Table of Contents

Table of Contents

Contents
Table of Contents ........................................................................................................................... iii Welcome to Financial Statements ................................................................................................... v Who these financial statements are for ....................................................................................... v How this manual is organized .................................................................................................... vi 1. 2. 3. 4. Chapter 1 Balance Sheet ........................................................................................... vi Chapter 2 Income Statement..................................................................................... vi Index ........................................................................................................................... vii References .................................................................................................................. vii

Additional Resources .................................................................................................................... vii The Balance Sheet........................................................................................................................... 3 Step 1: Balance Sheet Heading ................................................................................................... 3 FIGURE 1.1 ................................................................................................................................ 3 Balance Sheet Information .......................................................................................................... 3 Step 2: Assets .............................................................................................................................. 4 Step 3: Liabilities and Stockholders Equity .............................................................................. 4 Contributed Capital ..................................................................................................................... 5 Reinvested Earning ..................................................................................................................... 5 Liabilities .................................................................................................................................... 5 Assets .......................................................................................................................................... 5 Stockholders Equity................................................................................................................... 5 ............................................................................................................................ 7 The Income Statement .................................................................................................................... 9 Step 1: Income Statement Heading ............................................................................................. 9 Step 2: Revenue ........................................................................................................................ 10 Step 3: Expenses ....................................................................................................................... 10 Step 4: Net Income.................................................................................................................... 11 Index ............................................................................................................................................. 13

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Introduction

Welcome to Financial Statements

Welcome to the introduction of creating a financial statement. Financial statements are documents that encompass the entirety of a businesss finances. These statements cover every aspect of how the money moves around in a business. It shows where it comes from, where its going and where it stands in the present. It is important to know that the profit of a company is more than net operating income. Managers need these financial statements in order to learn about the different costs of the company, where they are losing money, or where they can stand to gain money. They can learn overtime the fluctuations of the market, which methods of business have the higher profit margins by looking at the financial statements of the periods where costs were low and where income was high. A company might look like they are earning tons of cash in a period when looking at one income statement and then learn that they are bleeding cash in another. Please note that looking at one document does not encompass the entirety of the companys finance. One must look at all three financial statements in order to make assumptions and draw conclusions about the activity of the company and how profitable they are, and if they are solvent or not. These financial statements are easy to make and easy to use. The benefits are monumental as one cannot simply remember all of the details of the business or make business decisions based on a fraction of the businesss information. You can start making decisions that maximize your companys value, time, and resources by utilizing these statements.

Who these financial statements are for

Financial statements are created by a business and are used by creditors, investors, and other external parties in order to evaluate the past, present state, and future of the company. These financial statements have been developed and intended to be easy to create. They utilize basic computer skills and knowledge of simple Excel worksheet data entry. The knowledge that it takes to create financial statements on a large company-wide basis usually

Financial Statements Instruction Manual requires a group of accountants and accounting managers that can gather these large sets of data and input them accurately and correctly. These financial statements are great for the internal business but are widely used as reports that are seen by the public and therefore they need to be prepared accurately and in an ethical manner. The companies are required to post their financial statements quarterly and yearly in order to adhere to certain commercial laws that are in place to prevent corporate fraud and unfair business practices. It is important to note that the ethical implications of creating financial statements that do not accurately depict the monetary on goings of your company have grave consequences. Companies in the past that used unethical reporting of financial statements to the public suffered greatly, some to the point of bankruptcy from lawsuits and becoming insolvent. Some of the people involved in these fraudulent claims became imprisoned. This distrust in large corporate entities caused consumers to now seek out companies who are ethical, fair and practice good work ethic. Therefore we can conclude that it pays to be ethical.

How this manual is organized

The manual includes the following:

1. Chapter 1 Balance Sheet This chapter contains information about the first financial statement. It describes what a balance sheet is, what it is used for, and provides a guide and examples on how it is created.

2. Chapter 2 Income Statement This chapter contains information about the income statement. It describes what the income statement is, what it is used for, and provides a guide and examples on how it is created.

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Introduction 3. Index An alphabetized list of subjects and corresponding page numbers.

4. References A list of related publications and textbooks.

Additional Resources
The Financial Accounting Standards Board offer additional resources to learn more about how to improve financial reporting. (Financial Accounting Standards Board, 2014)

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Chapter 1

The Balance Sheet

The graphic shown in Figure 1.1 shows an example of a balance sheet for Gregs Roofing. The balance sheet will state clearly the amount of assets, liabilities, and stockholders equity that a business has during quarterly period and annual periods. (Harrison Jr., Horngren, & Thomas)

Step 1: Balance Sheet Heading

1. The name of the business. 2. The type of statement. 3. The exact date of the statement. 4. The unit of measure used.

FIGURE 1.1
Balance Sheet Information

Name of the business Type of Statement Date of statement Unit of measure used All of your assets listed in monetary value All of the liabilities owed for prior purchases of supplies and contracts Amount that is invested in the company by stockholders and past earnings not distributed

Financial Statements Instruction Manual

Step 2: Assets
Gregs Roofing lists all of its assets in order from cash on hand down to how much land they own represented in a monetary value. These are all of the economic resources that are owned by the company. Once you have the total amount of each asset in dollar amount, list them one by one in the order represented on Figure 1.1. Then on the last line of the asset section of the balance sheet you will need to state the total amount of your assets combined.

