Financial Statement Preparation Guidance Instructions

Financial Statement Preparation Guidance Instructions
Financial Statement Entry Matrix (BUSN 5000)
The Financial Statement Entry Matrix below was developed in 2011 by Eddie Schwertz,
BUSN 5000 Course Lead for Webster University, to assist the online students with the
preparation of financial statements required for the Business Plan Term Project. It should be
used in conjunction with the Sample Business Plan B: Retail Business located in the Class
Resources area of the BUSN 5000 Online course and the Income Statement, Cash Flow
Statement, and Balance Sheet financial statements that follow the matrix on pages 3 to 5 of
this Word document file.
It is not possible to prepare instructions that answer all potential questions. However, an
attempt has been made to provide you with the situations you will likely most often
encounter during the preparation of the business plan for this course. It is recommended that
you print a copy of this help file for preparing the financial statements and a copy of the
Sample Business Plan B: Retail Business for reference as you use this matrix.
The Financial Statement Entry Matrix consists of four columns. The first column
identifies the financial statement item that appears on the three financial statements. In front
of each item is a bold upper-case letter. The purpose of the bold, highlighted capital letter
(e.g., A, B, C) is to assist you in locating the specific item on the financial statements and to
identify the relationships that exist between the item and the financial statements.
Note: While preparing financial statements, please remember in accounting that any
number shown in parentheses is a negative value. We recommend that you use
parentheses for negative numbers to emphasize that the number shown is a negative value.
Students should also round all figures to the nearest dollar.
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Financial Statement Entry Matrix (BUSN 5000)
Financial Statement Item Income Statement Cash Flow Statement Balance Sheet
A. Net Sales Revenue Operating Activities (Net Sales
to Customers)
NA
B. Depreciation Expenses Operating Expenses Operating Activities Accumulated Depreciation
C. Total Operating Expenses Operating Expenses Operating Activities NA
D. Accounts Payable NA Operating Activities Current Liabilities
E. Inventory Purchases Cost of Goods Sold (COGS) Operating Activities NA
F. Ending Inventory Cost of Goods Sold (COGS) NA Current Assets (Ending
Inventory at Cost)
G. Purchased Property, Plant
and Equipment
NA Investing Activities Long-term Assets (Fixed Assets)
H. Owner Capital Investment
(Cash Only)
NA Financing Activities Owner Capital Paid for Current
Year
I. Ending Cash Balance NA Ending Cash Balance and
Beginning Cash Balance (for
next year)
Current Assets (Cash and
Equivalents)
J. Income Taxes Owed for
Current Year
Income Taxes Operating Activities Current Liabilities (if not paid in
current year)
Also show the income tax
amount to be paid next year
under Owners’ Equity
K. Income Taxes Paid from
Prior year(s)
NA Operating Activities NA
L. Owners’ Equity NA NA Owners’ Equity and Owner
Capital (beginning of next year)
M. Accounts Receivable NA Subtracted from Net Sales Current Assets
Note: The shaded bold capital letters on the following sample financial statements link to this matrix. Please do not include the
letters in your business plan project financial statements.
