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Financial Statement Preparation: A Tutorial. Prepared by – Dr. Angela H. Sandberg Professor of Accounting – Jacksonville State University. Financial Statements. This tutorial illustrates how to prepare three basic financial statements. Financial Statements.

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Financial Statement Preparation: A Tutorial

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Financial Statement Preparation: A Tutorial

Prepared by – Dr. Angela H. Sandberg

Professor of Accounting – Jacksonville State University


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 Statement

The Statement of Retained Earnings


Financial Statements

  • This tutorial illustrates how to prepare three basic financial statements

The Income Statement

The Statement of Retained Earnings

The Balance Sheet


Financial Statements

  • This tutorial illustrates how to prepare three basic financial statements

The Income Statement

The Statement of Retained Earnings

The 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.


Order of Preparation

Income Statement

Net income

Statement of Retained Earnings

Beginning Retained Earnings

+Net income

–Dividends

Ending retained earnings

Balance Sheet

Ending Balance Retained Earnings


Review

  • 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.


Example Problem


Step One

  • Classify the accounts as assets, liabilities, equity, revenue or expenses.


Assets


Assets, Liabilities,


Assets, Liabilities,Equity


Assets, Liabilities,Equity, Revenues


Assets, Liabilities,Equity, Revenues, Expenses


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


Income Statement

Operating expenses include:

Utility expense 8,000

Salaries expense 16,000

Supplies expense 3,000


Income Statement

Non-operating items include:

Interest expense 5,000


Income Statement

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

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


Balance Sheet

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


The End


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