Answer to Question #287663 in Accounting for Yoyo

Question

Discuss about the four basic financial statement (income statement, statement of owners’ equity, balance sheet, and statement of cash flows); comparing and contrasting their differences in merchandising firms Vs. service providing entities

Answer 1

Income Statement

This one reports how much revenue a company has earned over a specific period of time.  It also shows the costs and expenses incurred in earning the revenue. The bottom line of the statement shows net earnings or losses for the company. This shows the much a company earned or lost over that period.

A merchandise engages in the purchase and resale of tangible goods whereas service companies primarily sell services rather than tangible goods.

Cash Flow Statement

This reports a company’s inflows and outflows of cash. This is to ensure that the company has enough cash on hand to pay its expenses and purchase assets. It tells whether the company generated cash. It shows changes over time rather than absolute dollar amounts at a point in time and utilizes information from a company’s balance sheet and income statement.

The bottom line of the cash flow statement shows the net increase or decrease in cash for the period. It is majorly divided into three types of activities; Operating activities, Investing activities and financing activities.

Operating cycle for the service company involves collecting payment from the customer. A typical operating cycle for a service company begins with having cash available, providing service to a customer, and then receiving cash from the customer for the service unlike for a merchandise that sells and then collects the amount from the customer.  

Balance Sheet

This is a statement of a business’s assets, liabilities, and owner's equity at a given period typically prepared at the end of set periods like quarterly, annually. The balance sheet is based on the fundamental equation: Assets = Liabilities + Equity.

The balance sheet for a merchandise and a service industry are the same apart from the assets as a merchandise has assets for inventory, whereas service companies do not have.

Statement of owners’ equity

It reports the changes in company’s equity and the changes that are generally reflected in the equity statement include the earned profits, dividends, inflow of equity, withdrawal of equity, net loss among others.