Balance Sheet and Income Statement

Current Assets
Current assets include cash and other assets that in the normal course of events are converted into
cash within the operating cycle. For example, a manufacturing enterprise will use cash to acquire
inventories of materials. These inventories of materials are converted into finished products and then
sold to customers. Cash is collected from the customers. This circle from cash back to cash is called
an operating cycle. In a merchandising business one part of the cycle is eliminated. Materials are not
purchased for conversion into finished products. Instead, the finished products are purchased and are
sold directly to the customers. Several operating cycles may be completed in a year, or it may take
more than a year to complete one operating cycle. The time required to complete an operating cycle
depends upon the nature of the business. It is conceivable that almost all of the assets that are used
to conduct your business, such as buildings, machinery, and equipment, can be converted into cash
within the time required to complete an operating cycle. However, your current assets are only those
that will be converted into cash within the normal course of your business.

The other assets are only held because they provide useful services and are excluded from the
current asset classification. If you happen to hold these assets in the regular course of business, you
can include them in the inventory under the classification of current assets. Current assets are
usually listed in the order of their liquidity and frequently consist of cash, temporary investments,
accounts receivable, inventories and prepaid expenses.

Cash
Cash is simply the money on hand and/or on deposit that is available for general business purposes.
It is always listed first on a balance sheet. Cash held for some designated purpose, such as the cash
held in a fund for eventual retirement of a bond issue, is excluded from current assets.

Marketable Securities
These investments are temporary and are made from excess funds that you do not immediately
need to conduct operations. Until you need these funds, they are invested to earn a return. You
should make these investments in securities that can be converted into cash easily; usually short-
term government obligations.

Accounts Receivable
Simply stated, accounts receivables are the amounts owed to you and are evidenced on your
balance sheet by promissory notes. Accounts receivable are the amounts billed to your customers
and owed to you on the balance sheet's date. You should label all other accounts receivable
appropriately and show them apart from the accounts receivable arising in the course of trade. If
these other amounts are currently collectible, they may be classified as current assets.

Inventories
Your inventories are your goods that are available for sale, products that you have in a partial stage
of completion, and the materials that you will use to create your products. The costs of purchasing
merchandise and materials and the costs of manufacturing your various product lines are
accumulated in the accounting records and are identified with either the cost of the goods sold during
the fiscal period or as the cost of the inventories remaining at the end of the period.

Prepaid expenses
These expenses are payments made for services that will be received in the near future. Strictly
speaking, your prepaid expenses will not be converted to current assets in order to avoid penalizing
companies that choose to pay current operating costs in advance rather than to hold cash. Often your
insurance premiums or rentals are paid in advance.

Investments
Investments are cash funds or securities that you hold for a designated purpose for an indefinite
period of time. Investments include stocks or the bonds you may hold for another company, real
estate or mortgages that you are holding for income-producing purposes. Your investments also
include money that you may be holding for a pension fund.

Plant Assets
Often classified as fixed assets, or as plant and equipment, your plant assets include land, buildings,
machinery, and equipment that are to be used in business operations over a relatively long period of
time. It is not expected that you will sell these assets and convert them into cash. Plant assets simply
produce income indirectly through their use in operations.

Intangible Assets
Your other fixed assets that lack physical substance are referred to as intangible assets and consist of
valuable rights, privileges or advantages. Although your intangibles lack physical substance, they still
hold value for your company.
Sometimes the rights, privileges and advantages of your business are worth more than all other assets
combined. These valuable assets include items such as patents, franchises, organization expenses and
goodwill expenses. For example, in order to become incorporated you must incur legal costs. You can
designate these legal costs as organizing expenses.

Other Assets
During the course of preparing your balance sheet you will notice other assets that cannot be
classified as current assets, investments, plant assets, or intangible assets. These assets are listed
on your balance sheet as other assets. Frequently, your other assets consist of advances made to
company officers, the cash surrender value of life insurance on officers, the cost of buildings in the
process of construction, and the miscellaneous funds held for special purposes.

