Financial Statement Preparation

Financial Statement
Preparation: A Tutorial
Prepared by Dr. Angela H. Sandberg

Professor of Accounting Jacksonville State University
Financial Statements
This tutorial illustrates how to prepare

three basic financial statements

The Income Statement

The Statement of Retained Earnings

The Balance Sheet

The Balance Sheet
The purpose of these statements is

to help users make better decisions.
Income Statement
The first statement prepared is the

Income Statement.
Income Statement
The first statement prepared is the

Income Statement.
The Income Statement reports a
business performance for the period.
Income Statement
A simple format for an income

statement is:
Income Statement

statement is:
Revenues Expenses = Net Income
Income Statement

statement is:
Revenues Expenses = Net Income
We will look at a more complex format

later.
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.
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.
Income Statement
Expenses are incurred when a

business receives goods and services.
Like revenues, payment may or may
not have been made.
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.
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.
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:
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
Income Statement
Cost of goods sold represents the

expense a business incurred to buy or
make a product for resale.
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.
Income Statement
Operating expenses are the usual

expenses incurred in operating a
business.
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.
Income Statement
Non-operating items are revenue,

expenses, gains and losses that do not
relate to the companys primary
operations.
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.
Income Statement
Income taxes are computed by

multiplying Income before taxes by the
income tax rate.
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.
The Statement of Retained

Earnings
Statement of Retained
Earnings

reports how net income and dividends
affected a companys financial position
during the period.
Earnings
The format of the statement is:
Earnings
The format of the statement is:
Beg. balance, retained earnings
+ Net income
- Dividends
End. balance, retained earnings
Earnings
Note that the Income Statement must

be prepared before the Statement of
Retained Earnings.
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.
The Balance Sheet
Balance Sheet
The purpose of the balance sheet is to

report the financial position of an
accounting entity at a particular point in
time.
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
Balance Sheet
Assets are economic resources owned

by a company.
Balance Sheet
Assets are economic resources owned

by a company.
Examples include cash, accounts

receivable, supplies, buildings and
equipment.
Balance Sheet
Liabilities are the companys debt or

obligations.
Balance Sheet
Liabilities are the companys debt or

obligations.
Examples are accounts payable,

unearned revenues and bonds payable.
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.
Balance Sheet
There are two different types of assets

shown on a balance sheet. These are
current assets and non-current assets.
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
Balance Sheet
Current assets are assets that will be

used or turned into cash within one
year.
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.
Balance Sheet
Non-current assets comprise the

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

remainder of the assets.
These include accounts such as:

long-term investments, land,
building, equipment and patents.
Balance Sheet
There are two different types of

liabilities shown on a balance sheet
current liabilities and long-term
liabilities.
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
Balance Sheet
Current liabilities are obligations that

will be paid in cash (or other services)
or satisfied by providing service within
the coming year.
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.
Balance Sheet
Long-term liabilities are obligations

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

that will not be paid or satisfied within
the year.
Examples include mortgage payable

and bonds payable.
Balance Sheet
Stockholders Equity is divided into

two categories: contributed capital and
retained earnings.
Contributed capital
+ Retained earnings
Total stockholders equity
Balance Sheet
Contributed capital is the amount of

cash (or other assets) provided by the
shareholders.
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.
Balance Sheet
Retained earnings is the total

earnings that have not been distributed
to owners as dividends.
The Balance Sheet

Current assets
Total assets
Current liabilities
+ Stockholders equity
Total liabilities and
stockholders equity
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.
Order of Preparation
Income
Statement
Net income
Earnings
Beginning Retained
Earnings
+ Net income
Dividends
Ending retained earnings
Balance Sheet
Ending Balance
Retained
Earnings
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.
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%
Step One
Classify the accounts as assets,

liabilities, equity, revenue or expenses.
Assets
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%
Assets, Liabilities,
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%
Assets, Liabilities, Equity

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%
Assets, Liabilities, Equity,

