Assignment 02: Personal Finance

An income statement, also known as a profit and loss statement shows how much money a company has spent over a period of time. It also shows the costs and expenses that are associated with earning that revenue. It is an important measure of the company’s profitability. The simple building blocks of a net income formula are revenues minus expenses equal net income.

Accounting is a business discipline that allows companies to record, analyze, and retrieve critical financial information that can be used to determine a company 's financial status. Its purpose is to help people understand what is going on financially within an organization provide reports and insights needed to make sound financial decisions.

Describe three examples of transactions that would affect a firm's income statement. For each transaction, identify if the transaction has a positive or negative effect on the firm's net income. Revenues is the amount of money a company receives for goods or services rendered. This type of transaction has a positive effect on net income. Expenses are costs that a business obtains through its operations to earn revenue. This has a negative effect on net income. Profit is a financial gain after expenses and revenues are taken into account. This has a positive effect on net income.

* Statement of net assets (Balance sheet) presentation required classification of current and non-current of assets and liabilities. Equity section presents: Net Assets Invested in Capital Assets, Care Organizations Net of Related Debt, Restricted Net Assets, and Unrestricted Net Assets.

For a partnership or sole proprietorship, it would include the owners’ capital or drawing accounts.

Ans: The income statement lists the revenues minus expenses or costs of goods sold and operating expenses and will reveal a net income or net loss (Revenues – Expenses = Net Profit or Net Loss). Income statements show how much money a company made and spent over a period of time. Income Statements cover a specified period of time usually annually or quarterly. An Income Statement represents only one limited view of the companies’ net profits or net loss after all revenues are listed while expenses (costs) and taxes are subtracted. The Income

According to our class text (Siegel and Yacht (2009)), we know that “personal finance is the process of paying for or financing a life and a way of living.” That said, we also know that using accounting principles to manage our personal finances will likely yield great success in one’s tracking and planning, financially, in the long run.

• The role of financial statements in financial planning • Personal balance sheet: assets, liabilities and net worth • Personal income and

The “financial statements are formal reports providing information on a company's financial position, cash inflows and outflows, and the results of operations” (Hermanson, p.22). There are four main components that make up a financial statement. The four parts are, balance sheet, income statements, cash flow and, statement of owner’s equity. The balance sheets role is to define the company’s assets liabilities and revenue of the business. The income statement shows the income within the company. Cash flow reviews the position of the company by cash payments and receipts. Lastly, the statement of owner’s equity shows the amount of earnings, stock and other capitals of people in the company. (Hermanson, p.34-35).

In order to determine the current financial status and provide an overall summary of the relative financial health then it would be advisable to compile a Personal Balance Sheet as well as a Cash Budget. This would indicate not only the financial situation in terms of assets and liabilities but also the monthly incomes and expenditures.

This is important as it will help me to differentiate between the company assets and liabilities.

These reports collect related items of content to display or link to them in those conclusions of the financial year, therefore; for this reason, does not uncover whichever the measure of unpaid liabilities alternating the possessions the firm need at present. Secondly, the financial formation of clear and distinct sounds gives just those relating to, measuring, or measured by the quantity of something rather than the quality and furthermore, most of many of the data regarding the financial issues of the firm (Vogel, 2014).

*"Accounting is a set of principles and procedures relating to the registration and compilation, analysis and interpretation of financial data for the purpose of determining the outcome of business and its financial position".

Accounting is the recording of financial transactions plus storing, sorting, retrieving, summarizing, and presenting the information in various reports and analyses. (Averkamp, 2012)

Accounting is basically defined as the process of identifying, measuring and communicating economic information to help its users make informed judgment and decisions. It also involves recording, classifying, summarizing and interpreting financial transactions and events about economic