Current Liabilities
On the equity side of the balance sheet, as on the asset side, you need to make a distinction between
current and long- term items. Your current liabilities are obligations that you will discharge within the
normal operating cycle of your business. In most circumstances your current liabilities will be paid
within the next year by using the assets you classified as current. The amount you owe under current
liabilities often arises as a result of acquiring current assets such as inventory or services that will be
used in current operations. You show the amounts owed to trade creditors that arise from
the purchase of materials or merchandise as accounts payable. If you are obligated under promissory
notes that support bank loans or other amounts owed, your liability is shown as notes payable. Other
current liabilities may include the estimated amount payable for income taxes and the various
amounts owed for wages and salaries of employees, utility bills, payroll taxes, local property taxes
and other services.

Long-Term Liabilities
Your debts that are not due until more than a year from the balance sheet date are generally
classified as long-term liabilities. Notes, bonds and mortgages are often listed under this heading. If a
portion of your long-term debt is due within the next year, it should be removed from the long-term
debt classification and shown under current liabilities.

Deferred Revenues
Your customers may make advance payments for merchandise or services. The obligation to the
customer will, as a general rule, be settled by delivery of the products or services and not by cash
payment. Advance collections received from customers are classified as deferred revenues, pending
delivery of the products or services.

Stockholders’
Equity Preferred
Stock
Preferred stock is a class of stock whose holders receive dividends from profits before common
stockholders do. In the
case of a company's going out of business, preferred stockholders are given priority in claiming assets.

Common Stock
Common stock is all stock other than preferred stock. Common stockholders are given voting power
in shareholder elections.

Retained Earnings
Retained earnings are the amounts that a business earns that have not been distributed as
dividends. Retained earnings are often held so a business can reinvest in its development or pay
debt. Retained earnings is a summary of the changes in net income.

BALANCE SHEET
ASSETS LIABILITIES
CURRENT ASSETS CURRENT LIABILITIES
CASH ACCOUNTS PAYABLE
MARKETABLE SECURITIES NOTES PAYABLE
ACCOUNTS RECEIVABLE WITHOLDING PAYABLE
INVENTORIES TAX PAYABLE
PREPAID EXPENSES SSS PAYABLE
RENT PAYABLE
NON-CURRENT ASSETS ACCRUED EXPENSES
PLANT, PROPERTY, AND EQUIPMENT
BUILDING NON-CURRENT LIABILITIES
EQUIPMENT LONG-TERM DEBT/BONDS
MACHINERIES MORTGAGE PAYABLE
FURNITURE AND FIXTURES
LESS: ACCUMULATED DEPRECIATION STOCKHOLDERS EQUITY
LAND COMMON STOCK
INTANGIBLE/OTHER ASSETS PREFERRED STOCK
FRANCHISE ADDITIONAL PAID IN CAPITAL
PATENTS RETAINED EARNINGS
GOODWILL
TRADEMARKS
 INCOME STATEMENT

Sales/ Total Revenue is a measure of the total value of sales of goods and services that were made
by a company to its customer base. Investors keep a close eye on this number as they can see the
year over year growth of the business.

Cost of Goods Sold measures the amount of expenses incurred for creating the goods and services
that were sold to the company’s customer base. This can include material costs and labor.

Gross Profits, or gross margins, are simply the difference between total revenue and the cost of
acquiring that revenue. Gross profits are used by the company to many of the other expenses that can
be incurred such operating expenses or general administrative costs.

Operating Income is also known as earnings before Interest & taxes (EBIT) and is a measure of the
company’s earnings capacity when yout remove non-operating costs such as tax and interest.

Net Income is the most looked at number on the income statement. Net income is arrived at by
taking total revenues and deducting it by the costs and expenses incurred to run the business.
Companies will pay dividends from their net income and apply the balance to the retained earnings
account within shareholders equity on the balance sheet. Net income is sometimes referred to as
the "bottom line" as it is the net of costs and expenses.