Step 3: Liabilities and Stockholders Equity

If a company has assets then it must have had funding in order to pay for those resources. This means that for every dollar worth of asset, there is an equal dollar worth of liabilities and stockholders equity. Any financing that is provided by a creditor for the business is considered a liability. Any financing provided by owners of the company create the stockholders equity. This very simple idea of a balance between assets and liabilities/stockholders equity forms an equation that is called the basic accounting equation. (see on Figure 1.2.). (Harrison Jr., Horngren, & Thomas, Financial Accounting) Once you have the total amount of each liability, you must state them in the order shown in Figure 1.2. Then on the last line of the liability section of the balance sheet you will need to state the total amount of your liabilities combined. Once you have the total stockholders equity amount, you must state them in the order shown in Figure 1.2. Then on the last line of the stockholders equity section of the balance sheet you will need to state the total amount of your stockholders equity combined. Once you have completed these steps, you have now completed your balance statement. This is an easy snap shot of the very basic financial values in your company.

Chapter 1

FIGURE 1.1

Basic Accounting Equation

Assets

Liabilities

Stockholders Equity

Contributed Capital

Reinvested Earning

Chapter 2

The Income Statement

The income statement is a simple financial statement in which it shows the difference between the companys revenues, and expenses. From that information we can tell how much net income the company earned in a specific time period by subtracting expenses from revenue. (Harrison Jr., Horngren, & Thomas, Financial Accounting) Unlike the balance sheet above, the income statement is stated and documented as a period of time, not a specific date in the year. It is referred to as the year ended. When you begin entering the date into the income statement, you will expect to list (see Figure 2.2): 1. Heading - information about the company and particular time period in which the document will be stated. 2. Revenues - how much money the company made by selling their products or services 3. Expenses - what types of expenses your company had and how much of each expense incurred during the period 4. Net Income total revenues total expenses The graphic shown in Figure 2.1 shows an example of an income statement for Gregs Roofing. The balance sheet will state clearly the amount of revenue, expenses and net income that a business had at the end of the year.

Step 1: Income Statement Heading

1. The name of the business. 2. The type of statement. 3. The exact date of the year ended. 4. The unit of measure used.

Financial Statements Instruction Manual

FIGURE 1.1

Income Statement Information Heading Name of the business Type of Statement Date of year ended Unit of measure used Revenue All of your revenue listed Expenses All of the expenses incurred during the period Net Income Amount that is left over after revenues expenses.

Step 2: Revenue
When a company earns revenue, it is because it is selling goods or services to consumers. This does not necessarily mean that the sale of a good or service will be paid for during the period. Revenues are normally stated in the income statement whether a consumer paid for them or not. The future income promised by the consumer is called accounts receivable and it will be later collected in cash. Even though the company has not received any revenue for the goods or services that were purchased, the goal of the business is to record all sales during the period whether they are sold in credit, cash, or a future payment.

Step 3: Expenses
You may be asking yourself why a company would record future payments in the current period. Why not record them in the period that the company receives the money in? The reason is that in order to sell something to make revenue, the company first has to

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Chapter 2 make the products and services. In the event of making these products and services, they incurred expenses. Those expenses have a direct relationship to how much revenue could be generated. Therefore they must be stated together in the same period of which they were created to illustrate the income the company will make from the amount of expenses they had to incur.

Step 4: Net Income

The net income is the remainder of the total revenues after total expenses has been deducted. You may have heard, Anything we sell now goes straight to the bottom line! which indicates that the company is operating past their breaking point and every dollar of contribution margin they earn goes straight to the bottom line, or net income. This is an important part of your financial statements as this shows how well your company can generate revenue and reduce expenses, or operate within a margin of profit. If this amount is a negative number, a company is said to have a net loss. Their expenses outweigh their revenue and the company should take a deep look into their company in order to find the underlying issue.

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Index

Index

accountants, vi Additional Resources, vii Balance Sheet Heading, 3 basic accounting equation, 4 commercial laws, vi ethical implications, vi Expenses, 10 external parties, v Financial Accounting Standards Board, vii How this manual is organized, vi

Income Statement Heading, 9 Liabilities, 4 Net Income, 11 Revenue, 10 Stockholders Equity, 4 Table of Contents, iii The Balance Sheet, 3 The Income Statement, 9 Welcome to Financial Statements, v Who these financial statements are for, v

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Financial Statements Instruction Manual

Financial Accounting Standards Board. (2014, April 15). Reference Library. Retrieved from Financial Accounting Standards Board Web Site: www.fasb.org/jsp/FASB/Page/LandingPage&cid=1175805314029 Harrison Jr., W. T., Horngren, C. T., & Thomas, C. W. (n.d.). Financial Accounting. In W. T. Harrison Jr., C. T. Horngren, & C. W. Thomas, Financial Accounting (p. 17). Pearson. Harrison Jr., W. T., Horngren, C. T., & Thomas, C. W. (n.d.). Financial Accounting. In W. T. Harrison Jr., C. T. Horngren, & C. W. Thomas, Financial Accounting (p. 11). Pearson. Harrison Jr., W. T., Horngren, C. T., & Thomas, C. W. (n.d.). Financial Accounting. In W. T. Harrison Jr., C. T. Horngren, & C. W. Thomas, Financial Accounting (p. 14). Pearson.

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