3
Your Memories
Income Statement
For the Year Ended December 31, 2027
Revenue
Gross Sales (60 customers @ $250 each) $15,000
Less: Sales Returns and Discounts (500)
Net Sales 14,500 A
Cost of Goods Sold
Beginning Inventory 0
Purchases of DVDs 360 E
Less: Ending Inventory (100) F
Less: Cost of Goods Sold (260)
Gross Profit 14,240
Operating Expenses
Selling Expenses
Delivery Expenses 700
Advertising Expenses 3,200
Entertainment Expenses 2,200
Miscellaneous Expenses 3,500
Sales Taxes Paid * 48
Total Selling Expenses 9,648
General and Administrative Expenses
Rent Expenses 3,500
Utilities Expenses 750
Automobile Expenses 1,500
Insurance Expenses 1,200
Supplies Expenses 2,600
Depreciation Expenses 3,597 B
Legal & Pro Services 2,400
Miscellaneous Expenses 1,500
Total G&A Expenses 17,047
Less: Total Operating Expenses (26,695) C
Income before Taxes (12,455)
Less: Income Taxes (@ 25 %) ** 0 J
Net Income after Taxes ($12,455) ————————-
Sales taxes are paid on inventory items sold. The sales taxes are normally paid to the state. Note: The business owner reports net income on his or her IRS Form 1040. In this case the business owner would reduce personal income taxes for this loss. 4 Your Memories Cash Flow Statement For the Year Ended December 31, 2027 Operating Activities
Net Sales to Customers $14,500 A
Accounts Receivable from Customers 2027 (0) M
Payments for Total Operating Expenses (26,695) C
Add Depreciation Expenses Taken 3,597 B
Add Accounts Payable for Current Year 2,100 D
Payments for 2026 Income Taxes (none) (0) K
Payments for 2027 Income Taxes (0) J
Payments for Inventory (DVDs) (360) E
Net Cash Flows from Operating Activities (6,858)
Investing Activities
Proceeds from Sale of Property/Plant/Equipment 0
Purchased Property/Plant/Equipment ( 3,142) G
Net Cash Flows from Investing Activities (3,142)
Financing Activities
Owner Investment (cash only) 10,000 H
Owner Withdrawals (0)
Repayment of Long-term Debt (0)
Net Cash Flows from Financing Activities 10,000
Changes in Cash Balance
Net Change in Cash for Current Year 0
Add: Beginning Cash Balance 0

Ending Cash Balance I $0

*The business owes suppliers $2,100 as of 12/31/27 for trade credit purchases. Therefore, Accounts
Payable amounts to $2,100 for 2027. There are no income taxes payable for 2027. Depreciation
Expenses in 2027 are $3,597, which consists of $455 for personal property converted to business
property ($2,275 depreciated at $455 per year for five years) and $3,142 in new equipment purchases.
** Only the $3,142 spent in cash for equipment in 2027 is shown under Investing Activities.
5
Your Memories
Balance Sheet
As of December 31, 2027
Assets
Current Assets
Cash and Equivalents $0
Accounts Receivable 0 M
Ending Inventory (at cost) 100 F
Total Current Assets 100
Long-term Assets
Property, Plant and Equipment 5,417 G
Less: Accumulated Depreciation 1
(3,597) B
Other Assets 0
Total Long-term Assets 1,820
Total Assets $1,920
Liabilities and Owners’ Equity
Current Liabilities
Accounts Payable (supplies) 2,100 D
Employment Taxes Payable 0 D
Income Taxes Owed (2017) 0 J
Notes Payable 0
Total Current Liabilities 2,100
Long-term Liabilities
Long Term Debt 0
Other Liabilities 0
Total Long-term Liabilities 0
Total Liabilities 2,100
Owners’ Equity
Owner Capital (1/1/2027) 0
Owner Capital Paid in 2027 2 12,275 H
Net Income after Taxes for the Year (12,455)
Less: Owner Withdrawals (0)
Total Owners’ Equity (180) L

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Total Liabilities and Owners’ Equity $1,920

1 This includes the $455 for property converted from personal use plus the $3,142 of new equipment
purchased in 2027.
2 The owner contributed $10,000 in cash and $2,275 in personal equipment to the business. Notice
that the $5,417 of property/plant/equipment includes the $2,275 plus $3,142 of new items purchased
in 2027.
6
Preparing the Income Statement
The Income Statement should be the first financial statement that you prepare for your
business. Its purpose is to identify the revenues and expenses that you expect to have at the
end of a period (normally a year). Because the bottom line is the amount of profit or loss that
you project to make from your business, the Income Statement is sometimes called the Profit
and Loss Statement.
There are usually four major parts to the Income Statement: Revenues, Cost of Goods Sold
(only for business that sell a tangible product; service business do not normally have a Cost
of Goods Sold section), Operating Expenses (often separated into Selling Expenses and
General and Administrative Expenses), and Net Income (including taxes paid).
Revenues
This section identifies the amount of sales or revenue received from customers. Sales
Returns and Allowances are subtracted from the gross amount of Sales, resulting in Net
Sales. The Net Sales (or Revenue) value is also the dollar value that you should use for the
“Net Sales to Customers” line of the Operating Activities section of the Cash Flow
Statement.
Note: On occasion a business will have additional revenue from investments or interest
income that will also need to be listed in the Revenue section.
