Financial Statement of Different Types of Organizations (Case Study Sample)

FINANCIAL STATEMENTS OF DIFFERENT TYPES OF ORGANIZATIONS
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Financial Statements of Different Types of Organizations
The sole proprietorship is owned and managed by one person. The entity is the most common and oldest form of business and the easiest to form (Miller, R. & Jentz, A. 2008). Although there is only a single owner, the organization can be run by multiple employees. The sole owner is responsible for all the operations of the business, including its profits and losses (Skripak, S. 2016). In addition, the proprietor has unlimited liability, and his/her assets can be attached in case of legal suits against the business. A partnership is formed by two or more people who agree on the modalities of sharing profits and responsibilities (Lopez-Mariano, N. 1989) . The quality of communication among the partners determines its level of success (Hauser, E. 1999). There are two types of partnerships: limited and unlimited partnerships. In limited partnerships, the partners have limited liability, although one member must have unlimited liability (Friedman, E. 1996). In unlimited partnerships, the law does not distinguish between the owners' personal property and business assets. The law requires partners to clearly stipulate how profits will be divided, the decision-making process, admission of new partners, dispute resolution, buying of the partners, and dissolution of the partnership in a legally binding document (Cody, T. 2007). Additionally, the partners should decide the percentage of capital and time each person will contribute to the business.
The tax of a sole proprietorship and partners is treated as income tax by law. A corporation is a legal entity that enjoys the same rights and obligations as a natural person. A limited company has a separate lifespan from its owners, and it can own property, sue, be sued, sell property, and raise capital through selling stock and shares. All the owners of a corporation have limited liability to their total capital contribution (Cody, T. 2007). However, the law specified instances where directors can be held directly liable for the business losses, such as when the doctrine of piercing the corporate veil is taken into account in determining matters before a court of competent jurisdiction. The limited liability company is subjected to corporate tax and can enter into legal, contractual agreements. Companies and businesses are required by law to prepare financial statements according to accounting standards to indicate its cash flows, financial position, earnings, and investments. The main components of the financial statements that are applicable to sole proprietors, partnerships, and corporations are balance sheets, income statement, statement of cash flows, and statement of shareholders' equity (Franklin et al. 2018). The type of business informs the ways and level of details each financial statement will contain.
Balance Sheets
The balance sheet depicts an organization’s financial position during a given accounting period. The main feature of the balance sheet is the accounting period being reported and the date when it was developed (Corporate Finance, 2020). The main accounting principle of all balance sheets is the accounting equation: Assets = Liabilities + Equity (Corporate Finance, 2020). The equation implies that all the company’s finance must originate either from debt obligations or from shareholders’ capital, or a combination of both. Therefore, assets are set apart from liabilities and shareholders’ equity on the balance sheet according to accounting standards (Ittelson, T. 2009).
Current assets are itemized above long-term assets on the balance sheet since they are easily sold to raise resources for meeting current debt compared to long-terms that need a considerable long time to dispose. Similarly, current liabilities are listed above long-term liabilities since firms need to settle them within a short time. Shareholders' equity is listed as the last item on the balance sheet since it lacks a fixed due date to be paid. Assets are a representation of all the resources that managers use to generate sales revenue for the firm. Anything that the business owns and has some value is considered to be an asset. All cash and cash equivalents constitute current assets since they can be easily converted into money to solve the company’s financial woes in the short-term (AR, S. 2020). Current assets include marketable securities, notes receivables, cash at hand, inventories, cash in the bank, and accounts receivable. Fixed assets include fixture and fittings, machinery, equipment, long-term notes receivables, and goodwill (AR, S. 2020). Fixed assets' value is recorded on the balance sheet as a book value by depreciating the market value.
Liabilities represent the commitment that the company has to service its current and long-term debts. Current liabilities represent bills that are paid in a single financial year, whereas long-term liabilities are bills that are of two years from the reporting date. Current liabilities include accrued expenses, accounts payable, and notes payable (Corporate Finance, 2020). Long-term liabilities include bond obligations, mortgages, and long-term notes payable. The owners’ equity is the difference between the total liabilities and total assets on the balance sheet (Corporate Finance, 2020). Equity is the owners claim after all the assets have been liquidated and the liabilities settled. The main difference between a sole proprietor's and partnership's balance sheet compared to corporations is the equity portion. Dividends, as well as the initial amount of the stocks, traded form part of a corporation's equity segment.
Income Statement
The main downside of the balance sheet is that it lacks the necessary information to indicate a firm's financial performance over a period of time. The income statement shows the company's financial performance including profitability measures. The income statement is a representation of all the operations accruing within two points in time that show the organization's profits and losses (SEC, 2007). All the firm's sales during the accounting period are recorded as gross revenue on the income statement. The total expenses are recorded and deducted from the total revenue to determine the company's profitability within the period under consideration (Corporate Finance Institute, 2019). The cost of goods sold is depicted as the price the firm pays to manufacture, produce, or purchase the products sold to generate revenue. The cost of goods sold constitutes the largest expense for the majority of businesses. Operating expenses are typically operational and administrative tariffs that include sales, salaries, administrative, rent, general office, and utility expenses.
Depreciation represents the difference between the market value and the book value of the fixed assets resulting from continuous use in the firm's operations. Earnings before interest and taxes (EBIT) constitutes the company's profits before honoring its debt financing interest cost and tax obligations. Earnings before taxes (EBT) are derived by subtracting loan interest expenses from the EBIT, also known as profit before taxes. The organization's net income is arrived at by subtracting tax expenses from the EBT. The net income is what is available to be reinvested in the firm or paid to shareholders in the form of dividends. Retained earnings represent the reinvested net income after deducting shareholders' dividends. The net working capital is calculated by the formula; total assets – current liabilities = net working capital (Corporate Finance, 2020). A positive net working capital is an indicator of the organization’s financial health. On the contrary, a negative net working capital implies that the organization is unable to meet its current liabilities in the next year using its current assets. Companies strive to post a positive net working capital, which indicates that it's financially sound in the short term.