1

The Inter-relationship between the Income Statement and the Balance Sheet

Income Statement The Balance Sheet
ASSETS = LIABILITIES + EQUITY

Revenue

Expenses

2

Misc. Confusing Topic
1. Sale of property, plant, and equipment versus the sale of inventory.

a. Sold inventory that cost $60 for $100.
b. Sold land that cost $800 for $1,000.



60
Balance Sheet Income Statement
Cash Inventory Revenue Cost of goods sold
800
Cash Land Gain on sale (IS)
3

The final accounting tool the journal entry

Accounts Debits Credits
4

= +
Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - +
Contributed Capital
Dr. Cr. Dr. Cr.
- + - +
Income
Statement Dr. Cr. Dr. Cr.
Accounts
- + + -
Revenues Expenses
Retained Earnings
Assets Liabilities Owners' Equity
The Balance Sheet Accounts

5

Analyzing Income Statements using Common Size Income Statements
Geo Group Inc. For the Years Ended December 31, Common Size
Income Statement 2005 2004 2003 2005 2004 2003
Revenue:

Revenue $ 612,900 $ 593,994 $ 549,238 100% 100% 100%
Expenses:

Operating 540,128 495,226 467,018 88.13% 83.37%
85.03%
General and administrative 48,958 45,879 39,379 7.99% 7.72% 7.17%
Depreciation and amortization 15,876 13,898 13,341 2.59% 2.34% 2.43%
Total expenses 604,962 555,003 519,738 98.70% 93.44%
94.63%
Operating income 7,938 38,991 29,500 1.30% 6.56% 5.37%
Other (income) expense:
Interest expense, net 23,016 22,138 17,896 3.76% 3.73% 3.26%
Other (income) expense (9,131) (8,541) (61,623) -1.49% -1.44% -11.22%
13,885 13,597 (43,727) 2.27% 2.29% -7.96%

Income before tax (5,947) 25,394 73,227 -0.97% 4.28% 13.33%
Income tax (expense) benefit 11,826 (8,231) (36,852) 1.93% -1.39% -6.71%

Income from continuing operations 5,879 17,163 36,375 0.96% 2.89% 6.62%

Special items 1,127 (348) 3,644 0.18% -0.06%
0.66%



Net income (loss) $ 7,006 $ 16,815 $ 40,019
1.14% 2.83% 7.29%
=________
=________
6


Step One: Compute every item on the IS as a percentage of Sales.
Step Two: Any percentage that increases (decreases) from the previous year is growing faster (slower) than revenues.

7




The Accounting Cycle


During the Accounting Year End of the Accounting Year












General
J ournal
General
Ledger
Trial Balance Adjusted
Trial Balance
Financial
Statements
Adjusting
Entries
8

Adjusting Entries
Accrual accounting requires adjustments at the end of the reporting period (primarily because of
matching and revenue realization).

1. Some items have not been recorded.
2. Some items need to be updated.

Objective:
To make sure that the proper amount of revenues and expenses have been recognized in the correct
accounting period.

Financial Statements affected
1. Balance sheet primarily current asset and current liability accounts
2. Income statement primarily revenue and expense accounts

9

Example
J une 1: purchased $500 of office supplies
J une 30: Supplies costing $425 are left at the end of the month.

How does this affect our J une Income Statement and the J une 30 Balance Sheet?

Balance Sheet Income Statement
(end of J une) (for the month of J une)

Supplies Supply Expense




10

Five types of adjusting entries
1. Prepaid items
2. Unearned or deferred revenues
3. Accrued expenses
4. Accrued revenues
5. Estimated items


Three Characteristics of Adjusting Entries
1.
2.
3.
Cash amount
previously recorded
Cash amount NOT
yet recorded
Non-Cash
11

List the accounts that are likely to need adjustments.
InfoLogix Inc
Balance Sheet ($ thousands) December 31,
2009 2008 Change
ASSETS

Currents assets:
Cash and cash equivalents $1,018 $3,037
Accounts receivables (net of uncollectible accounts)
14,158 22,610
Unbilled revenue 252 1,498
Inventory, net
1,089 1,775
Prepaid expenses 674 1,228
Total current assets 17,191 30,148

Property and equipment, net 600 944
Intangible assets, net 7,343 8,709
Goodwill 10,337 10,540
Deferred financing costs 471 501
Total assets $35,942 $50,842




12

LIABILITIES AND STOCKHOLDERS EQUITY

Accounts payable $7,591 $11,099
Line of credit 7,559 9,000
Current portion of long-term debt
12,417 12,163
Sales tax payable 276 477
Accrued expenses payable 3,183

3,090
Accrued earn out payable 1,958 1,958
Deferred revenue 1,690 276
Other liabilities 900
Total current liabilities 34,674 38,963
Long-term debt, net of current maturities 345 4,401
Warrant liabilities 3,467
Total liabilities 38,486 43,364
Stockholders (deficit) equity:
Common stock, issued and outstanding
3,722,156 shares and 1,024,091 shares
Additional paid in capital 38,132 25,766
Accumulated deficit (40,676) (18,288)
Total stockholders (deficit) equity (2,544) 7,478
Total liabilities and stockholders (deficit) equity $35,942 $50,842
13

