Financial statement preparation

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

Financial Statements ,[object Object]

Financial Statements ,[object Object],The Income Statement

Financial Statements ,[object Object],The Income Statement The Statement of Retained Earnings

Financial Statements ,[object Object],The Income Statement The Statement of Retained Earnings The Balance Sheet

Financial Statements ,[object Object],The Income Statement The Statement of Retained Earnings The Balance Sheet The purpose of these statements is to help users make better decisions.

Income Statement ,[object Object]

Income Statement ,[object Object],[object Object]

Income Statement ,[object Object],Revenues – Expenses = Net Income

Income Statement ,[object Object],Revenues – Expenses = Net Income ,[object Object]

Income Statement ,[object Object],Examples of revenues include sales, service revenue and interest revenue.

Income Statement ,[object Object],Examples of expenses include salaries expense, utility expense and interest expense.

Income Statement ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Income Statement ,[object Object],Example - a book store buys a book for $25 and then sells it for $32. The cost of goods sold is $25.

Income Statement ,[object Object],Accounts such as salaries expense, utility expense, and depreciation expenses are all shown in this section.

Income Statement ,[object Object],Accounts include interest expense and gains and losses of the sale of equipment and investments.

Income Statement ,[object Object],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 ,[object Object]

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 ,[object Object],[object Object]

Balance Sheet ,[object Object]

Balance Sheet ,[object Object],The basic format for the balance sheet is: Assets = Liabilities + Equity

Balance Sheet ,[object Object],Examples include cash, accounts receivable, supplies, buildings and equipment.

Balance Sheet ,[object Object],Examples are accounts payable, unearned revenues and bonds payable.

Balance Sheet ,[object Object],Current assets + Non-current assets Total assets

Balance Sheet ,[object Object],Examples include cash, accounts receivable, inventory, short-term investments, supplies and prepaids.

Balance Sheet ,[object Object],These include accounts such as: long-term investments, land, building, equipment and patents.

Balance Sheet ,[object Object],Current liabilities + Long-term liabilities Total liabilities

Balance Sheet ,[object Object],Examples include accounts payable, short-term notes payable, and taxes payable.

Balance Sheet ,[object Object],Examples include mortgage payable and bonds payable.

Balance Sheet ,[object Object],Contributed capital + Retained earnings Total stockholders’ equity

Balance Sheet ,[object Object],Common Stock and Additional Paid in Capital are accounts in this section.

The Balance Sheet ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

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

[object Object],[object Object],[object Object],Review

Example Problem 3,000 Supplies Expense 40,000 Bonds Payable 58,000 Cost of Goods Sold 4,000 Supplies 20,000 Additional Paid in Capital 5,000 Interest Expense 10,000 Accounts Receivable 16,000 Salaries Expense 30% Income Tax Rate 5,000 (beg. bal.) Retained Earnings 45,000 Inventories 12,000 Accounts Payable 45,000 Common Stock 65,000 Buildings 8,000 Utility Expense 100,000 Sales 5,000 Cash

Assets 3,000 Supplies Expense 40,000 Bonds Payable 58,000 Cost of Goods Sold 4,000 Supplies 20,000 Additional Paid in Capital 5,000 Interest Expense 10,000 Accounts Receivable 16,000 Salaries Expense 30% Income Tax Rate 5,000 (beg. bal.) Retained Earnings 45,000 Inventories 12,000 Accounts Payable 45,000 Common Stock 65,000 Buildings 8,000 Utility Expense 100,000 Sales 5,000 Cash

Assets, Liabilities, 3,000 Supplies Expense 40,000 Bonds Payable 58,000 Cost of Goods Sold 4,000 Supplies 20,000 Additional Paid in Capital 5,000 Interest Expense 10,000 Accounts Receivable 16,000 Salaries Expense 30% Income Tax Rate 5,000 (beg. bal.) Retained Earnings 45,000 Inventories 12,000 Accounts Payable 45,000 Common Stock 65,000 Buildings 8,000 Utility Expense 100,000 Sales 5,000 Cash

