1. The Work Sheet and Financial Statements
Chapter 8
The Work Sheet and Financial Statements

2. The Six-Column Work Shop

3. Purpose of the Work Sheet
A work sheet is an informal business paper used to organize and plan the information for the financial statements.
This is a great application for a computerized spreadsheet program.
In Chapter 9 we will expand the work sheet to eight columns, allowing for the adjustments required by certain GAAPs.

4. Control Accounts for Accounts Receivable and Accounts Payable
In the future, when we prepare a trial balance, or a work sheet, we will not display the debtors’ names or creditors’ names associated with Accounts Receivable and Accounts Payable.
Alternatively, we will use control accounts.
The Accounts Receivable control account represents the sum of the balances of all the individual Accounts Receivable accounts.

5. Control Accounts for Accounts Receivable and Accounts Payable
The Accounts Payable control account represents the sum of the balances of all the individual Accounts Payable accounts.
Having two control accounts, instead of dozens or hundreds of individual debtors’ and creditors’ accounts, streamlines the work sheet.
The details about the accounts of individual debtors and creditors are kept in separate records. This will be covered in more detail in Chapter 11.

6. Steps in Preparing a Work Sheet
Write in the title of the work sheet and all of the headings:
Accounts
Trial Balance
Income Statement
Balance Sheet

7. Steps in Preparing a Work Sheet
Enter all accounts, with their balances, in the first two columns.

8. Steps in Preparing a Work Sheet
Assets,
Liabilities,
Capital and
Drawings
in the
Balance Sheet
columns.
Revenue and
Expenses in
the Income
Statement
columns.
Step 3
Extend each of the amounts from the trial balance.

9. Steps in Preparing a Work Sheet
Step 4: Balance the work sheet … (a) take totals

10. Steps in Preparing a Work Sheet
If they are not
equal, the work
sheet does
not balance.
Errors must be
found before
proceeding to
the preparation
of financial
statements.
Make sure the
difference for
the Income
Statement
columns equals
the difference
for the Balance
Sheet columns.
Step 4: (b) calc. difference

11. Steps in Preparing a Work Sheet
Step 4: (c) Record the balancing figure (difference) in the appropriate Income Statement and Balance Sheet columns.
Because revenues (Income Statement credits) are greater than expenses (debits) the difference is Net Income and it is recorded in the debit column.
The balancing figure appears on the credit side of the Balance Sheet section, because Net Income represents an increase in capital.

12. Steps in Preparing a Work Sheet

13. Steps in Preparing a Work Sheet
Balance Sheet Columns
Net Income (the balancing
figure) is on the credit side
as it is an increase to capital
Income Statement Columns
Revenue (credits) greater
than expenses (debits).
Result … Net Income.

14. Steps in Preparing a Work Sheet
Income Statement Columns
If the work sheet showed a
Net Loss, the expenses (debits)
would be greater than the
revenues (credits).
The Net Loss (balancing figure)
would be in the credit column.
Balance Sheet Columns
If the work sheet showed a
Net Loss, the balancing
figure would be on the
debit side as it is an
decrease to capital.

15. The Work Sheet and the Financial Statements
Review the
format

16. Steps in Preparing a Work Sheet
Review the
format

17. Class Work p. 260, Exercise 1
For each account listed below, indicate whether it would be extended to the Income Statement or Balance Sheet, debit or credit columns.
Accounts Payable
Miscellaneous Expense
Revenue
Advertising Expense
Wages Expense
Mortgage Payable
Utilities Expense
Equipment
G. Rojek, Capital
Delivery Expense
GST Recoverable
Bank Loan
Accounts Receivable
Automobile
Bank
G. Rojek, Drawings
Sales
Bank Charges Expense
Rent Expense
Supplies
Trucks
GST Payable

18. Class Work p. 261, Exercise 2
Prepare a work sheet for N. Foreman and Company for the month ended April 30, 2007.

19. Class Work p. 262, Exercise 4
Locate errors and make necessary corrections.

20. Homework p. 261, Exercise 3
Prepare a work sheet for Collision Bodywork and Repairs for the year ended December 31, 2007.

21. How Accountants use Income Statements

22. Comparing Income Statements
When comparing income statements for two consecutive years, accountants often make the following two calculations for each statement item:
The dollar amount of the increase or decrease from the first year to the second; and
The percentage amount of the increase or decrease from the first year to the second.

23. Comparing Income Statements
Item
Year 1
Year 2
$ Increase or Decrease
% Increase or Decrease
Car Expense
$50,250
$59,360
+ $9,110 %
9,110 .
50,250
X 100

24. Trend Analysis
A trend analysis shows financial data over a number of consecutive periods.
It is not easy to interpret a trend just by looking at the numbers.
Calculating a percentage change compared to a base year adds meaning to the numbers.
Graphing the data can also provide a better perspective of the trend over time.

