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
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Financial Statements

• This tutorial illustrates how to prepare three
  basic financial statements

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Financial Statements

• This tutorial illustrates how to prepare three
  basic financial statements

The Income Statement
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Financial Statements

• This tutorial illustrates how to prepare three
  basic financial statements

The Income Statement The Statement of Retained
Earnings
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Financial Statements

• This tutorial illustrates how to prepare three
  basic financial statements

The Income Statement The Statement of Retained
Earnings The Balance Sheet
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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.
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The Income Statement

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Income Statement

• The first statement prepared is the Income
  Statement.

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Income Statement

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

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Income Statement

• A simple format for an income statement is

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Income Statement

• A simple format for an income statement is

Revenues Expenses Net Income
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Income Statement

• A simple format for an income statement is

Revenues Expenses Net Income

• We will look at a more complex format later.

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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.

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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.
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Income Statement

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

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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.
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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.

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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

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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

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Income Statement

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

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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.
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Income Statement

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

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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.
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Income Statement

• Non-operating items are revenue, expenses, gains
  and losses that do not relate to the companys
  primary operations.

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Income Statement

• Non-operating items are revenue, expenses, gains
  and losses that do not relate to the companys
  primary operations.

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

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

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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.
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The Statement of Retained Earnings

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Statement of Retained Earnings

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

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

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

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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.

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The Balance Sheet

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Balance Sheet

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

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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

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Balance Sheet

• Assets are economic resources owned by a company.
  

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Balance Sheet

• Assets are economic resources owned by a company.
  

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

• Liabilities are the companys debt or
  obligations.

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Balance Sheet

• Liabilities are the companys debt or
  obligations.

Examples are accounts payable, unearned revenues
and bonds payable.
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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.

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Balance Sheet

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

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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
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Balance Sheet

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

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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.
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Balance Sheet

• Non-current assets comprise the remainder of the
  assets.

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Balance Sheet

• Non-current assets comprise the remainder of the
  assets.

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

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

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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
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Balance Sheet

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

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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.
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Balance Sheet

• Long-term liabilities are obligations that will
  not be paid or satisfied within the year.

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Balance Sheet

• Long-term liabilities are obligations that will
  not be paid or satisfied within the year.

Examples include mortgage payable and bonds
payable.
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Balance Sheet

• Stockholders Equity is divided into two
  categories contributed capital and retained
  earnings.

Contributed capital Retained
earnings Total stockholders equity
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Balance Sheet

• Contributed capital is the amount of cash (or
  other assets) provided by the shareholders.

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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.
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Balance Sheet

• Retained earnings is the total earnings that have
  not been distributed to owners as dividends.

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The Balance Sheet

• Current assets
• Non-current assets
• Total assets
• Current liabilities
• Long-term liabilities
• Stockholders equity
• Total liabilities and
• stockholders equity

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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.

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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
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Review

• Income statementA 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 sheetA list of the assets, liabilities,
  and owners equity as of a specific date.

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Example Problem
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Step One

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

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Assets
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Assets, Liabilities,
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Assets, Liabilities, Equity
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Assets, Liabilities, Equity, Revenues
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Assets, Liabilities, Equity, Revenues, Expenses
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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
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Income Statement
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Income Statement
Operating expenses include Utility expense
8,000 Salaries expense 16,000 Supplies expense
3,000
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Income Statement
Non-operating items include Interest expense
5,000
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Income Statement
Income taxes Income before taxes Income tax
rate 10,000 30 3,000
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Step Three

• Prepare the Statement of Retained Earnings.

Beg. balance, retained earnings Net
income - Dividends End. balance, retained
earnings
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Statement of Retained Earnings
Net Income is brought forward from the Income
Statement.
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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
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Balance Sheet
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Balance Sheet
End. Bal. is brought forward from the Statement
of Retained Earnings
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The End