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
Financial Statements
 This tutorial illustrates how to prepare
three basic financial statements

The Income Statement

Financial Statements
 This tutorial illustrates how to prepare
three basic financial statements

The Income Statement

The Statement of Retained Earnings
Financial Statements
 This tutorial illustrates how to prepare
three basic financial statements

The Income Statement

The Statement of Retained Earnings
The Balance Sheet
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.
The Income Statement
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
 A simple format for an income
statement is:

Revenues – Expenses = Net Income

Income Statement
 A simple format for an income
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 company’s primary
operations.
 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
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
 The Statement of Retained Earnings
reports how net income and dividends
affected a company’s financial position
during the period.
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
 Note that the Income Statement must
be prepared before the Statement of
Retained Earnings.
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.
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 company’s debt or
obligations.
 Balance Sheet
 Liabilities are the company’s 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
+ Non-current assets
Total assets
Current liabilities
+ Long-term 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
Statement of Retained
Earnings Balance Sheet
Net income Beginning Retained
Earnings
+ Net income
– Dividends
Ending retained earnings Ending Balance
Retained
Earnings
 Review

 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.
 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 20,000

Capital
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 20,000

Capital
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 20,000

Capital
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 20,000

Capital
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 20,000

Capital
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 20,000

Capital
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 100,000

- Cost of Goods Sold -58,000

Gross Margin 42,000

- Operating Expenses -27,000

Income from 15,000

Operations
- Non-operating Items -5,000

Income before Taxes 10,000

- Income Taxes -3,000

Net Income 7,000

 Income Statement
Sales 100,000

- Cost of Goods Sold -58,000

Operating expenses include:
Gross Margin 42,000

- Operating Expenses -27,000 Utility expense 8,000

Salaries expense 16,000
Income from 15,000 Supplies expense 3,000
Operations
- Non-operating Items -5,000

Income before Taxes 10,000

- Income Taxes -3,000

Net Income 7,000

 Income Statement
Sales 100,000

- Cost of Goods Sold -58,000

Gross Margin 42,000

- Operating Expenses -27,000

Income from 15,000

Operations Non-operating items include:
- Non-operating Items -5,000
Interest expense 5,000
Income before Taxes 10,000

- Income Taxes -3,000

Net Income 7,000

 Income Statement
Sales 100,000

- Cost of Goods Sold -58,000

Gross Margin 42,000

- Operating Expenses -27,000

Income from 15,000

Operations
- Non-operating Items -5,000
Income taxes = Income
Income before Taxes 10,000
before taxes * Income tax
- Income Taxes -3,000 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
 Statement of Retained
Earnings
Beginning Balance, 5,000
Retained Earnings Net Income is brought
+ Net Income +7,000 forward from the
Income Statement.
- Dividends -0

Ending Balance, 12,000

Retained Earnings
 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
 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 Common Stock 45,000
Assets:
Buildings 65,000 Additional Paid in 20,000
Capital
Retained Earnings 12,000

Total Assets 129,000 Total Liabilities 129,000

and Equity
 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
End. Bal. is
Supplies 4,000 Stockholders’ brought
Equity:
forward from
Non-Current Common Stock 45,000 the
Assets:
Statement of
Buildings 65,000 Additional Paid in 20,000
Capital
Retained
Earnings
Retained Earnings 12,000

Total Assets 129,000 Total Liabilities 129,000

and Equity
The End