24 Aug 2022

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How to Prepare a Balance Sheet (with Examples)

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Academic level: College

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The balance sheet shows a firm's assets, stockholders equity, and liabilities over a certain period of time. The income statement shows an outline of net incomes, earnings per share, expenses, and revenues, over a period of time, which can be quarter for quarterly financial and a year for annual statements. Cash flow statement (CFS) measures how well a business creates cash to pay its debt requirements, fund investments, and pay for its operating expenses ( Jury, 2012 ). In the CFS, operating activities comprise of any source and cash expenses from the running business while investments operations include sources of cash and cash expenditures from a firm’s investment into the future. The statements are interrelated in that the figure in the net income statement is incorporated in the withheld earnings list of the balance sheet hence altering the volume of equity in the balance sheet ( Jury, 2012 ). In the operating activities, cash flow section of the CFS, the net income is also present. Another item in both the balance sheet and the CFS is the ending cash balance. Another common interrelationship is that changes in several line items of the balance sheet move onward into the cash flow item listed in the CFS. For example, changes in the existing loans appear in both the balance sheet’s liabilities section and in the financing activities section of CFS. The financing activities show sources of cash from banks or investors.

Cash flows in the direct method, are listed in the operation section of CFS. On the other hand, when recording operating cash flow using the indirect method, one starts with net income for the period then the items in the balance sheet that affected profit without impacting the actual cash flow are subtracted or added. The indirect method is the GAAP as it uses the accrual accounting information to present the cash flows in CFS ( Jury, 2012 ).

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References 

Jury, T., (2012). Cash Flow Analysis and Forecasting: The Definitive Guide to Understanding and Using Published Cash Flow Data . Hoboken, NJ: John Wiley & Sons. 

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StudyBounty. (2023, September 15). How to Prepare a Balance Sheet (with Examples) .
https://studybounty.com/how-to-prepare-a-balance-sheet-with-examples-essay

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