9. Financial statements description Using the five transactions described above, we can now prepare the company financial statements for the period. Recall that there are four general-purpose financial statements: Income Statement Statement of Changes in Equity Balance Sheet Statement of Cash Flows 9.1. Presentation of the income statement An income statementis presented below. (We will not go into detail on the preparation of financial statements process in this tutorial.That topic will be covered in future tutorials. The financial statements below are presented to give you an idea of what an income statement looks like.) Illustration 9: Income statementfor Friends Company Friends Company Income Statement For the Period Ended 20X6 Revenue (i.e., assets increase) 3,000 Expenses (i.e., assets decrease) (1,000) Net Income (i.e., change in net assets) $ 2,000 The income statement measures the change in net assets or the difference between asset increases and asset decreases from operating activities. The asset increases from the operating activities are labeledrevenues. The asset decreases from the operating activities are calledexpenses. The difference between revenues and expenses is callednet incomeif revenue is greater than expenses or anet lossif vice versa. Note: At this point we don't consider liabilities in the determination of revenues and expenses. Liabilities and how theyimpact revenues and expenses are covered in other tutorials. Net incomeis the excess of revenues over expenses for an accounting period. Net lossis the opposite of net income. Net loss results from the excess of expenses over revenues for an accounting period. 9.2. Presentation of the statement of changes in equity The statement of changes in equityhas the following format: Illustration 10: Statement of changes in equity for Friends Company Friends Company Statement of Changes in Equity Period Ended 20X6 Beginning Contributed Capital $0 Plus: Capital Acquisition 5,000 Ending Contributed Capital 5,000 Beginning Retained Earnings $0 Plus: Net Income 2,000 Less: Distribution (500) Ending Retained Earnings 1,500 Total Equity $ 6,500 The statement of changes in equity explains the effects of transactions on owner's equity during an accounting period. The statement includes the beginning and ending balances of contributed capital and reflects any new capital acquisitions madeduring the accounting period in the contributed capital section. The statement also shows the portion of net earnings retained in the business in the retained earnings section.