Cost of Goods Sold (COGS)
The Cost of Goods Sold section identifies the cost of goods purchased and/or manufactured
that are sold to the customer. The section begins with a Beginning Inventory value. If you
are just starting the business normally your beginning inventory will be zero unless you have
converted personal goods into business inventory.
Add Purchases: During the year, your business will purchase additional items for your
inventory and subsequent sale. The cost of these purchases is listed here and on the Cash
Flow Statement in the Operating Activities section as “Payments for Inventory” to the
extent that you paid for the inventory with cash. You should also identify and add the cost of
freight charges that your business is charged to have the inventory shipped/delivered to your
business.
Direct Labor: If your business manufactures or assembles goods, you will also have other
cost required to produce the goods (e.g., direct labor costs). Other expenses directly linked to
the manufacturing or assembly of the goods is also normally included in the Cost of Goods
Sold section.
7
Less: Ending Inventory: The Ending Inventory value is the lower of the cost or market
value of the inventory remaining at the end of the income period. (We will just plan on using
cost value rather than complicate matters for our business plan by trying to calculate Fair
Market Values.) This value is also carried to the Balance Sheet Statement and listed in the
Assets section as Ending Inventory (at cost).
Cost of Goods Sold: This is the mathematical result of subtracting the value of the Ending
Inventory from the sum of the cost of inventory purchased during the year and the Ending
Inventory value from the previous year (Beginning Inventory for this year). Sometimes
you will see an extra line in the Cost of Goods Sold section that summarizes the value of
goods available for sale (this is a personal preference).
Gross Profit: You will normally see a Gross Profit subtotal that subtracts the Cost of Goods
Sold section value from the Net Sales value. Hopefully, the value will be positive.
Operating Expenses
Operating Expenses are often separated into to two distinct expense areas: Selling Expenses
and General and Administrative Expenses.
Selling Expenses: Items normally included are advertising, commissions/salaries for sales
force, delivery expense, sales entertainment expenses, sales taxes collected on the sale of
tangible products, and other miscellaneous expenses that can be identified with the costs of
making sales.
General and Administrative Expenses: These are the expenses connected with the day-today operations of the business. You might think of these expenses as the cost of staff to
support the sales force personnel. Some items normally included are:

  • Bank charges
  • Contract labor
  • Credit card fees
  • Depreciation (This expense charge also appears on the Cash Flow Statement
    in the Operating Activities section as a positive addition to cash flow)
  • Insurance (building, cars, etc.)
  • Interest costs (on loans) (Although interest payments are shown on the Income
    Statement, the principal paid is shown on the CFS in the Financing Activities section
    and on the BS statements in the Long-term Liabilities section. The BS amount is
    calculated by subtracting this year’s principal paid from last year’s loan balance.)
  • Maintenance costs
  • Miscellaneous
  • Office Supplies (typing paper, copier paper, toner, pens, etc.)
  • Payroll taxes (Social Security taxes, also known as FICA)
  • Permits and licenses
  • Property taxes
  • Rent or lease costs
  • Repairs
    8
  • Telephone (including computer modems/Internet hookups)
  • Travel
  • Utilities (lights, natural gas, water, and sewerage charges)
  • Vehicle expenses (gas, oil, minor repairs)
  • Wages (for employees – not yourself if self-employed)
    You do not have to show all of the above expenses on your Income Statement. Just include
    those that you feel you will have. If you have an expense not listed above, please include it as
    well.
    Total Operating Expenses: This is a subtotal addition of the Selling Expenses and the
    General and Administrative Expenses.
    Income before Taxes: This is the result of subtracting the value of Total Operating
    Expenses from the Gross Profit value. Although students will select the Sole Proprietorship
    form of business ownership and show only the value of the Income before Taxes value as
    the last line of their income statement, we include an adjustment for income taxes paid so
    that students don’t forget that taxes have to be paid. (Please refer to Schedule C of IRS Form
    1040 if you want more details on how to treat sole proprietorship income and expenses.)
    Less Income Taxes Paid @ 25%: The Sample Business Plans currently use the federal
    marginal tax rate (MTR) of 25%. Please use the MTR of 25% for your business plan since
    that is the present MTR for most Americans owning a small business.
