UNDERSTANDING FINANCIAL STATEMENTS OF CORPORATES

DR. MD. MAHABBAT HOSSAIN

BBA & MBA (Accounting), PhD. (IBA, RU), DIB (IIBI, UK), CIPA & CSAA (AAOIFI)

Faculty Member, BIBM;

Academic Advisor, CSBIB;
Member, SSC of SBAC Bank Ltd.;
Member, SSC of Meghna Bank Ltd.;
Member, FAS Revision WG of AAOIFI;
Member, SSB of IDLC Shariah Fund; and
Member, SSB of Summit Communication Ltd.
Email: mahabbat@bibm.org.bd; Mobile: +8801716373565

 Accounting
Accounting is an information system that identifies, records, and communicates the economic events of
an organization to interested users.
 Financial Statements
Financial Statements (FS) are the output of accounting system. Accounting communicates the financial
information to the interested users through FS. FSs provide information about an entity’s:
(a) Assets,
(b) Liabilities
(c) Equity
(d) Income and Expenses, including gains and losses
(e) Cash Flows
(f) Others
 Components of Financial Statements (FSs)
After transactions are identified, recorded and summarized, a set of FSs are prepared from the
summarized accounting data. A complete set of FSs comprises:
(a) A Balance Sheet
(b) An Income Statement
(c) A Statement of Changes in Equity showing
(d) A Cash Flow Statement and
(e) Notes, comprising a summary of significant accounting policies and other explanatory notes.

 Some Definitions
 Assets:  Capital: Owner’s equity
i) Current Assets  Cost
ii) Fixed Assets
 Liabilities:
 Expense
i) Current Liabilities  Revenue
ii) Long-term Liabilities  Net Profit or Loss

Page 1 of 9
 Income Statement or Comprehensive Income Statement

An Income Statement presents the revenues and expenses and resulting net income or net loss for a
specific period of time. The Income Statement is sometimes referred to as the Statement of
Operations, Earnings Statement or profit and Loss Statement.
 Multiple-Step Income Statement
ABC Co. Ltd.
Income Statement (Multiple Steps)
For the year ended December 31, 200X
Sales ****
Less: Cost of Goods Sold ****
Gross Profit ****
Operating Expenses
Administrative Expenses ****
Selling and General Expenses ****

Total Expenses ****

Income from operation ****
Other Income and Expenses:
Add: Interest Revenue ****
Less: Interest on notes payable (***)
Net Income ****

CALCULATION OF COST OF GOODS SOLD (FOR MERCHANDISING CONCERN)

Beginning Merchandise Inventory ****

Purchases ****
Add: Transportation-In ****
****
Less: Purchase Returns ****
Net Purchase ****
Cost of Goods Available for Sale ****
Less: Ending Merchandise Inventory ****
Total cost of Goods Sold ****

Page 2 of 9
 COST OF GOODS SOLD (FOR MANUFACTURING CONCERN)

Beginning Raw Material XXX

Add, Raw Material Purchase XXX
Raw Material Available for use XXX
Ending Raw Material XXX
Cost of Direct Material Used XXX
Direct Labor XXX
Prime Cost XXX
Factory Overhead XXX
Total Manufacturing Cost XXX
Add: Beginning Work-in-Process XXX
Total Goods in Process XXX
Less: Ending Work-in-Process XXX
Cost of Goods Manufactured XXX
Add: Beginning Finished Goods XXX
Cost of Goods Available for Sale XXX
Less: Ending Finished Goods XXX
Cost of Good Sold XXX
 Balance Sheet
Balance Sheet is a formal statement of assets, liabilities and owner’s equity of a specific date.
Considering the presentation, there are two types of Balance Sheet;
 Classified Balance Sheet

ABC Co. Ltd.

Balance Sheet (Classified)
December 31, 200X
Assets Taka Liabilities and Owner’s Equity Taka
Current Assets Current Liabilities
Cash xxx Accounts Payable xxx
Accounts Receivable xxx Notes Payable xxx
Inventory xxx Accrued Expenses xxx
Prepaid Expenses xxx Long-term Liabilities
Long-term Investments Long-Term Notes Payable
Investment in Share/ Debenture xxx Long-Term Bank Loan
Property, plant and Equipment (Net) Debenture
Land & Building xxx Total Liabilities xxxx
Plant and Machinery xxx
Furniture and Fixture xxx
Intangible Assets (Net)
Goodwill xxx Owner’s Equity
Trade Mark xxx Capital xxx
Other Assets (+) Retained Earnings xxx
Non-current receivable xxx
Preliminary xxx
Total Assets xxx Total Liabilities and Owner’s Equity xxx

Page 3 of 9
 Current Practice: Balance Sheet (Liquidity Order)

ABC Co. Ltd.

