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Financial Statements

Financial Statements

3 basic financial statements :


The Income Statement
The Statement of Retained Earnings
The Balance Sheet

Income Statement

The first statement prepared .

Reports a business performance for the


period.

Income Statement

A simple format for an income


statement is:
Revenues Expenses = Net Income

Income Statement

Revenues are earned for the sale of


goods or services.
Note : 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.

Examples of expenses include salaries expense,


utility expense and interest expense.

Income Statement

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.

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.
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.

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.

Example Income before taxes is


$50,000. The income tax rate is
30%. Income taxes = $50,000 *
30% = $15,000.

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

The Statement of Retained


Earnings

Statement of Retained
Earnings

Reports how net income and dividends


affected a companys financial position
during the period.

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 :
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.

The basic format for the balance sheet


is:
Assets = Liabilities + Equity

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.

Examples are accounts payable,


unearned revenues and bonds payable.

Balance Sheet

Equity is the residual balance.

Assets liabilities = equity

Balance Sheet

Equity is called stockholders equity if


the business is a corporation

Balance Sheet

2 different types of assets shown on a


balance sheet.
Current assets
+ Non-current assets
Total assets

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.

These include accounts such as:


long-term investments, land,
building, equipment and patents.

Balance Sheet

2 different types of liabilities shown on


a balance sheet.
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.
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.

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.
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
Income
Statement
Statement
Net
Netincome
income

Statement
Statementof
ofRetained
Retained
Earnings
Earnings
Beginning
BeginningRetained
Retained
Earnings
Earnings
++ Net
Netincome
income
Dividends
Dividends
Ending
Endingretained
retainedearnings
earnings

Balance
BalanceSheet
Sheet

Ending
EndingBalance
Balance
Retained
Retained
Earnings
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

- 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

Operating expenses include:


Utility expense 8,000
Salaries expense 16,000
Supplies expense 3,000

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

Step Three

Prepare the Statement of Retained


Earnings.

Statement of Retained
Earnings
Beginning Balance, Retained Earnings

5,000

+ Net Income

+7,000

- Dividends

-0

Ending Balance, Retained Earnings

12,000

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

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

THANK YOU

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