Financial Statement Preparation

Financial Statements This tutorial illustrates how to prepare

three basic financial statements

Financial Statements This tutorial illustrates how to prepare

three basic financial statements

The Income Statement

Financial Statements This tutorial illustrates how to prepare

three basic financial statements

The Income StatementThe Statement of Retained Earnings

Financial Statements This tutorial illustrates how to prepare

three basic financial statements

The Income StatementThe Statement of Retained EarningsThe Balance Sheet

Financial Statements This tutorial illustrates how to prepare

three basic financial statements

The Income StatementThe Statement of Retained EarningsThe Balance Sheet

The purpose of these statements is to help users make better decisions.

The Income Statement

Income Statement The first statement prepared is the

Income Statement.

Income Statement The first statement prepared is the

Income Statement. The Income Statement reports a

business’ performance for the period.

Income Statement A simple format for an income statement

is:

Income Statement A simple format for an income statement

is:

Revenues – Expenses = Net Income

Income Statement A simple format for an income statement

is:

Revenues – Expenses = Net Income

We will look at a more complex format later.

Income Statement Revenues are earned for the sale of

goods or services. Note that revenues occur when the sale is made. The payment may or may not have been received.

Income Statement Revenues are earned for the sale of

goods or services. Note that revenues occur when the sale is made. The payment may or may not have been received.

Examples of revenues include sales, service revenue and interest revenue.

Income Statement Expenses are incurred when a business

receives goods and services. Like revenues, payment may or may not have been made.

Income Statement Expenses are incurred when a business

receives goods and services. Like revenues, payment may or may not have been made.

Examples of expenses include salaries expense, utility expense and interest expense.

Income Statement Most businesses require more information

from their businesses than a simple income statement can provide. Therefore, they use a multi-step income statement format.

Income Statement Most businesses require more information

from their businesses than a simple income statement can provide. Therefore, they use a multi-step income statement format.

A format for a multi-step income statement is:

Income Statement Sales revenue- Cost of goods sold Gross profit- Operating expenses Income from operations+/- Non-operating items Income before taxes- Income taxes Net income

Income Statement Cost of goods sold represents the

expense a business incurred to buy or make a product for resale.

Income Statement Cost of goods sold represents the

expense a business incurred to buy or make a product for resale.

Example - a book store buys a book for $25 and then sells it for $32. The cost of goods sold is $25.

Income Statement Operating expenses are the usual

expenses incurred in operating a business.

Income Statement Operating expenses are the usual

expenses incurred in operating a business.

Accounts such as salaries expense, utility expense, and depreciation expenses are all shown in this section.

Income Statement Non-operating items are revenue,

expenses, gains and losses that do not relate to the company’s primary operations.

Income Statement Non-operating items are revenue,

expenses, gains and losses that do not relate to the company’s primary operations.

Accounts include interest expense and gains and losses of the sale of equipment and investments.

Income Statement Income taxes are computed by

multiplying Income before taxes by the income tax rate.

Income Statement Income taxes are computed by

multiplying Income before taxes by the income tax rate.

Example – Income before taxes is $50,000. The income tax rate is 30%. Income taxes = $50,000 * 30% = $15,000.

The Statement of Retained Earnings

Statement of Retained Earnings The Statement of Retained Earnings

reports how net income and dividends affected a company’s financial position during the period.

Statement of Retained Earnings

The format of the statement is:

Statement of Retained Earnings

The format of the statement is:

Beg. balance, retained earnings+ Net income- Dividends End. balance, retained earnings

Statement of Retained Earnings Note that the Income Statement must be

prepared before the Statement of Retained Earnings.

Statement of Retained Earnings Note that the Income Statement must be

prepared before the Statement of Retained Earnings.

This is because you have to know the amount of net income in order to compute the ending balance of retained earnings.

The Balance Sheet

Balance Sheet The purpose of the balance sheet is to

report the financial position of an accounting entity at a particular point in time.

Balance Sheet The purpose of the balance sheet is to

report the financial position of an accounting entity at a particular point in time.

The basic format for the balance sheet is: Assets = Liabilities + Equity

Balance Sheet Assets are economic resources owned

by a company.

Balance Sheet Assets are economic resources owned

by a company.

Examples include cash, accounts receivable, supplies, buildings and equipment.

Balance Sheet Liabilities are the company’s debt or

obligations.

Balance Sheet Liabilities are the company’s debt or

obligations.

Examples are accounts payable, unearned revenues and bonds payable.