Balance Sheet (Classified)
December 31, 200X
Assets Taka Liabilities and Owner’s Equity Taka
Current Assets Current Liabilities
Cash xxx Accounts Payable xxx
Accounts Receivable xxx Notes Payable xxx
Inventory xxx Accrued Expenses xxx
Prepaid Expenses xxx Long-term Liabilities
Long-Term Notes Payable xxx
Noncurrent Assets Long-Term Bank Loan xxx
Land & Building xxx Debenture xxx
Plant and Machinery xxx Total Liabilities xxx
Furniture and Fixture xxx Shareholders’ Equity
Intangible Assets (Net) xxx Share Capital xxx
Share Premium xxx
Retained Earnings xxx
Total Equity xxx
Total Assets xxx Total Liabilities and Equity xxx

 Current Practice: Balance Sheet (Maturity Order)

ABC Co. Ltd.

Balance Sheet (Classified)
December 31, 200X
Assets Taka Liabilities and Owner’s Equity Taka
Noncurrent Assets Owner’s Equity
Land & Building xxx Share Capital xxx
Plant and Machinery xxx Share Premium xxx
Furniture and Fixture xxx Returned Earnings xxx
Intangible Assets (Net) xxx Total Equity xxx
Long-term Liabilities
Long-Term Notes Payable xxx
Current Assets Long-Term Bank Loan xxx
Cash xxx Debenture xxx
Accounts Receivable xxx Current Liabilities
Inventory xxx Accounts Payable xxx
Prepaid Expenses xxx Notes Payable xxx
Accrued Expenses xxx
Total Liabilities xxx
Total Assets xxx Total Liabilities and Equity xxx

Page 4 of 9
 Current Practice: Balance Sheet (Working Capital Approach)

ABC Co. Ltd.

Balance Sheet (Classified)
December 31, 200X
Assets Taka Liabilities and Owner’s Equity Taka
Current Assets Long-term Liabilities
Cash xxx Long-Term Notes Payable xxx
Accounts Receivable xxx Long-Term Bank Loan xxx
Inventory xxx Debenture xxx
Prepaid Expenses xxx Total Liabilities xxx
Total Current Assets xxx
Current Liabilities Shareholders’’ Equity
Accounts Payable xxx Share Capital xxx
Notes Payable xxx Share Premium xxx
Accrued Expenses xxx Revaluation Surplus xxx
Total Current Liabilities xxx Retained Earnings xxx
Net Current Assets xxx Total Equity xxx
Noncurrent Assets
Land & Building xxx
Plant and Machinery xxx
Furniture and Fixture xxx
Intangible Assets (Net) xxx

Total Assets xxx Total Liabilities and Equity xxx

 Current Practice: Balance Sheet (Vertical Format-Net Current Assets)

ABC Co. Ltd.
Balance Sheet (Classified)
December 31, 200X
Source of Fund Taka
Shareholders’ Equity
Share Capital xxx
Revaluation Surplus xxx
Retained Earnings xxx
Total Equity xxx
Loan Fund
Secured Load xxx
Unsecured Loan xxx
Total xxx
Application of Funds xxx
Fixed Assets xxx
Investments xxx
Current Assets
Cash xxx
Inventory xxx
Total Current Assets xxx
Less: Current Liabilities
Accounts Payable xxx
Total Current Liabilities xxx
Net Current Assets xxx
Total xxx

Page 5 of 9
 Current Practice: Balance Sheet (Vertical Format)
ABC Co. Ltd.
Balance Sheet (Classified)
December 31, 200X
Assets
Noncurrent Assets
Land & Building xxx
Plant and Machinery xxx
Furniture and Fixture xxx
Intangible Assets (Net) xxx
Total Non-Current Assets xxx
Current Assets
Cash xxx
Accounts Receivable xxx
Inventory xxx
Prepaid Expenses xxx
Total Current Assets xxx
Current Liabilities
Accounts Payable xxx
Notes Payable xxx
Accrued Expenses xxx
Total Current Liabilities xxx
Net Current Assets xxx
Net Assets xxx