Revenues
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%
Assets, Liabilities, Equity,

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

Salaries expense 16,000
Supplies expense 3,000
Income Statement
Sales
100,000
-58,000
Gross Margin
42,000
-27,000
Income from
Operations
15,000
-5,000
Income before Taxes
10,000
- Income Taxes
-3,000
Net Income
7,000
Non-operating items include:

Interest expense 5,000
Income Statement
Sales
100,000
-58,000
Gross Margin
42,000
-27,000
Income from
Operations
15,000
-5,000
Income before Taxes
10,000
- Income Taxes
-3,000
Income taxes = Income

before taxes * Income tax
rate
Net Income
7,000
10,000 * 30% = 3,000
Step Three
Prepare the Statement of Retained

Earnings.
Beg. balance, retained earnings

+ Net income
- Dividends
End. balance, retained earnings
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
Income Statement.
Step Four
Prepare the Balance Sheet.
Current assets
Total assets
Current liabilities
+ Stockholders equity
Total liabilities and
stockholders equity
Balance Sheet
Current Assets:
Current Liabilities:
Cash
5,000
Accounts Payable
Accounts Receivable
10,000
Long-term
liabilities:
Inventories
45,000
Bonds Payable
Supplies
4,000
Stockholders
Equity:
Non-Current
Assets:
Buildings
Total Assets
65,000
129,000
12,000
40,000
Common Stock
45,000
Additional Paid in
Capital
20,000
Retained Earnings
12,000
Total Liabilities
and Equity
129,000
Balance Sheet
Current Assets:
Current Liabilities:
Cash
5,000
Accounts Payable
Accounts Receivable
10,000
Long-term
liabilities:
Inventories
45,000
Bonds Payable
Supplies
4,000
Stockholders
Equity:
Non-Current
Assets:
Buildings
Total Assets
65,000
129,000
12,000
40,000
Common Stock
45,000
Additional Paid in
Capital
20,000
Retained Earnings
12,000
Total Liabilities
and Equity
129,000
End. Bal. is
brought
forward from
the
Statement of
Retained
Earnings
The End

Financial Statement Preparation

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Financial Statement Preparation

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Financial Statement

Prepared by Dr. Angela H. Sandberg

This tutorial illustrates how to prepare

This tutorial illustrates how to prepare

This tutorial illustrates how to prepare

This tutorial illustrates how to prepare

This tutorial illustrates how to prepare

The purpose of these statements is

The Income Statement

The first statement prepared is the

The first statement prepared is the

A simple format for an income

A simple format for an income

A simple format for an income

We will look at a more complex format

Revenues are earned for the sale of

Revenues are earned for the sale of

Expenses are incurred when a

Expenses are incurred when a

Examples of expenses include salaries expense,

Most businesses require more

Most businesses require more

Cost of goods sold represents the

Cost of goods sold represents the

Example - a book store buys a book

Operating expenses are the usual

Operating expenses are the usual

Accounts such as salaries expense,

Non-operating items are revenue,

Non-operating items are revenue,

Accounts include interest expense and

Income taxes are computed by

Income taxes are computed by

Example Income before taxes is

The Statement of Retained

The Statement of Retained Earnings

Note that the Income Statement must

Note that the Income Statement must

The Balance Sheet

The purpose of the balance sheet is to

The purpose of the balance sheet is to

The basic format for the balance sheet

Assets are economic resources owned

Assets are economic resources owned

Examples include cash, accounts

Liabilities are the companys debt or

Liabilities are the companys debt or

Examples are accounts payable,

Equity is the residual balance. Assets

There are two different types of assets

There are two different types of assets

Current assets are assets that will be

Current assets are assets that will be

Examples include cash, accounts

Non-current assets comprise the

Non-current assets comprise the

These include accounts such as:

There are two different types of

There are two different types of

Current liabilities are obligations that

Current liabilities are obligations that

Long-term liabilities are obligations

Long-term liabilities are obligations

Examples include mortgage payable