctermining the amount of external financing needed in order to carryon the business operations, the Percentage of Sales Method is utilized as a major financial forecasting... Capital = Current Assets - Current Liabilities Current Ratio ~ Current Assets Current Liabili ties Quick Ratio (Acid Test) = Current Assets - Inventory Current Liabilities Efficiency Ratios Inventor... earnings as we ll as the res iliency of the company's earnings during the various phases of the business cycl e TIP: Ult im at ely, compa re t he yiel d s and p a yo uts of oth er firms in your