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

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

3. Financial Statements
This tutorial illustrates how to prepare three basic financial statements
The Income Statement

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

5. Financial Statements
This tutorial illustrates how to prepare three basic financial statements
The Income Statement
The Statement of Retained Earnings
The Balance Sheet

6. 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.

7. The Income Statement

8. Income Statement
The first statement prepared is the Income Statement.

9. Income Statement The first statement prepared is the Income Statement.
The Income Statement reports a business’ performance for the period.

10. Income Statement
A simple format for an income statement is:

11. Income Statement A simple format for an income statement is:
Revenues – Expenses = Net Income

12. Income Statement A simple format for an income statement is:
Revenues – Expenses = Net Income
We will look at a more complex format later.

13. 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.

14. 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.

15. Income Statement
Expenses are incurred when a business receives goods and services. Like revenues, payment may or may not have been made.

16. 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.

17. 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.

18. 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:

19. 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

20. Income Statement
Cost of goods sold represents the expense a business incurred to buy or make a product for resale.

21. 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.

22. Income Statement
Operating expenses are the usual expenses incurred in operating a business.

23. 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.

24. Income Statement
Non-operating items are revenue, expenses, gains and losses that do not relate to the company’s primary operations.

25. 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.

26. Income Statement
Income taxes are computed by multiplying Income before taxes by the income tax rate.

27. 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.

28. The Statement of Retained Earnings

29. Statement of Retained Earnings
The Statement of Retained Earnings reports how net income and dividends affected a company’s financial position during the period.

30. Statement of Retained Earnings
The format of the statement is: 19 19

31. Statement of Retained Earnings
The format of the statement is:
Beg. balance, retained earnings
+ Net income
- Dividends
End. balance, retained earnings 19 19

32. Statement of Retained Earnings
Note that the Income Statement must be prepared before the Statement of Retained Earnings.

33. 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.

34. The Balance Sheet

35. Balance Sheet
The purpose of the balance sheet is to report the financial position of an accounting entity at a particular point in time.

36. 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

37. Balance Sheet
Assets are economic resources owned by a company.

38. Balance Sheet Assets are economic resources owned by a company.
Examples include cash, accounts receivable, supplies, buildings and equipment.

39. Balance Sheet
Liabilities are the company’s debt or obligations.

40. Balance Sheet Liabilities are the company’s debt or obligations.
Examples are accounts payable, unearned revenues and bonds payable.

41. 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.

42. Balance Sheet
There are two different types of assets shown on a balance sheet. These are current assets and non-current assets.

43. 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

44. Balance Sheet
Current assets are assets that will be used or turned into cash within one year.

45. 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.

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

47. Balance Sheet Non-current assets comprise the remainder of the assets.
These include accounts such as: long-term investments, land, building, equipment and patents.

48. Balance Sheet
There are two different types of liabilities shown on a balance sheet – current liabilities and long-term liabilities.

49. 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

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

51. 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.

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

53. Balance Sheet
Long-term liabilities are obligations that will not be paid or satisfied within the year.
Examples include mortgage payable and bonds payable.

54. Balance Sheet
Stockholders’ Equity is divided into two categories: contributed capital and retained earnings.
Contributed capital
+ Retained earnings
Total stockholders’ equity

55. Balance Sheet
Contributed capital is the amount of cash (or other assets) provided by the shareholders.

56. 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.

57. Balance Sheet
Retained earnings is the total earnings that have not been distributed to owners as dividends.

58. The Balance Sheet Current assets + Non-current assets Total assets
Current liabilities
+ Long-term liabilities
+ Stockholders’ equity
Total liabilities and
stockholders’ equity 5 7 7

59. 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.

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

61. 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.

62. 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
Additional Paid in Capital
20,000
Bonds Payable
40,000
Supplies Expense
3,000
Salaries Expense
16,000
Accounts Receivable
10,000
Inventories
Retained Earnings
5,000 (beg. bal.)
Income Tax Rate
30%

63. Step One
Classify the accounts as assets, liabilities, equity, revenue or expenses.

64. 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
Additional Paid in Capital
20,000
Bonds Payable
40,000
Supplies Expense
3,000
Salaries Expense
16,000
Accounts Receivable
10,000
Inventories
Retained Earnings
5,000 (beg. bal.)
Income Tax Rate
30%

65. 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
Additional Paid in Capital
20,000
Bonds Payable
40,000
Supplies Expense
3,000
Salaries Expense
16,000
Accounts Receivable
10,000
Inventories
Retained Earnings
5,000 (beg. bal.)
Income Tax Rate
30%

66. 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
Additional Paid in Capital
20,000
Bonds Payable
40,000
Supplies Expense
3,000
Salaries Expense
16,000
Accounts Receivable
10,000
Inventories
Retained Earnings
5,000 (beg. bal.)
Income Tax Rate
30%

67. 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
Additional Paid in Capital
20,000
Bonds Payable
40,000
Supplies Expense
3,000
Salaries Expense
16,000
Accounts Receivable
10,000
Inventories
Retained Earnings
5,000 (beg. bal.)
Income Tax Rate
30%

68. 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
Additional Paid in Capital
20,000
Bonds Payable
40,000
Supplies Expense
3,000
Salaries Expense
16,000
Accounts Receivable
10,000
Inventories
Retained Earnings
5,000 (beg. bal.)
Income Tax Rate
30%

69. 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

70. 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

71. Income Statement Operating expenses include: Utility expense 8,000
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
Operating expenses include:
Utility expense 8,000
Salaries expense 16,000
Supplies expense 3,000

72. Income Statement Non-operating items include: Interest expense 5,000
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
Non-operating items include:
Interest expense 5,000

73. Income Statement Income taxes = Income before taxes * Income tax rate
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
Income taxes = Income before taxes * Income tax rate
10,000 * 30% = 3,000

74. Step Three Prepare the Statement of Retained Earnings. + Net income
Beg. balance, retained earnings
+ Net income
- Dividends
End. balance, retained earnings

75. 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 Income Statement.

76. Step Four Current assets Prepare the Balance Sheet.
+ Non-current assets
Total assets
Current liabilities
+ Long-term liabilities
+ Stockholders’ equity
Total liabilities and
stockholders’ equity

77. 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
Buildings
65,000
Additional Paid in Capital
20,000
Retained Earnings
Total Assets
129,000
Total Liabilities and Equity

78. 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
Buildings
65,000
Additional Paid in Capital
20,000
Retained Earnings
Total Assets
129,000
Total Liabilities and Equity
End. Bal. is brought forward from the Statement of Retained Earnings

79. The End