Financed By
Shareholders’ Equity
Share Capital xxx
Share Premium xxx
Revaluation Surplus xxx
Total Equity xxx
Non-Current Liabilities
Long-Term Notes Payable xxx
Long-Term Bank Loan xxx
Debenture xxx
Total Non-Current Liabilities xxx
Total Liabilities and Equity xxx

Page 6 of 9
 Exercise on FSs for Service Concern
The following trial balance and additional data are for South Sea Tours Company:
Debit Credit
Cash 109,050
Accounts receivable 133,750
Prepaid insurance 4,350
Prepaid advertising 18,000
Notes receivable 11,250
Land 90,000
Buildings 165,000
Accumulated depreciation-Buildings 49,500
Office equipment 83400
Accumulated depreciation-Office equipment 16,680
Accounts payable 56,850
Notes payable 75,000
Capital stock 240,000
Retained earnings 47,820
Dividends 30,000
Service revenue 368,350
Salaries expense 96,000
Travel expense 111,000
Interest revenue 600
Interest expense 3,000
Total 854,800 854,800
The company consistently followed the policy of initially debiting all prepaid items to asset
accounts
Additional Data:
(i) The buildings have an expected life of 50 years with no salvage value
(ii) The office equipment has an expected life of 10 years with no salvage value
(iii) Accrued interest on notes receivable is Tk. 450
(iv) Accrued interest on notes payable is Tk. 1000
(v) Accrued salaries are Tk. 2100
(vi) Expired prepaid insurance is Tk. 3750
(vii) Expired prepaid advertising is Tk. 16500

Required:
(a) Prepare a multiple steps income statement
(b) Prepare a statement of retained earnings
(c) Prepare a classified balance sheet as at December 31st 2015.

Page 7 of 9
 Solution
Req. (a):
South Sea Tours Company
Income Statement
For the year ended of 31 December, 2015
Particulars Tk. Tk. Tk.
Service Revenue 368,350
Less: Operating Expenses:
Salaries Expense 96,000
Add: Accrued 2,100 98,100
Travel Expense 111,000
Insurance expense 3,750
Advertisement expense 16,500
Depreciation expense: Building 3,300 0
Equipment 8,340 11,640
Total operating expense 240,990
Operating Income 127,360
Add: Non-Operating Income:
Interest Revenue 600
(+) Accrued interest on notes receivable 450
1050
Less: Non-Operating Expenses
Interest Expense 3,000
(+) Accrued interest on notes payable 1,000
(4,000)

Net Income 124,410

Req. (b):

South Sea Tours Company

Retained Earnings Statement
For the year ended of 31 December, 2015
Particulars TK.
Retained Earnings 01.01.2015 47,820
Add: Net Income 124,410
172,230
Less: Dividend Paid (30,000)
Retained Earnings Balance as on December 31, 2015 142,230

Page 8 of 9
Req. (c):
South Sea Tours Company
Balance Sheet
As on 31 December, 2015

Particulars Tk. Tk. Tk.

Assets:
Current Assets:
Cash 109,050
Accounts receivable 133,750
Prepaid insurance (4350-3750) 600
Prepaid advertisement (18000-16500) 1,500
Note receivable 11,250
Accrued interest on note receivable 450
Total Current Assets 256,600
Fixed Assets:
Land 90,000
Building 165,000
(-) Accumulated depreciation (49500+3300) 52,800
112,200
Office equipment 83,400
(-) Accumulated depreciation (16680+8340) 25,020
58,380
Total Fixed Assets 260,580
Total Assets 517,180
Liabilities & Owner's Equity:
Current Liabilities:
Accounts payable 56,850
Note payable 75,000
Accrued interest on note payable 1,000
Salaries Payable 2,100
Total Current Liabilities 134,950
Long Term Liabilities: -
Owner's Equity:
Capital Stock 240,000
(+) Retained Earnings 142,230
382,230
Total Liabilities & Owner's Equity: 517,180

Page 9 of 9