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2.1 Describe the Income Statement, Statement of Owner's Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate

The Four Primary Financial Statements​

Financial statements are formal reports that summarize a business's financial activities and position. In Luxembourg, businesses must prepare these statements according to PCN standards. There are four primary financial statements:

  1. Income Statement (Compte de RĂ©sultat)
  2. Statement of Owner's Equity (État des Variations des Capitaux Propres)
  3. Balance Sheet (Bilan)
  4. Statement of Cash Flows (Tableau des Flux de Trésorerie)

Each statement provides different information, but they are all interconnected. Understanding how they relate to each other is crucial for interpreting a business's financial health.

The Income Statement (Compte de Résultat)​

The Income Statement shows a business's revenues, expenses, and net income (or net loss) over a specific period of time—typically a month, quarter, or year.

Purpose: To show whether the business is profitable during the period

Key Components:

  • Revenue (Chiffre d'Affaires): Money earned from selling goods or services
  • Expenses (Charges): Costs incurred to generate revenue
  • Net Income (RĂ©sultat Net): Revenue minus expenses (profit)
  • Net Loss (Perte): When expenses exceed revenue

Time Period: Covers a period of time (e.g., "For the year ended December 31, 2024")

Example for Marie's Restaurant:

Income Statement
Le Petit Bistro
For the Month Ended November 30, 2024

Revenue:
  Sales                                    €15,000
  Less: Cost of Goods Sold                  (8,000)
Gross Profit                                 €7,000

Operating Expenses:
  Salaries                                  €3,000
  Rent                                      €800
  Utilities                                 €200
  Other Expenses                            €500
Total Operating Expenses                    (4,500)

Net Income                                   €2,500

The Statement of Owner's Equity (État des Variations des Capitaux Propres)​

The Statement of Owner's Equity shows changes in the owner's interest in the business during a specific period.

Purpose: To explain how equity changed from the beginning to the end of the period

Key Components:

  • Beginning Equity
    • Net Income (from Income Statement) or - Net Loss
    • Additional Investments
    • Withdrawals/Distributions
  • = Ending Equity

Time Period: Covers a period of time (same as Income Statement)

Example for Marie's Restaurant:

Statement of Owner's Equity
Le Petit Bistro
For the Month Ended November 30, 2024

Beginning Equity, November 1, 2024        €10,000
Add: Net Income (from Income Statement)     2,500
Less: Owner Withdrawals                        (0)
Ending Equity, November 30, 2024          €12,500

The Balance Sheet (Bilan)​

The Balance Sheet shows a business's assets, liabilities, and equity at a specific point in time.

Purpose: To show what the business owns (assets), what it owes (liabilities), and the owner's interest (equity) at a specific date

Key Components:

  • Assets (Actif): Resources owned by the business
  • Liabilities (Passif): Obligations owed by the business
  • Equity (Capitaux Propres): Owner's interest (Assets - Liabilities)

Time Period: Shows position at a specific point in time (e.g., "As of December 31, 2024")

The Accounting Equation: Assets = Liabilities + Equity

Example for Marie's Restaurant:

Balance Sheet
Le Petit Bistro
As of November 30, 2024

ASSETS
  Cash                                    €5,000
  Accounts Receivable                       500
  Inventory                              2,000
  Equipment                             15,000
Total Assets                            €22,500

LIABILITIES
  Accounts Payable                        €8,000
  Bank Loan                              2,000
Total Liabilities                        €10,000

EQUITY
  Owner's Equity (from Statement of
    Owner's Equity)                      12,500
Total Liabilities and Equity            €22,500

The Statement of Cash Flows (Tableau des Flux de Trésorerie)​

The Statement of Cash Flows shows cash inflows and outflows during a specific period, categorized by operating, investing, and financing activities.

Purpose: To show where cash came from and where it went during the period

Key Components:

  • Operating Activities: Cash from day-to-day business operations
  • Investing Activities: Cash from buying/selling long-term assets
  • Financing Activities: Cash from borrowing, repaying loans, owner investments/withdrawals

Time Period: Covers a period of time (same as Income Statement)

Note: We'll cover the Statement of Cash Flows in detail in Chapter 16. For now, understand that it shows cash movement, which is different from profit shown on the Income Statement.

How the Financial Statements Interrelate​

The four financial statements are connected in important ways:

Connection 1: Income Statement → Statement of Owner's Equity​

The Net Income (or Net Loss) from the Income Statement flows into the Statement of Owner's Equity:

Income Statement shows: Net Income = €2,500
                                    ↓
Statement of Owner's Equity: Beginning Equity + Net Income = Ending Equity

Connection 2: Statement of Owner's Equity → Balance Sheet​

The Ending Equity from the Statement of Owner's Equity appears on the Balance Sheet:

Statement of Owner's Equity shows: Ending Equity = €12,500
                                              ↓
Balance Sheet: Assets = Liabilities + Equity (€12,500)

Connection 3: Balance Sheet → Next Period's Statements​

The Ending Balance Sheet becomes the Beginning Balance Sheet for the next period:

Balance Sheet (Nov 30): Ending Equity = €12,500
                                ↓
Statement of Owner's Equity (Dec 1): Beginning Equity = €12,500

Connection 4: All Statements Together​

Together, the statements tell a complete story:

  • Income Statement: Did we make a profit? (Performance)
  • Statement of Owner's Equity: How did equity change? (Changes in ownership)
  • Balance Sheet: What do we own and owe? (Position)
  • Statement of Cash Flows: Where did cash come from and go? (Cash movement)

Think It Through​

Marie's restaurant shows a Net Income of €2,500 on the Income Statement, but her bank account only increased by €1,500. How is this possible? What statement would help explain this difference?

Concepts in Practice​

Luxembourg Annual Accounts:

When a Luxembourg SME files annual accounts with RCS, it must include:

  1. Balance Sheet (Bilan)
  2. Income Statement (Compte de RĂ©sultat)
  3. Notes to Financial Statements (Annexe)
  4. Statement of Cash Flows (for larger companies)

These statements must be prepared according to PCN standards and are publicly available through RCS.

Luxembourg Compliance Note​

In Luxembourg, all businesses must prepare annual accounts (comptes annuels) that include at minimum:

  • Balance Sheet
  • Income Statement
  • Notes to Financial Statements

These must be filed with RCS within 7 months of the fiscal year end. The statements must follow PCN 2020 format and classifications.