Financial Statement and Income Statement Case Study.

Introducing here the balance sheet and income statement of the Diamond Gem Cleaning and Maintenance Service Company by going in deep details and estimating the missing values within both the income statement and balance sheet. Moreover, discover of the terminology of each value and provide a narrative about the calculation procedure of each line. Finally, a summery with analysis of the data gathered within both balance sheet and income statement that used to assess the performance of financial strength of the company. Firstly, for the balance sheet which ideally consists of three main parts: assets, liabilities and stockholders’ equity (Collins, 2016). Whereas assets are divided into two categories: current assets and long-term assets (Collins, 2016), the current assets are considered these assets, which planned to be converted into cash within one year (Feldman, 1959). So, the contracts receivable line is a current asset can be obtained by less the value of total current asset 893,868 by cash and other assets, that yields 505,050. On the other hand, long-term assets concept is considered when an asset is hold for more than a year or for long period (Collins, 2016). Hence, equipment is dealt as a long-term asset and determined by less the total assets 1,180,660 by total current assets 893,868 that result in 286,792. Besides the previous narrative, here we go further to estimate the value missed within the liabilities section. In similar to assets, liabilities have two major sections: current liabilities and long-term liabilities. Both of them have the same concept as assets. In other words, current liabilities express these ones that are due within one year, while long-term liabilities is planned to paid on a basis of long periods more than a year (Collins, 2016). Accounts payable can be calculated via minus the total current liabilities 571,697 by all others current liabilities (line of credit, income tax payable, current portion of notes payable and deferred income taxes) so the result should be 257,335. Moreover, on the approach to indicating the retained earnings within the equity section, firstly we should know what is its definition. “Retained earnings represented the total earnings invested in the business” (Lowe, 1961). As the total stockholders’ equity is 436,496, less this value by other values of equity items results in the value of retained earnings 310,634. Finally As per the accounting equation (Collins, 2016): Assets = Liabilities + Owner’s equity The sum of liabilities and equity must be equal to assets. Hence, its value should be 1,180,660. Secondly, for the income statement which is one of the prominent financial statements used for assessment of a firm financial performance. It is also called revenue and expenses statement or profit and loss (P&L) statement (Kenton, 2018). Polishing an income statement report is executed via gathering three main compositions: revenue, expenses and profit during a specific period ("Income Statement - Definition, Explanation and Examples", n.d). While the gross profit is the direct deduction of the associated cost of the service from its revenue (Hayes, 2019), so the contract cost should be obtained by less the contract revenues 5,146,862 by gross profit 614,343 that yields 4,532,519. Heading to the second section of income statement, the expenses or in this case the provision for income taxes, which is the estimated value, that taxpayer expects to pay in a particular year (“Provision for income taxes”, 2018). That value are estimated by the following equation: Provision for Income Taxes = Gross Profit - General and Administrative Expenses – Net Income Thus the provision on income taxes will be 141,220. Finally, whereas the income statement is created within indicated period. So, there should be a retained earnings balance for both the beginning and ending of that period. Thus the next formula applies in the approach of estimating the value of retained earnings, beginning balance. Retained Earnings, Beginning Balance = Retained Earnings, Beginning Balance – Net Income So, the value is assumed to be 159,867. Summarizing both of balance sheet and income statement with performance assessment of the financial statement for the company will add a reasonable value to the report itself. Firstly, “Profit Margin Ratio tells you how much of each sales dollar is left after certain costs are covered” (Collins, 2016). In this case, profit margin ratio is 614,343/5,146,862 = 11.94 % while the average of 2018 Q4 is 37.23 % (CSI Market “Profitability Information & Trends”, 2019). Moreover, to assess the performance another ration should be used, Return On Assets. ROA (Return On Assets) is another ratio that represent as the net profit in relation to resources or assets (Albrecht, James, Earl Kay, Monte, 2005). So, ROA is (net income)/(total assets) = 150,767/1,180,660 = 12.77 % and the trend for the service industry of 2018 Q4 for that ratio is 5.66 % (CSI Market “Management Effectiveness Information & Trends”, 2019) . References Albrecht, W. Steve, James D. Stice, Earl Kay Stice, and Monte Swain. Financial Accounting. Thomson South-Western, 2005. Collins, K. (2016, April 08). Exploring Business (p.503). Retrieved February 05, 2019, from https://open.lib.umn.edu/exploringbusiness/ Collins, K. (2016, April 08). Exploring Business (p.512). Retrieved February 05, 2019, from https://open.lib.umn.edu/exploringbusiness/ Collins, K. (2016, April 08). Exploring Business (p.522). Retrieved February 05, 2019, from https://open.lib.umn.edu/exploringbusiness/ CSI Market, Retail Sector. (n.d.). Management Effectiveness Information & Trends. Retrieved February 6, 2019, from https://csimarket.com/Industry/industry_ManagementEffectiveness.php?ind=908 CSI Market, Retail Sector. (n.d.). Industry Profitability Ratios. Retrieved February 6, 2019, from https://csimarket.com/Industry/industry_Profitability_Ratios.php?ind=908 Feldman, S. (1959). A Critical Appraisal of the Current Asset Concept. The Accounting Review, 34(4), 574-578. Retrieved from http://www.jstor.org/stable/241753 Hayes, A. (2019, February 03). What is Gross Profit? Retrieved February 05, 2019, from https://www.investopedia.com/terms/g/grossprofit.asp Income Statement - Definition, Explanation and Examples. (n.d.). Retrieved February 05, 2019, from https://corporatefinanceinstitute.com/resources/knowledge/accounting/income-statement/ Kenton, W. (2018, December 13). Income Statement. Retrieved February 05, 2019, from https://www.investopedia.com/terms/i/incomestatement.asp Lowe, H. (1961). The Classification of Corporate Stock Equities. The Accounting Review, 36(3), 425-433. Retrieved from http://www.jstor.org/stable/242875 Provision for income taxes. (2018, May 31). Retrieved February 05, 2019, from https://www.accountingtools.com/articles/2017/5/16/provision-for-income-taxes