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Starting a business requires much time, commitment and patience. The ultimate goal of most businesses is to be professionally and financially successful. In order to show the progress of the business operations, meticulous financial statements must be kept. This statement communicates economic information about the business to individuals involved in making decisions and judgment. According to the University of Phoenix 2006, "An entity's financial statements are the end product of a process that starts with transactions between the entity and other organizations and individuals."
Connie Rochce started a cookie business in November 1986. Developed was a business plan and place people to assist. Connie was concerned, needed was someone to maintain the financial accounts. Aunt Connie's Cookies, financial statement for November and December are reviewed along with a suggestion to expand her operation.
The transactions in Connie's financial statement addressed the balance sheet, income statement and statement of cash flows. Reviewed will be a few transactions in the balance sheet and income statement. Connie's initial transaction of depositing $80,000 into her account to start her business increased her property. This transaction increased the company's equity and was added to balance the account. According to the University of Phoenix (2006), "the balance sheet is sometimes called the statement of financial position because it summarizes the entity's resources (assets), obligations (liabilities), and owners' claims (owners' equity)". Kitchen and office equipment were purchased along with supplies. With theses three transactions she also increased her property. Purchasing the supplies increased her debt but still added value to the operation of the business. Meeting her obligation of the first sale increased revenue, this was shown in the income statement. This statement will show Connie whether the business is operating at a profit or loss. Greta (1998) stated the following:
The balance sheet can show how financially sound a company is. The income statement can answer every investor's central question: "How much money are they making?" Even more important, the income statement can provide a solid basis for forecasting future profits.
If Aunt Connie was seeking a loan to expand her business the financial statement can show income in advance. Aunt Connie can, in good faith, accept a future order from a client. Connie can show this transaction as income received in advance and a liability under unearned revenue. During the process of balancing the books the income received in advance would be entered as an adjustment.
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Hendricks (2005) provides the following for entrepreneurs after one year of business start-up:
Personal savings, friends-and-family and bootstrapping suffice to start many a new enterprise, but as your company grows, its needs for capital are likely to outstrip those initial funding sources. The good news is that now you have a track record, you'll be much more attractive to banks, angel investors and other financing sources.
Connie needs a stronger and longer track record of her business performance to strongly negotiate borrowing money.
After reviewing the University of Phoenix simulation of Aunt Connie's Cookies from November and December the following was discovered:
1. Initial start up of $80,000, increase equity and property
2. Purchase of kitchen and office equipment, increased property
3. Office equipment increased property, purchased on credit and shown as a debt in accounts payable
4. She partially settled her debt with cash and decreased her accounts payable
5. Rent paid in advance increased property and decreased cash
6. From her first sale revenue increased
7. The credit sale increased accounts receivable and revenue
8. The credit sale paid in cash which decreased her accounts payable
9. Salaries paid decreased expense and capital
10. Utilities is an expense decreasing cash
11. Personal use of cash decreased cash and capital
12. Insurance decreased by 6 thousand, expenses decreased by $500 to cover the premium for the remaining of that year in which the remaining was placed in the unexpired Insurance for the next year
13. An order not year received increased cash and unearned income
14. Money borrowed has interest, it is a liability as accrued interest and analyzed interest expense
Financial statements are extremely important in a business. The statement gives a snapshot of the profit or loss either quarterly or yearly. Included are the gross and net sales, operating expense and profit, pre-taxed profits, taxes payable and net income after taxes. Income statements are valuable tools in situations where credit review may be necessary. "Making a side-by-side comparison of a company's income statement and balance sheet over two or more accounting periods makes determining trends and spotting emerging problems far easier than looking at a customer's financial performance during a single accounting period" (Dennis, 2006).
Dennis, M. (2006). Encyclopedia of credit. Retrieved March 18, 2006. www.encyclopediaofcredit.com
Greta, A. (1998). Part 3: Dissecting the income statement. www.thestreet.com
Hendricks, M. (2005). Charting your business time-line years 2-5: Time to grow. www.entrepreneur.com
University of Phoenix. (2006) Week one overview. Retrieved March 16, 2006, from University of Phoenix, Week One, rEsource. MBA503-Web site: https://ecampus.phoenix.edu/secure/resource/resource