    Net Income after Taxes: The result of subtracting the amount of taxes from the Income
    before Taxes is the bottom line of our Income Statement. For our purpose, we transfer the
    value of the Net Income after Taxes to the Balance Sheet in the Owners’ Equity section
    (near the bottom) as the Net Income after Taxes for the Year.
    9
    Preparing the Cash Flow Statement
    The preparation of the Cash Flow Statement can be the most difficult of the three financial
    statements for the novice business student to prepare. The Sample Business Plan B: Retail
    Business provided in Business 5000 presents Cash Flow Statements that are easier to
    follow for a cash basis business.
    (Note: The IRS no longer requires small businesses to use the accrual accounting method. As of January 1,
    2002, qualifying small businesses can choose to use the cash method of accounting. A qualifying small
    business taxpayer is any taxpayer with average annual gross receipts of more than $1,000,000 but less than
    $10,000,000 that is not prohibited from using the cash method of accounting under section 448 of the Internal
    Revenue Code. Small businesses with average annual gross receipts of $1,000,000 or less can also use the cash
    method of accounting under Revenue Procedure 2001-10, which is discussed in IRS Publication 538,
    Accounting Periods and Methods.)
    We recommend that you print a copy of the Sample Business Plan B: Retail Business so
    that you can more easily follow along with the instructions below.
    Since most small businesses tend to operate primarily on a cash basis, you may find this
    approach easier for your business plan. Please note that we had to include Accounts Payable
    and Accounts Receivable activities where our sample retail business plan reported them. If
    we were using an accrual basis Cash Flow Statement as shown in the textbook, we would
    start with Net Income and then show changes in Accounts Payable and Accounts
    Receivable during the accounting period (in this case one year). We opted to show both AR
    and AP amounts in the financial reports for the Sample Business Plan B: Retail Business.
    Note: Please remember, we are not trying to make accountants out of you this term.
    We are just trying to introduce you to accounting this term. Hopefully in a future term
    you will take BUSN 5600: Accounting Theory and Practice.
    If you choose to operate on a cash basis, you will not have to deal with Accounts
    Receivable. Likewise, if you pay all your bills in cash (or by credit card) including sales
    taxes and income taxes (in other words prepay current income taxes); you can also avoid
    Accounts Payable activities. Students that decide to report revenue and expenses when
    earned will avoid the need to use Accounts Receivable and Accounts Payable on the
    financial statements and this will make the financial statements easier to prepare.
    Students that intend to prepare a service business plan should also print a copy of the
    Sample Business Plan A.
    We prefer that you simplify your financial statements for this project. We realize that in real
    life it is more complicated. However, for this introduction to business class, we will not get
    carried away with accounting details that you may not be ready to deal with at this point.
    10
    The Cash Flow Statement has four categories: Operating Activities, Investing Activities,
    Financing Activities, and Changes in Cash Balance. Please keep in mind that cash inflows
    are reported as positive values while cash outflows are reported as negative values. The
    accounting convention is to place parentheses around these negative values.
    Operating Activities
    Net Sales to Customers: Determine the value of the net sales (Gross Sales less Returns and
    Allowances) that were received. Enter this as a positive value.
    Accounts Receivable from Customers for the Current Year: If you did not collect from
    all of your customer(s) when they received goods or services, you should have an Accounts
    Receivable amount for the current year. The value for the Accounts Receivable for the
    current year would be shown as a negative value here and would reduce your cash inflow for
    the current year.
    Accounts Receivable from Customers for Prior Years: If you have customers that pay you
    for goods and services that they received in a prior year, you should include a line in your
    Cash Flow Statement to show these cash receipts for the current year (see the 2027 Cash
    Flow Statement in the Sample Business Plan B: Retail Product Business). The amount of
    money received should be entered as a positive value.
    Cash Payments for Current Year Total Operating Expenses: Identify the total cost of
    your operating expenses (Selling Expenses and General and Administrative Expenses)
    including depreciation taken. Enter this as a negative value.
    Depreciation Expenses for Current Year: Enter the value that is taken (expense claimed)
    for the current year as a positive value.
    Accounts Payable for the Current Year: If you decided to use trade credit for goods or
    services that you received for your business; you will need to show as a positive value the
    amount of these deferred expenses. (You will normally pay this amount next year as
    indicated in the next paragraph.)