Balance Sheet Equity is the residual balance. Assets –

liabilities = equity. Equity is commonly called stockholders’ equity if the business is a corporation as it represents the financing provided by the stockholders along with the earnings from the business not paid out as dividends.

Balance Sheet There are two different types of assets

shown on a balance sheet. These are current assets and non-current assets.

Balance Sheet There are two different types of assets

shown on a balance sheet. These are current assets and non-current assets.

Current assets+ Non-current assets Total assets

Balance Sheet Current assets are assets that will be

used or turned into cash within one year.

Balance Sheet Current assets are assets that will be

used or turned into cash within one year.

Examples include cash, accounts receivable, inventory, short-term investments, supplies and prepaids.

Balance Sheet Non-current assets comprise the

remainder of the assets.

Balance Sheet Non-current assets comprise the

remainder of the assets.

These include accounts such as: long-term investments, land, building, equipment and patents.

Balance Sheet There are two different types of liabilities

shown on a balance sheet – current liabilities and long-term liabilities.

Balance Sheet There are two different types of liabilities

shown on a balance sheet – current liabilities and long-term liabilities.

Current liabilities+ Long-term liabilities Total liabilities

Balance Sheet Current liabilities are obligations that will

be paid in cash (or other services) or satisfied by providing service within the coming year.

Balance Sheet Current liabilities are obligations that will

be paid in cash (or other services) or satisfied by providing service within the coming year.

Examples include accounts payable, short-term notes payable, and taxes payable.

Balance Sheet Long-term liabilities are obligations that

will not be paid or satisfied within the year.

Balance Sheet Long-term liabilities are obligations that

will not be paid or satisfied within the year.

Examples include mortgage payable and bonds payable.

Balance Sheet Stockholders’ Equity is divided into two

categories: contributed capital and retained earnings.

Contributed capital+ Retained earnings Total stockholders’ equity

Balance Sheet Contributed capital is the amount of

cash (or other assets) provided by the shareholders.

Balance Sheet Contributed capital is the amount of

cash (or other assets) provided by the shareholders.

Common Stock and Additional Paid in Capital are accounts in this section.

Balance Sheet Retained earnings is the total earnings

that have not been distributed to owners as dividends.

The Balance Sheet Current assets+ Non-current assets Total assets

Current liabilities+ Long-term liabilities+ Stockholders’ equity Total liabilities and stockholders’ equity

Balance Sheet The Balance Sheet must be prepared

after the Statement of Retained Earnings in order to have calculated the ending balance of Retained Earnings.

Income Statement

Net income

Income Statement

Net income

Statement of Retained Earnings

Beginning Retained Earnings+ Net income– Dividends

Ending retained earnings

Statement of Retained Earnings

Beginning Retained Earnings+ Net income– Dividends

Ending retained earnings

Balance Sheet

Ending Balance Retained Earnings

Balance Sheet

Ending Balance Retained Earnings

Order of Preparation

Income statement—A summary of the revenue and expenses for a specific period of time.

Statement of retained earnings – a summary of the changes in the retained earnings that have occurred during a specific period of time.

Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date.

Review

Example Problem

Cash 5,000 Sales 100,000

Utility Expense 8,000 Buildings 65,000

Common Stock 45,000 Accounts Payable 12,000

Supplies 4,000 Cost of Goods Sold 58,000

Interest Expense 5,000 Additional Paid in Capital

20,000

Bonds Payable 40,000 Supplies Expense 3,000

Salaries Expense 16,000 Accounts Receivable 10,000

Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

Income Tax Rate 30%

Step One Classify the accounts as assets, liabilities,

equity, revenue or expenses.