25. Trend Analysis Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 60,000 55,000
Sales
$ 55,000
$ 60,000
$ 75,000
$ 45,000
$105,000
$112,000
Sales Percentage
100.0%
109.1%
136.4%
81.8%
190.9%
203.6%
60,000
55,000
X 100
75,000
55,000
X 100
45,000
55,000
X 100
105,000
55,000
X 100
112,000
55,000
X 100

26. Common-Size Income Statements
At times, it may be necessary to compare the income statements of two different companies.
To make two companies “look the same”, convert each dollar amount to a percentage using the sales figure as the base.
Showing these percentages puts the income statement in common-size form.

27. Common-Size Income Statements

28. Class / Homework p. 266/267, Exercise 1
p. 267, Exercise 3 (use format on p. 264)
p. 267, Exercise 4 (may use computers)
p. 268, Exercise 5 (may use computers)
p. 268, Exercise 6 (may use computers)

29. How Accountants use Balance Sheets

30. Balance Sheet Account Form vs. Report Form
Heading
Assets
Total
Liabilities
And
Owner’s
Equity
Account Form
Heading
Assets
Total
Liabilities
And
Owner’s
Equity
Report Form

31. Classified Balance Sheet

32. Classified Balance Sheet
Provides useful totals for comparison.
For example, current assets and current liabilities.
These match up well because the time frame for both is one year.
The difference between current assets and current liabilities is known as working capital.
Working capital is an indication of a company’s ability to meet current obligations.

33. Classified Balance Sheet
Another example, fixed assets and long-term liabilities.
These match up well because the time frame for both is greater than one year.
A comparison of these totals provides insight into the financing of fixed assets.
This also provides an indication of what portion / percentage of fixed assets continue to be financed through long-term debt.

34. Comparative Balance Sheet

35. Trend Analysis APOLLO PRINTING Working Capital 1998 - 2002 1998 1999
2000
2001
2002
$ 19,626
$ 18,993
$ 20,584
$ 16,761
$ 19,970
100.0%
96.8%
104.9%
85.4%
101.8%

36. Common-Size Balance Sheet

37. Class / Homework p. 276, Exercise 1 p. 277, Exercise 2

38. Accountability

39. Accountability
Accounting data is used in many ways, the most important of which is to provide information for the financial statements.
Accountability is the company officers’ obligation to show how well they have been managing the company.
The financial statements provide evidence of accountability.

40. Users of Financial Statements
The five groups who use financial statements most commonly are:
Managers – managers probably us the financial statements more than any other group. They use past performance in order to improve results and efficiency, and to eliminate weaknesses.
Owners – many owners are not directly involved in managing their companies. Financial statements help them evaluate the performance of the management team.

41. Users of Financial Statements
Creditors – particularly bankers, ask for financial statements to assess the company’s progress and its ability to meet its loan obligations.
Shareholders – the law requires that corporations provide their shareholders with financial statements. The shareholders are the real owners of an incorporated company and can use this information to assess progress.
Investors and brokers – shares of public corporations are traded through the stock exchange. Employees of stock brokerage firms and potential investors stay informed by reading corporate financial reports.

42. Quality of Financial Statements
Users of financial statements expect accurate, complete, up-to-date, and reliable information.
Generally Accepted Accounting Principles (GAAPs) play an important role in the accountability process … they provide the users of financial statements with confidence in the numbers.

43. Quality of Financial Statements
An audit is a critical review by a public accountant of the internal controls and accounting records of a company.
The audit makes it possible to evaluate the fairness of the company’s financial statements.

44. Quality of Financial Statements
In addition to the GAAPs previously discussed, the following help produce credible financial statements:
The consistency principle requires that a business
must use the same accounting methods and
procedures from period to period.
If there is a change in method from one period to another, the financial statements must clearly indicate the change.
Consistency is assumed unless otherwise stated.
Consistency prevents manipulation of information through the changing of methods of accounting.

45. Quality of Financial Statements
The materiality principle requires accountants
to include in a firm’s financial statements
any information that could be considered material
(or important) to the users of that
financial information.
For information not to be included, it must be such that neither the net income nor the financial position of the firm are impacted in any significant way.
Excluding particular information must not lead statement users to make decisions different from what they would make were they to have that information.

46. Quality of Financial Statements
The full disclosure principle states that
all information needed for a full understanding
of the company’s financial affairs must be
included in the financial statements.
Some items that are necessary for an understanding of the company’s financial affairs may not affect the ledger accounts directly.
Such items would be included in the form of accompanying notes to the financial statements.
e.g. Pending litigations, tax disputes, company takeovers, etc.

47. Class / Homework p. 293, Exercise 3 p. 293/294, Exercise 4
p. 296, Case 1
p. 297, Case 2