    Payments for Accounts Payable from Prior Years: If you used Accounts Payable for
    some of your operating expenses (Selling Expenses and General and Administrative
    Expenses) for a prior year you will need to include a line for payments that you made in the
    current year for these expenses. Enter the amount as a negative value.
    Cash Paid for Inventory Purchases: Enter the costs for inventory purchases for the current
    year as a negative value.
    Cash Paid for Prior Year Income Taxes: If you had prior year income taxes due, enter as a
    negative value the amount of cash paid for the prior year income taxes in the current year.
    11
    Payments for Current Year Taxes: If you prepaid your income taxes for the current year,
    enter that amount as a negative value.
    Deferred Payments to the Following Year for Current Year Income Taxes: If the student
    decides to defer the payment for the current-year income taxes until the next year the amount
    deferred should be shown as a positive value in the Operating Activities section of the Cash
    Flow Statement. This amount must also be shown in the Owner’s Equity section of the
    Balance Sheet for that year. It is recommended that students not defer the payment of
    income taxes to the following year to avoid this more complicated financial statement.
    Net Cash Flow from Operating Activities: This figure is the net value of the above
    operating activities. Normally it will be a positive value (at least you would hope so).
    Investing Activities
    Proceeds from the Sale of Property, Plant and Equipment: If you sold any of your longterm (fixed) assets, enter the value as a positive number.
    Purchased Property, Plant and Equipment: Enter the cost of long-term (fixed) assets
    purchased with cash in the current year as a negative value.
    Net Cash Flows from Investing Activities: Enter the net value. It will normally be a
    negative value if the business purchases long-term assets during the accounting period
    (normally a year).
    Financing Activities
    Owner Investment (cash only): Enter as a positive value the amount of cash contributed to
    the year by the owner(s). If the owner converts personal property to business use, it is not
    shown as a cash input. However, this investment does show up on the Balance Sheet as
    Owner Capital Paid (see the 2027 Balance Sheet in the Sample Business Plan B: Retail
    Business where the owner contributed $10,000 in cash and $2,275 in used equipment
    converted from personal use to business use).
    Owner Withdrawals: Enter as a negative value any cash withdrawn by the owner(s) during
    the current year. In real-life sole proprietorship situations, the business owner is responsible
    for reporting the full amount of the business profits on his or her Form 1040 income tax
    statements on Schedule C. If the business owner chooses to use some of the business cash to
    pay personal income taxes that are due, the business owner would have to show the amount
    of money that he or she withdrew for this purpose as a withdrawal from the business. The
    business owner would also have to show this on the Balance Sheet as Less Owner
    Withdrawals.
    Proceeds from Long-term Debt: Enter the value of the proceeds from long-term loans/debts
    as a positive value.
    12
    Repayment of Long-term Debt: Enter the value of principal payments made on long-term
    debt as a negative number. These payments reduce the long-term debt principal amount and
    reduce Long-term Liability values on the Balance Sheet. You can claim only the interest
    paid in the current year as an expense on your Income Statement.
    Net Cash Flows from Financing Activities: Enter the net value of the financing activities.
    The value could be positive or negative.
    Changes in Cash Balance
    Net Change in Cash for Current Year: Enter the net value of the change in cash for the
    current year. One would expect this to be a positive value. However, sometimes you may
    have a net negative change in cash. Your business must at least have a zero or positive
    Ending Cash Balance.
    Add: Beginning Cash Balance: Enter the amount of cash that your business began the year
    with. If you have a new business, you will normally begin your business with a zero cash
    value. After the first year, your Beginning Cash Balance value for the year is the Ending
    Cash Balance value for the prior year.
    Ending Cash Balance: Add your Net Change in Cash value to your Beginning Cash
    Balance value to obtain your Ending Cash Balance value. Note that your Ending Cash
    Balance value is the value of your Cash and Equivalents on your Balance Sheet for the
    current year.
    13
    Preparing the Balance Sheet
    Also known as a Statement of Financial Position, the Balance Sheet is a snapshot of the
    business’ net worth at the end of the accounting period (normally the fiscal year ending
    December 31). It includes three major sections: Assets, Liabilities, and the difference
    between the assets and liabilities (i.e., Owners’ Equity or Net Worth).