Deferrals: Cash transaction has occurred prior to year-end

1. Prepaid Expenses (allocate expired assets to expense)
J anuary 1: Prepaid one-year rent on equipment, $1,500
J uly1: Accounting year-end
Balance Sheet Asset Accounts Income statement account
Prepaid Expense (BS) Cash Rent Expense
BB 0
1/1: 1,500 1/1: 1,500


EB

Jan. 1 Prepaid expense (BS) 1,500
Cash 1,500


Adjust. 7/1


14

2. Unearned or deferred revenue (allocate earned portion of unearned revenue to revenue)
J anuary 1: Rented a building to a customer, two years in advance, $2,000
J uly 1: Accounting year-end
Balance Sheet Accounts Income statement account
Deferred revenue (BS-liability) Cash Rent Revenue
BB 0
1/1: 2,000 1/1: 2,000


EB

Jan. 1 Cash 2,000
Deferred Revenue (BS) 2,000


Adjust. 7/1


15

3. Accrued expense (record expenses to reflect expenses, not paid, but incurred during the year)

Dec. 15 Dec. 31 J an. 15
Year-end is December 31.
Wages are earned $3,000 a month, but are paid on the 15
th
of each month. At December 31, $1,500
is owed the workers.

Balance Sheet Accounts Income statement account
Accrued Payable (BS lia.) Cash Wage Expense
BB 0



EB

12/31 Adjustment:



Jan 15, payment:


16

4. Accrued revenue (record revenue to reflect revenue earned but not yet collected)
On November 1, you invested in a $10,000 1-year 6% CD. The accounting year ends on December
31.
Balance Sheet Accounts Income statement account
Accrued revenue (BS-asset) Cash Interest Income (IS)
BB 0



EB

12/31 Adjustment:





17

InfoLogix Deferrals: Cash transaction has occurred prior to year-end
(Cash amount XX unknown, YY expense or revenue unknown)

1. Prepaid Expenses (allocate expired assets to expense)

Balance Sheet Asset Account
Prepaid Expense (BS)
BB 1,228
Cash Expense
Paid Recognized


EB 674

Prepay: Prepaid expense (BS) XX
Cash XX

Adjustment: Expense (IS) YY
Prepaid expense (BS) YY


18

2. Unearned or deferred revenue (allocate earned portion of unearned revenue to revenue)
Balance Sheet liability Account
Deferred revenue (BS-liability)
BB 276
Revenue Cash in
Recognized advance


EB 1,690

In advance: Cash XX
Deferred Revenue (BS) XX


Adjustment: Deferred Revenue (BS) YY
Revenue (IS) YY

19

InfoLogix Accruals: Cash transaction has not yet occurred prior to year-end

3. Accrued Expenses (record expenses to reflect expenses, not paid, but incurred during the year)

As of December 31, incurred $3,183 of expenses not yet paid.

Balance Sheet Liability Account
Accrued Expense Payable (BS)
BB 3,090
Expense recognized
Cash paid before cash paid

EB 3,183

12/31 Adjustment: Expense (IS) YY
Accrued expense payable (BS) YY

Payments during yr: Accrued expense payable (BS) XX
Cash XX

20

4. Accrued revenue (record revenue to reflect revenue earned but not yet collected)

Balance Sheet Asset Accounts
Unbilled revenue (BS-asset)
BB 1,498
Revenue earned Cash
not collected collected .

EB 252


12/31 Adjustment: Unbilled Revenue (BS) YY
Revenue (IS) YY

Collections during yr: Cash (BS) XX
Unbilled Revenue (BS) XX


21

Revenue: The Relationship between the Income Statement and the Balance Sheet Accounts
$XXX
$XXX
$XXX
$XXX
Current period
Future period (receivables)
Prior period (unearned or deferred revenue)
Cash Collected in:
Receivables
Deferred Revenues
Unearned or
Income Statement
Revenue (is recognized)
Balance Sheet
Current Assets Current Liabilities
Cash
1
2
3
1
2
3

22



The Impact of revenues on the financial statements:

Debit Credit
Cash (BS) XXX
Receivable (BS) XXX
Unearned Revenue (BS-CL) XXX
Revenue on IS XXX

Revenues result in a:
Credit to the IS
Debit to the BS



23

Expenses: The Relationship between the Income Statement and the Balance Sheet Accounts

$XXX
$XXX
$XXX
$XXX
Cash Paid in:
Current period
Prior period (prepaid item)
Future period (paid in the future)
Prepaid item
Accrued Payable
Income Statement
Expense (is recognized)
Balance Sheet
Current Assets Current Liabilities
Cash
1
2
3
1
2
3

24



The impact of expenses on the financial statements

Debit Credit
Expense (IS) XXX
Cash (BS) XXX
Prepaid item (BS) XXX
Accrued payable (BS-CL) XXX

Expenses result in a:
Debit to the IS
Credit to the BS