Assets

Cash 5,000 Sales 100,000

Utility Expense 8,000 Buildings 65,000

Common Stock 45,000 Accounts Payable 12,000

Supplies 4,000 Cost of Goods Sold 58,000

Interest Expense 5,000 Additional Paid in Capital

20,000

Bonds Payable 40,000 Supplies Expense 3,000

Salaries Expense 16,000 Accounts Receivable 10,000

Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

Income Tax Rate 30%

Assets, Liabilities,

Cash 5,000 Sales 100,000

Utility Expense 8,000 Buildings 65,000

Common Stock 45,000 Accounts Payable 12,000

Supplies 4,000 Cost of Goods Sold 58,000

Interest Expense 5,000 Additional Paid in Capital

20,000

Bonds Payable 40,000 Supplies Expense 3,000

Salaries Expense 16,000 Accounts Receivable 10,000

Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

Income Tax Rate 30%

Assets, Liabilities, Equity

Cash 5,000 Sales 100,000

Utility Expense 8,000 Buildings 65,000

Common Stock 45,000 Accounts Payable 12,000

Supplies 4,000 Cost of Goods Sold 58,000

Interest Expense 5,000 Additional Paid in Capital

20,000

Bonds Payable 40,000 Supplies Expense 3,000

Salaries Expense 16,000 Accounts Receivable 10,000

Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

Income Tax Rate 30%

Assets, Liabilities, Equity, Revenues

Cash 5,000 Sales 100,000

Utility Expense 8,000 Buildings 65,000

Common Stock 45,000 Accounts Payable 12,000

Supplies 4,000 Cost of Goods Sold 58,000

Interest Expense 5,000 Additional Paid in Capital

20,000

Bonds Payable 40,000 Supplies Expense 3,000

Salaries Expense 16,000 Accounts Receivable 10,000

Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

Income Tax Rate 30%

Assets, Liabilities, Equity, Revenues, Expenses

Cash 5,000 Sales 100,000

Utility Expense 8,000 Buildings 65,000

Common Stock 45,000 Accounts Payable 12,000

Supplies 4,000 Cost of Goods Sold 58,000

Interest Expense 5,000 Additional Paid in Capital

20,000

Bonds Payable 40,000 Supplies Expense 3,000

Salaries Expense 16,000 Accounts Receivable 10,000

Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

Income Tax Rate 30%

Step Two Prepare the Income Statement.

Sales revenue- Cost of goods sold Gross profit- Operating expenses Income from operations+/- Non-operating items Income before taxes- Income taxes Net income

Income Statement

Sales 100,000

- Cost of Goods Sold -58,000

Gross Margin 42,000

- Operating Expenses -27,000

Income from Operations

15,000

- Non-operating Items -5,000

Income before Taxes 10,000

- Income Taxes -3,000

Net Income 7,000

Income Statement

Sales 100,000

- Cost of Goods Sold -58,000

Gross Margin 42,000

- Operating Expenses -27,000

Income from Operations

15,000

- Non-operating Items -5,000

Income before Taxes 10,000

- Income Taxes -3,000

Net Income 7,000

Operating expenses include:

Utility expense 8,000Salaries expense 16,000Supplies expense 3,000

Income Statement

Sales 100,000

- Cost of Goods Sold -58,000

Gross Margin 42,000

- Operating Expenses -27,000

Income from Operations

15,000

- Non-operating Items -5,000

Income before Taxes 10,000

- Income Taxes -3,000

Net Income 7,000

Non-operating items include:

Interest expense 5,000

Income Statement

Sales 100,000

- Cost of Goods Sold -58,000

Gross Margin 42,000

- Operating Expenses -27,000

Income from Operations

15,000

- Non-operating Items -5,000

Income before Taxes 10,000

- Income Taxes -3,000

Net Income 7,000

Income taxes = Income before taxes * Income tax rate

10,000 * 30% = 3,000

Step Three Prepare the Statement of Retained

Earnings.

Beg. balance, retained earnings+ Net income- Dividends End. balance, retained earnings

Statement of Retained Earnings

Beginning Balance, Retained Earnings

5,000

+ Net Income +7,000

- Dividends -0

Ending Balance, Retained Earnings

12,000

Net Income is brought forward from the Income Statement.

Step Four Prepare the Balance Sheet.

Current assets+ Non-current assets Total assets

Current liabilities+ Long-term liabilities+ Stockholders’ equity Total liabilities and stockholders’ equity

Balance Sheet

Current Assets: Current Liabilities:

Cash 5,000 Accounts Payable 12,000

Accounts Receivable 10,000 Long-term liabilities:

Inventories 45,000 Bonds Payable 40,000

Supplies 4,000 Stockholders’ Equity:

Non-Current Assets: Common Stock 45,000

Buildings 65,000 Additional Paid in Capital

20,000

Retained Earnings 12,000

Total Assets 129,000 Total Liabilities and Equity

129,000

Balance Sheet

Current Assets: Current Liabilities:

Cash 5,000 Accounts Payable 12,000

Accounts Receivable 10,000 Long-term liabilities:

Inventories 45,000 Bonds Payable 40,000

Supplies 4,000 Stockholders’ Equity:

Non-Current Assets: Common Stock 45,000

Buildings 65,000 Additional Paid in Capital

20,000

Retained Earnings 12,000

Total Assets 129,000 Total Liabilities and Equity

129,000

End. Bal. is brought forward from the Statement of Retained Earnings

The End