    The Balance Sheet follows the following accounting equation:
    Assets = Liabilities + Owners’ Equity (A=L+OE)
    Sometimes the equation is shown as follows:
    Assets – Liabilities = Owners’ Equity (A-L=OE)
    Assets
    The Assets section is divided into two subsections: Current Assets and Long-term Assets
    (often called Fixed Assets).
    Current Assets: These are assets that are cash or can be converted to cash in less than one
    year. They are listed on the Balance Sheet in decreasing order of liquidity. Liquidity is the
    speed that an asset can be converted into cash.
    The amount of Cash and Equivalents held by the business is taken from the Ending Cash
    Balance on the Cash Flow Statement for the current accounting period (normally the year
    just ended). This value should always be positive.
    Accounts Receivable: If the business allows its customers to purchase their products or
    services on credit, there will be an amount of money that its customers have not paid yet.
    These funds are normally expected to be paid in 30 to 60 days or so.
    It is recommended that you not allow customers to make credit purchases for a small sole
    proprietorship or partnership business. (Credit card purchases are fine.) It is best that you
    require them to pay for the products or services when received – the essence of cash basis
    accounting.
    Ending Inventory (at cost): The lower of cost or market value of the Ending Inventory is
    also shown in the Current Assets section of the Balance Sheet. (As indicated on page 7 of
    this document, plan to use the cost value.) The value is transferred from the Income
    Statement’s Cost of Good Sold (COGS) subsection.
    Total Current Assets: This sub-total value is the mathematical total of the Cash and
    Equivalents, Accounts Receivable, and Ending Inventory (at cost) values.
    14
    Long-term Assets (Fixed Assets): This subsection lists the assets that will last for one year
    or longer. Typically, you will need to total the purchase prices of the property (land values),
    plant (buildings), equipment, and furniture to identify the value of these long-term assets.
    There are two approaches to showing the value of the long-term assets. One approach is to
    show the “net value” of the assets by listing the value of the long-term assets as the purchase
    price less the accumulated depreciation.
    The second approach lists the purchase price value of the long-term assets on a separate line
    (all of the assets added together) and the total accumulated depreciation as a separate value.
    Note: It is recommended that you use the latter approach for your business plan, as
    illustrated in the Sample Business Plan B: Retail Business. For example, if your business
    takes advantage of the Section 179 depreciation, the value of long-term assets purchased
    could be offset by the amount of accumulated depreciation taken (as shown on the Income
    Statement for that year) if it is less than the $1,020,000 maximum allowed for Section 179
    depreciation as January 1, 2019.
    To use the second approach described above, follow these steps:
  1. Add the amount of long-term assets purchased or converted to business use in the
    first year to the long-term assets purchased in the second year to obtain the total
    value of long-term assets for the business.
  2. Add the value of the accumulated depreciation for the first and second years to
    obtain the total value for accumulated depreciation for the first two years of
    business.
    Assuming that the long-term assets did not include the purchase price of land, the net value
    of the long-term assets purchased value and the accumulated depreciation would be zero after
    the full depreciation time frame has passed.
    Note: The IRS does not allow land to be depreciated in value. You should always have a net
    positive value for Long-term Assets if your business purchased land.
    Other Assets: This line could include such assets as goodwill, other firm’s stock or bonds, or
    other holdings including land. For our purposes, enter zero for this category in your business
    plan.
    Long-term Assets (Fixed Assets) Total: This is the mathematical total of the Long-term
    Assets and Accumulated Depreciation.
    Total Assets: This is the mathematical total of the values for the Current Assets and Longterm Assets subtotals.
    15
    Liabilities and Owners’ Equity
    These sections constitute the second half of the Balance Sheet. It used to be the custom to
    show Assets on the left side of a page and Liabilities/Owners’ Equity on the right, thus
    explaining the name Balance Sheet, since both sides “balanced.”
    Liabilities include Current Liabilities, Long-term Debt, and Other Long-term Liabilities.
    As was the case with the Assets portion of the Balance Sheet, current liabilities are debts
    that are due (owed) in less than one year. Long-term Debt becomes due in one year or
    longer. For purposes of your business plan project for Business 5000, you do not have to list
    anything under Other Longer-term Liabilities.