Assets, Liabilities, Equity 3,000 Supplies Expense 40,000 Bonds Payable 58,000 Cost of Goods Sold 4,000 Supplies 20,000 Additional Paid in Capital 5,000 Interest Expense 10,000 Accounts Receivable 16,000 Salaries Expense 30% Income Tax Rate 5,000 (beg. bal.) Retained Earnings 45,000 Inventories 12,000 Accounts Payable 45,000 Common Stock 65,000 Buildings 8,000 Utility Expense 100,000 Sales 5,000 Cash

Assets, Liabilities, Equity, Revenues 3,000 Supplies Expense 40,000 Bonds Payable 58,000 Cost of Goods Sold 4,000 Supplies 20,000 Additional Paid in Capital 5,000 Interest Expense 10,000 Accounts Receivable 16,000 Salaries Expense 30% Income Tax Rate 5,000 (beg. bal.) Retained Earnings 45,000 Inventories 12,000 Accounts Payable 45,000 Common Stock 65,000 Buildings 8,000 Utility Expense 100,000 Sales 5,000 Cash

Assets, Liabilities, Equity, Revenues, Expenses 3,000 Supplies Expense 40,000 Bonds Payable 58,000 Cost of Goods Sold 4,000 Supplies 20,000 Additional Paid in Capital 5,000 Interest Expense 10,000 Accounts Receivable 16,000 Salaries Expense 30% Income Tax Rate 5,000 (beg. bal.) Retained Earnings 45,000 Inventories 12,000 Accounts Payable 45,000 Common Stock 65,000 Buildings 8,000 Utility Expense 100,000 Sales 5,000 Cash

Step Two ,[object Object],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 -5,000 - Non-operating Items -27,000 - Operating Expenses 15,000 Income from Operations 10,000 Income before Taxes 7,000 Net Income -3,000 - Income Taxes 42,000 Gross Margin -58,000 - Cost of Goods Sold 100,000 Sales

Income Statement Operating expenses include: Utility expense 8,000 Salaries expense 16,000 Supplies expense 3,000 -5,000 - Non-operating Items -27,000 - Operating Expenses 15,000 Income from Operations 10,000 Income before Taxes 7,000 Net Income -3,000 - Income Taxes 42,000 Gross Margin -58,000 - Cost of Goods Sold 100,000 Sales

Income Statement Non-operating items include: Interest expense 5,000 -5,000 - Non-operating Items -27,000 - Operating Expenses 15,000 Income from Operations 10,000 Income before Taxes 7,000 Net Income -3,000 - Income Taxes 42,000 Gross Margin -58,000 - Cost of Goods Sold 100,000 Sales

Income Statement Income taxes = Income before taxes * Income tax rate 10,000 * 30% = 3,000 -5,000 - Non-operating Items -27,000 - Operating Expenses 15,000 Income from Operations 10,000 Income before Taxes 7,000 Net Income -3,000 - Income Taxes 42,000 Gross Margin -58,000 - Cost of Goods Sold 100,000 Sales

Step Three ,[object Object],Beg. balance, retained earnings + Net income - Dividends End. balance, retained earnings

Statement of Retained Earnings Net Income is brought forward from the Income Statement. 12,000 Ending Balance, Retained Earnings -0 - Dividends +7,000 + Net Income 5,000 Beginning Balance, Retained Earnings

Step Four ,[object Object],Current assets + Non-current assets Total assets Current liabilities + Long-term liabilities + Stockholders’ equity Total liabilities and stockholders’ equity

Balance Sheet 45,000 Common Stock Non-Current Assets: 40,000 Bonds Payable 45,000 Inventories Stockholders’ Equity: 4,000 Supplies 20,000 Additional Paid in Capital 65,000 Buildings 129,000 Total Liabilities and Equity 129,000 Total Assets 12,000 Retained Earnings Long-term liabilities: 10,000 Accounts Receivable 12,000 Accounts Payable 5,000 Cash Current Liabilities: Current Assets:

Balance Sheet End. Bal. is brought forward from the Statement of Retained Earnings 45,000 Common Stock Non-Current Assets: 40,000 Bonds Payable 45,000 Inventories Stockholders’ Equity: 4,000 Supplies 20,000 Additional Paid in Capital 65,000 Buildings 129,000 Total Liabilities and Equity 129,000 Total Assets 12,000 Retained Earnings Long-term liabilities: 10,000 Accounts Receivable 12,000 Accounts Payable 5,000 Cash Current Liabilities: Current Assets:

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