Financial Statement Preparation: A Tutorial

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Financial Statement

Preparation: A Tutorial

Prepared by – Dr. Angela H. Sandberg

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Financial Statements

■ This tutorial illustrates how to prepare

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Financial Statements

three basic financial statements

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Financial Statements

The Income Statement

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Financial Statements

The Statement of Retained Earnings The Balance Sheet

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Financial Statements

The Statement of Retained Earnings The Balance Sheet

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

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Income Statement

■ The first statement prepared is the

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Income Statement

■ The first statement prepared is the

Income Statement.

■ The Income Statement reports a

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Income Statement

■ A simple format for an income

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Income Statement

statement is:

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Income Statement

statement is:

Revenues – Expenses = Net Income

■ We will look at a more complex format

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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

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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

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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

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Income Statement

■ Non-operating items are revenue,

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

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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

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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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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:

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Balance Sheet

■ Assets are economic resources owned

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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 company’s debt or

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Balance Sheet

■ Liabilities are the company’s debt or

obligations.

Examples are accounts 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

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Balance Sheet

■ Non-current assets comprise the

remainder of the assets.

These include accounts such as: long-term investments, land,

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Balance Sheet

■ There are two different types of

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

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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

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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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Income Statement Net income Statement of Retained Earnings Beginning Retained Earnings + Net income – Dividends Ending retained earnings Balance Sheet Ending Balance Retained Earnings

Order of Preparation

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▪ 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.

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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%

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Step One

■ Classify the accounts as assets,

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Assets

Capital

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Assets,

Liabilities,

Capital

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Assets,

Liabilities,

Equity

Capital

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Assets,

Liabilities,

Equity,

Revenues

Capital

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Assets,

Liabilities,

Equity,

Revenues,

Expenses

Capital

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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

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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

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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

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Step Three

■ Prepare the Statement of Retained

Earnings.

Beg. balance, retained earnings

+ Net income - Dividends

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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

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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

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

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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

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