    Current Liabilities: The current liabilities are listed in increasing chronological order for
    when they will be due (Accounts Payable, Notes Payable, and Other Current Liabilities).
    Accounts Payable lists debts your business owes suppliers or other vendors. Accounts
    Payable actually reduces the amount of cash your business pays at the present time for the
    goods or services it receives. For example, if your business uses trade credit (accepting
    supplies or inventory for payment in 30 days, etc.) and the bill is not payable before the end
    of the accounting period (usually December 31 for most businesses), this cost is actually not
    paid for with cash until the next year. On the Cash Flow Statement, you would only show
    the cash spent on purchases for this year. The amount of debt postponed because you used
    trade credit for that last month or so would be shown on the Balance Sheet as Accounts
    Payable.
    Employment Taxes Payable, Wages Payable, and Other Short-Term Debts Payable: If
    you did not pay your employees’ social security or income tax withholdings owed the IRS
    for a period of the tax year, these items can also be listed as Accounts Payable items as a
    separate line if you want to show the detail. They would normally be payable in mid-January
    of the next year.
    Notes Payable: The Notes Payable is the debts you owe that are longer term but usually less
    than one year. For example, you may have taken a 180-day loan from your bank.
    Total Current Liabilities: This is the mathematical total of the Accounts Payable
    (including taxes owed) and Notes Payable.
    Long-term Debt: This is debt principal that is owed beyond one year. It normally includes
    mortgage loans, automobile loans, and other types of equipment or furniture loans that
    extend over one or more years. The remaining loan balance is shown in the Long-term Liabilities
    section of the Balance Sheet. The value is calculated by subtracting this year’s principal paid from
    last year’s loan balance.
    Other Long-term Liabilities: This would be other long-term liabilities that your business
    may owe such as bonds payable.
    16
    Total Long-term Liabilities: This is the mathematical total of the Long-term Debt and
    Other Long-term Liabilities.
    Total Liabilities: This is the mathematical total of the values for the Total Current
    Liabilities and the Total Long-term Liabilities.
    Owners’ Equity
    If the business is a corporation with stock, this subsection is called Stockholders’ Equity. If
    you have a Sole Proprietorship or Partnership form of business, this subsection is referred to
    as Owners’ Equity.
    As shown in the Sample Business Plan B: Retail Business, the Owners’ Equity section is
    composed of Owner Capital as of the beginning of the year plus additional capital
    contributions, net income from the current year and, if the owner(s) withdraw capital, the
    amount withdrawn from the business is shown as “Less Owner Withdrawals.”
    Owner Capital (beginning of the year): This is the value of the Owners’ Equity as of the
    beginning of the present year. It is the same value as the Total Owners’ Equity as of the end
    of the previous year.
    Owner Capital Paid in (Current Year): This is the value of capital contributed during the
    current year. If the owner(s) contribute equipment or inventory from personal use, it is
    treated as a conversion to business use and the value is recorded at its fair market value on
    this line. Owners may contribute cash, equipment, inventory, or some combination, as they
    desire.
    Current-year Income Taxes to be paid Next Year: If the student decided to defer payment
    for the current year income taxes until next year, the amount of current-year income taxes to
    be paid must be shown in the Owner’s Equity section of the Balance Sheet. As was noted
    earlier in the Cash Flow Statement in the Operating Activities section, it is recommended
    that students not defer the payment of current year income taxes to the following year to
    avoid this more complicated financial statement. However, if you want a challenge, the Your
    Memories Sample Business Plan B: Retail Product Business shows how deferring income
    taxes to the next year are prepared.
    Net Income after Taxes for the Year: This is the value of the income generated by the
    business for the current year after deducting the cost of income taxes. It is the bottom line in
    the Income Statement. Corporations refer to this figure as Retained Earnings.
    Less Owner Withdrawals: This is the amount of funds/capital (usually in cash) that the
    owner(s) withdrew from the business for the year.
    Total Owners’ Equity: This value is the mathematical total of the above four values. It is
    also the value moved forward to next year’s Balance Sheet for the beginning Owner
    Capital for the start of the next year.
    17
    Total Liability and Owners’ Equity: This is the total of the values for the Total Liabilities
    and the Total Owners’ Equity. This value will equal the value of the Total Assets value at
    the top (or left) of the Balance Sheet.

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