CH 8 THE WORKSHEET AND FINANCIAL STATEMENTS

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CH 8 THE WORKSHEET AND FINANCIAL STATEMENTS
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8.1 The Six-Column Worksheet

• A worksheet is an informal business paper used to
  organise and plan the information for the
  financial statements.
• The worksheet is prepared on columnar paper
  usually in pencil so that changes can be made.

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Control Accounts for AR and AP

• The Accounts Receivable Control Account
  represents the sum of the balances of all the
  individual Accounts Receivable Accounts.
• The Accounts Payable Control Account represents
  the sum of the balances of all the individual
  Accounts Payable Accounts.
• Why do we do this?
• Streamlines the worksheet
• Some companies will have hundreds or thousands of
  debtors and/or creditors

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Steps in preparing the worksheet
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1. Name, title (worksheet), fiscal period.
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2. Enter all amounts with their balances in the
first 2 columns. Make sure these are correct!
They must balance!
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3. Extend each of the amounts from the trial
balance columns into one of the four columns to
the right. Revenue and Expense items to the
income statement. All other items (assets,
liabilities, capital, and drawings) are extended
to the balance sheet columns. Be sure to record
all amounts accurately!
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4. Balance the worksheet
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Balance the worksheet continued

• a) Total each of the four columns and write in
  the totals.
• b) Calculate the difference between the two
  income statement columns (35, 579.01), and the
  difference between the two balance sheet columns
  (35579.01) they should be equal! If they are
  not then an error has been made.

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Balance the worksheet continued

• c) Record the balancing figure on the worksheet
  in 2 places. If revenues are greater than
  expenses then the figure represents a net income.
  Write Net Income in the accounts section. Record
  the balance on the debit side of income statement
  and on credit side of balance sheet.
• d) rule and show the final column totals.

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Net Loss

• Everything is the same except you record the
  balancing figure in the center/inner two columns

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The Work Sheet and Financial Statements

• Owners and business executives rarely look at the
  raw data
• They rely on the accounting dept to maintain
  accurate records
• Instead the accounting dept produces first class
  reports and statements for them
• The completed Work Sheet has all the necessary
  info needed to prepare the income statement and
  balance sheet.

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Note the new way to do a Balance Sheet
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Income Statement
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The Accounting Cycle
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8.2 How accounts use Income Statements

• Needed by owners/managers to evaluate the
  stability and growth of a business.
• Comparing Income Statements
• When comparing two consecutive years
• 1. The dollar amount increase or decrease from
  the first year to the second
• 2. The percentage amount of the increase or
  decrease from the first year to the second

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Example
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Car expense is increasing.

• Why?
• Is the sales force driving further? Obtaining
  more orders?
• If so, is AR or Sales Revenue increasing too?
• If not, then maybe the cars are becoming less
  economical
• Need to be sold/replaced.

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Trend Analysis

• Shows the financial data over a number of
  consecutive periods
• Ex) Sales for XYZ Company
• Year 1 ? 55 000
• Year 2 ? 60 000
• Year 3 ? 75 000
• Year 4 ? 45 000
• Year 5 ? 105 000
• Year 6 ? 112 000

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Now as percentages

• Year 1 ? 55 000 ? 100
• Year 2 ? 60 000 ? 109.1
• Year 3 ? 75 000 ? 136.4
• Year 4 ? 45 000 ?88.1
• Year 5 ? 105 000 ? 190.9
• Year 6 ? 112 000 ? 203.6

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Or even as a graph
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Common-size Income Statements

• Allows you to compare the income statements of
  two different companies.
• This is not easily done just by looking at only
  the dollar figures
• So we use percentages to scale them to the same
  size
• This is called common-size form

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Common-size Inc. State.
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8.3 How Accountants use balance sheets

• Balance Sheet Account Form and Report Form
• Account form ? information is presented side-by
  side
• Report Form ? information is presented vertically

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Classified Balance Sheet

• Has the data grouped according to major
  categories
• Makes it easier to analyze the information on the
  balance sheet

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Classified Balance Sheet

• 1) The heading gives
• Name of business
• Name of statement
• Date on which the balance is taken
• 2) Current Assets ? assets that will be converted
  to cash (or used up) during the next year
• 3) Fixed Assets ? long term assets held for their
  usefulness in producing goods and services
• 4) Current Liabilities ? short term debts,
  payment of which is expected to occur within one
  year of the date of the balance sheet

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Classified Balance Sheet

• 5) Long-term liabilities ? debts of the business
  that are not due within one year
• 6) Capital ? the owners claim on assets
• Beginning Balance
• Increase/Decrease (Net Profit/Loss)
• Drawings
• Ending Balance
• 7) Inner columns ? are used to list individual
  items building up to subtotals
• 8) The two balancing totals total assets, and
  total liabilities Owners Equity

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Working Capital

• the difference between the current assets and
  current liabilities
• The more working capital there is the better of
  the company is
• The more working capital you have the better able
  you are to pay of your liabilities and/or invest
  in ways to improve your business.
• Fixed assets and long-term liabilities also match
  up well.
• The fixed assets (building, cars) and the means
  you used to attain these (long term loans) give
  you a good idea of where your company is
  financially. The greater the difference in these
  the better off your company will be.

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Comparative Financial Statement

• Presents figures for successive years in
  side-by-side columns
• Both income statements and balance sheets may be
  shown in this way

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When analysing

• First look for items showing unusual change
• Can be a signal of a difficult situation
• Ex AR increased to 140 but sales did not
  increase.
• Or maybe little or no change has occurred
• This is also a sign of concern
• Business not moving forward/improving
• Or spend lots of money on advertising and no
  sales improvements.
• Analysing is important not only for the answers
  they provide but also the questions they generate!

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8.4 Accountability

• Shows how well managers have been managing the
  company
• Management must provide evidence of its
  performance
• The five most common people to use financial
  statements
• 1) Managers ? carefully study to improve
  performance

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Accountability continued

• 2) Owners ? to see how managers are doing
• 3) Creditors ? to view a companys progress
  assess loans or take away loans
• 4) Shareholders ? must provide shareholders with
  financial papers (the law)
• 5) Investors/Brokers ? stock brokers and
  potential investors use them too

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Quality of Financial Statements

• Financial Statements are very important
• They need to be accurate, complete, up-to-date
  and reliable
• For this reason we have the GAAPs
• So that bankers, owners, can read them with
  confidence
• To make sure you are meeting standards, most
  companies have to undergo an audit.
• An audit is a critical review by a public
  accountant of the internal controls and
  accounting records of a company
• There are some new GAAPs important for
  accountability

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GAAP The Consistency Principle

• Requires that a business must use the same
  accounting methods and procedures from period to
  period
• Prevents people from manipulating figures

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GAAP THE materiality Principle

• Requires accountants to follow GAAPs except when
  to do so would be expensive or difficult, and
  where it makes no real difference if the rules
  are ignored
• Ex) small error found after printing document of
  50 for net income. Net income was 350 000 ?
  very small in comparison so not necessary to
  correct

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GAAP The Full Disclosure Principle

• All information needed for a full understanding
  of the companys financial affairs must be
  included in the financial statements
• A law suit against a chemical company ? you would
  need to disclose this info