Preparation of Financial

Statement

Instructor :Liban Ali Abdinur

Financial Statements

This tutorial illustrates how to

prepare three basic financial
statements
Statement of comprehensive income (Income Statement)
The Statement of Retained Earnings
Statement of Financial Position (Balance Sheet)

The purpose of these statements is

to help users make better decisions.
Statement of comprehensive
Income (Income Statement)
Statement of comprehensive
Income (Income Statement)
The first statement prepared is the
Statement of comprehensive Income.
The Statement of comprehensive
Income reports a business’
performance for the period.
Statement of comprehensive
Income
A simple format for an Statement
of comprehensive Income is:

Revenues – Expenses = Net Income

We will look at a more complex

format later.
Statement of comprehensive
Income
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.
Statement of comprehensive
Income
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.
Statement of comprehensive
Income
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:
Statement of comprehensive
Income
Sales revenue
- Cost of goods sold
Gross profit
- Operating expenses
Income from operations
+/- Non-operating items
Income before taxes
- Income taxes
Net income
Statement of comprehensive
Income
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.
Statement of comprehensive
Income
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.
Statement of comprehensive
Income
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.
Statement of comprehensive
Income
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.
The Statement of Retained
Earnings
Statement of Retained Earnings

The Statement of Retained Earnings

reports how net income and dividends
affected a company’s 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 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.
 STATEMENT OF
FINANCIAL POSITION
(BALANCE SHEET)
Statement of Financial Position

The purpose of the Statement of

Financial Position is to report the
financial position of an accounting
entity at a particular point in time.
The basic format for the Statement of
financial position is:
Assets = Liabilities + Equity
Statement of Financial Position

Assets are economic resources owned

by a company.

Examples include cash, accounts

receivable, supplies, buildings and
equipment.
Statement of Financial Position

Liabilities are the company’s debt or

obligations.

Examples are accounts payable, unearned

revenues and bonds payable.
Statement of Financial Position

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.
Statement of Financial Position

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
Statement of Financial Position

Current assets are assets that will

be used or turned into cash within
one year.
Statement of Financial Position

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.
Statement of Financial Position

Non-current assets comprise the

remainder of the assets.

These include accounts such as: long-

term investments, land, building,
equipment and patents.
Statement of Financial Position

There are two different types of

liabilities shown on a SOFP – current
liabilities and long-term liabilities.

Current liabilities
+ Long-term liabilities
Total liabilities
Statement of Financial Position

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.
Statement of Financial Position

Long-term liabilities are obligations

that will not be paid or satisfied
within the year.

Examples include mortgage payable

and bonds payable.
Statement of Financial Position

Stockholders’ Equity is divided into

two categories: contributed capital
and retained earnings.

Contributed capital
+ Retained earnings
Total stockholders’ equity
Statement of Financial Position

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.
Statement of Financial Position

Retained earnings is the total

earnings that have not been
distributed to owners as dividends.
Statement of Financial
Position

Current assets
+ Non-current assets
Total assets
Current liabilities
+ Long-term liabilities
+ Stockholders’ equity
Total liabilities and
stockholders’ equity
Statement of Financial Position

The SOFP must be prepared after

the Statement of Retained Earnings
in order to have calculated the ending
balance of Retained Earnings.
 Order of Preparation

Statement
Statementof
of
comprehensive
comprehensive
income Statement
Statementof
ofRetained
Retained
income
Earnings
Earnings Statement
Statementofof
Beginning
BeginningRetained
Retained financial
financialposition
position
Net Earnings
Earnings
Netincome
income ++ Net
Netincome
income
–– Dividends
Dividends
Ending
Endingretained
retainedearnings
earnings
Ending
EndingBalance
Balance
Retained
RetainedEarnings
Earnings
 Review

 Statement of comprehensive income—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.
 Statement of financial position—A list of the
assets, liabilities, and owner’s 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 20,000

Capital
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, 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 20,000

Capital
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 Statement of

Comprehensive income.
Sales revenue
- Cost of goods sold
Gross profit
- Operating expenses
Income from operations
+/- Non-operating items
Income before taxes
- Income taxes
Net income
 Statement of comprehensive
income

Sales 100,000

- Cost of Goods Sold -58,000

Gross Margin 42,000

Operating expenses
include:
- Operating Expenses -27,000

Income from
Operations
15,000
Utility expense
- Non-operating Items -5,000 8,000
Income before Taxes 10,000 Salaries expense
- Income Taxes -3,000
16,000
Supplies expense
Net Income 7,000
3,000
 Statement of comprehensive
income

Sales 100,000

- Cost of Goods Sold -58,000

Gross Margin 42,000

- Operating Expenses -27,000

Income from 15,000

Operations Non-operating items
- Non-operating Items -5,000
include:
Income before Taxes 10,000

- Income Taxes -3,000 Interest expense

Net Income 7,000
5,000
 Statement of comprehensive
income

Sales 100,000

- Cost of Goods Sold -58,000

Gross Margin 42,000

- Operating Expenses -27,000

Income from 15,000

Operations
- Non-operating Items -5,000 Income taxes =
Income before Taxes 10,000
Income before taxes
* Income tax rate
- Income Taxes -3,000

Net Income 7,000 10,000 * 30% =

3,000
Step Three

Prepare the Statement of Retained

Earnings.

Beg. balance, retained earnings

+ Net income
- Dividends
End. balance, retained earnings
 Statement of Retained
Earnings

Beginning Balance, 5,000

Retained Earnings
Net Income is
+ Net Income +7,000
brought forward
- Dividends -0
from the Income
Ending Balance,
Retained Earnings
12,000 Statement.
Step Four

Prepare the Statement of financial

position.
Current assets
+ Non-current assets
Total assets
Current liabilities
+ Long-term liabilities
+ Stockholders’ equity
Total liabilities and
stockholders’ equity
 Statement of financial
position
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’

End. Bal.
Equity: is brought
Non-Current
Assets:
Common Stock 45,000 forward
Buildings 65,000 Additional Paid in 20,000 from the
Capital Statement
Retained Earnings 12,000
of
Total Assets 129,000 Total Liabilities 129,000 Retained
and Equity Earnings
The End