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Financial Statement Preparation: A Tutorial

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  1. Financial Statement Preparation: A Tutorial Prepared by – Dr. Angela H. Sandberg Professor of Accounting – Jacksonville State University

  2. Financial Statements • This tutorial illustrates how to prepare three basic financial statements

  3. Financial Statements • This tutorial illustrates how to prepare three basic financial statements The Income Statement

  4. Financial Statements • This tutorial illustrates how to prepare three basic financial statements The Income Statement The Statement of Retained Earnings

  5. Financial Statements • This tutorial illustrates how to prepare three basic financial statements The Income Statement The Statement of Retained Earnings The Balance Sheet

  6. 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.

  7. The Income Statement

  8. Income Statement • The first statement prepared is the Income Statement.

  9. Income Statement • The first statement prepared is the Income Statement. • The Income Statement reports a business’ performance for the period.

  10. Income Statement • A simple format for an income statement is:

  11. Income Statement • A simple format for an income statement is: Revenues – Expenses = Net Income

  12. Income Statement • A simple format for an income statement is: Revenues – Expenses = Net Income • We will look at a more complex format later.

  13. 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.

  14. 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.

  15. Income Statement • Expenses are incurred when a business receives goods and services. Like revenues, payment may or may not have been made.

  16. 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.

  17. 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.

  18. 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:

  19. 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

  20. Income Statement • Cost of goods sold represents the expense a business incurred to buy or make a product for resale.

  21. 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.

  22. Income Statement • Operating expenses are the usual expenses incurred in operating a business.

  23. 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.

  24. Income Statement • Non-operating items are revenue, expenses, gains and losses that do not relate to the company’s primary operations.

  25. 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.

  26. Income Statement • Income taxes are computed by multiplying Income before taxes by the income tax rate.

  27. 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.

  28. The Statement of Retained Earnings

  29. Statement of Retained Earnings • The Statement of Retained Earnings reports how net income and dividends affected a company’s financial position during the period.

  30. Statement of Retained Earnings The format of the statement is:

  31. Statement of Retained Earnings The format of the statement is: Beg. balance, retained earnings + Net income - Dividends End. balance, retained earnings

  32. Statement of Retained Earnings • Note that the Income Statement must be prepared before the Statement of Retained Earnings.

  33. 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.

  34. The Balance Sheet

  35. Balance Sheet • The purpose of the balance sheet is to report the financial position of an accounting entity at a particular point in time.

  36. 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

  37. Balance Sheet • Assets are economic resources owned by a company.

  38. Balance Sheet • Assets are economic resources owned by a company. Examples include cash, accounts receivable, supplies, buildings and equipment.

  39. Balance Sheet • Liabilities are the company’s debt or obligations.

  40. Balance Sheet • Liabilities are the company’s debt or obligations. Examples are accounts payable, unearned revenues and bonds payable.

  41. 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.

  42. Balance Sheet • There are two different types of assets shown on a balance sheet. These are current assets and non-current assets.

  43. 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

  44. Balance Sheet • Current assets are assets that will be used or turned into cash within one year.

  45. 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.

  46. Balance Sheet • Non-current assets comprise the remainder of the assets.

  47. Balance Sheet • Non-current assets comprise the remainder of the assets. These include accounts such as: long-term investments, land, building, equipment and patents.

  48. Balance Sheet • There are two different types of liabilities shown on a balance sheet – current liabilities and long-term liabilities.

  49. 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

  50. Balance Sheet • Current liabilities are obligations that will be paid in cash (or other services) or satisfied by providing service within the coming year.