Chapter 6

Financial Statements
Prepared by: Ma. Rona Corda-Prado, CPA University of St. La Salle

Chapter 6-1

Prepared by: RC Prado

Chapter Objectives
After studying this chapter, you should be able to:

Prepare a work sheet. Describe the nature and purpose of an adjusted trial balance. Prepare financial statements.

Worksheet

A work sheet is a multiple-column form that may be used in the adjustment process and in preparing financial statements. It is a working tool or a supplementary device for the accountant and not a permanent accounting record. Use of a work sheet should make the preparation of adjusting entries and financial statements easier. It is not a substitute for financial statements.

Chapter 6-3

Prepared by: RC Prado

Worksheet

The use of a work sheet is optional. When one is used, financial statements are prepared from the worksheet. Adjustments are journalized and posted from the work sheet after financial statements are prepared.

Benefits of a Worksheet
Aids the preparation of financial statements. Reduces possibility of errors. Links accounts and their adjustments.
Chapter 6-5

Assists in planning and organizing an audit. Not a required report.

Helps in preparing interim financial statements.

Shows the effects of proposed transactions.

Prepared by: RC Prado

Steps in Preparing a Worksheet

1.
2. 3. 4.

5.

Prepare an unadjusted trial balance on the worksheet. Enter the adjustments in the adjustments columns Enter adjusted balances in the adjusted trial balance columns Extend adjusted trial balance amounts to appropriate financial statement columns Total the statement columns, compute net income (loss), and complete the worksheet

Account Numbers and Titles

Worksheet
Trial Balance Debit Credit Adjustments Debit Credit Adjusted Trial Balance Debit Credit Income Statement Debit Credit Balance Sheet Debit Credit

1. Prepare unadjusted trial balance on the worksheet.

2. Enter adjustment data.

3. Enter adjusted balances

4. Extend adjusted balance to appropriate columns. 5. Calculate income/loss and complete the worksheet.

Chapter 6-7

Prepared by: RC Prado

Step1: Prepare an Unadjusted Trial Balance

PIONEER ADVERTISING AGENCY Work Sheet For the Month Ended October 31, 2002
Account Titles Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Fees C.R. Byrd, Capital C.R. Byrd, Drawing Fees Earned Salaries Expense Rent Expense Totals Advertising Supplies Expense Insurance Expense Accum. Depr. Office Equip. Depreciation Expense Interest Expense Accounts Receivable Interest Payable Salaries Payable Totals Trial Balance Dr. Cr.
15,200 2,500 600 5,000 5,000 2,500 1,200 10,000 500 10,000 4,000 900 28,700 28,700

Adjustments Dr. Cr.

Adjusted Trial Balance Dr. Cr.

Chapter 6-8

Prepared by: RC Prado

Step 2: Enter the Adjustments.

PIONEER ADVERTISING AGENCY Work Sheet For the Month Ended October 31, 2002
Account Titles Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Fees C.R. Byrd, Capital C.R. Byrd, Drawing Fees Earned Salaries Expense Rent Expense Totals Advertising Supplies Expense Insurance Expense Accum. Depr. Office Equip. Depreciation Expense Interest Expense Accounts Receivable Interest Payable Salaries Payable Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 15,200 a 1,500 2,500 b 50 600 5,000 5,000 2,500 d 400 1,200 10,000 500 d 400 e 200 10,000 4,000 900 28,700
g 1,200

Adjusted Trial Balance Dr. Cr.

28,700
a 1,500 b 50 c 40

c f e

40 50 200
f 50 g 1,200

3,440

3,440

Chapter 6-9

Prepared by: RC Prado

Step 3: Enter Adjusted Balances.

PIONEER ADVERTISING AGENCY Work Sheet For the Month Ended October 31, 2002
Account Titles Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Fees C.R. Byrd, Capital C.R. Byrd, Drawing Fees Earned Salaries Expense Rent Expense Totals Advertising Supplies Expense Insurance Expense Accum. Depr. Office Equip. Depreciation Expense Interest Expense Accounts Receivable Interest Payable Salaries Payable Totals Trial Balance Dr. Cr. 15,200 2,500 600 5,000 5,000 2,500 1,200 10,000 500 10,000 4,000 900 28,700 Adjustments Dr. Cr. Adjusted Trial Balance Dr. Cr.
15,200 a 1,500 1,000 b 50 550 5,000 5,000 2,500 800 10,000 500 10,600

d 400

d 400 5,200 e 200 900 g 1,200

1,500 50

28,700 a 1,500 b 50 c c 40 f 50 e 200 f 50 g 1,200 3,440 40

40 40 50 200 50 1,200

3,440

30,190

30,190

Chapter 6-10

Prepared by: RC Prado

Step 4: Extend Adjusted Balances to Income Statement

PIONEER ADVERTISING AGENCY Work Sheet For the Month Ended October 31, 2002
Account Titles Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Fees C.R. Byrd, Capital C.R. Byrd, Drawing Fees Earned Salaries Expense Rent Expense Advertising Supplies Expense Insurance Expense Accum. Depr. Office Equip. Depreciation Expense Interest Expense Accounts Receivable Interest Payable Salaries Payable Totals Adjusted Trial Balance Dr. Cr. 15,200 1,000 550 5,000 5,000 2,500 800 10,000 500 10,600 5,200 900 1,500 50 40 40 50 200 50 1,200 30,190 30,190 Income Statement Dr. Cr. Balance Sheet Dr. Cr.

10,600
5,200 900 1,500 50 40 50

7,740 2,860 10,600

10,600 10,600

22,450 22,450

19,590 2,860 Prepared by: RC Prado 22,450

Chapter 6-11

Net Income Totals

Step 4: Extend Adjusted Balances to Balance Sheet

PIONEER ADVERTISING AGENCY Work Sheet For the Month Ended October 31, 2002
Account Titles Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Fees C.R. Byrd, Capital C.R. Byrd, Drawing Fees Earned Salaries Expense Rent Expense Advertising Supplies Expense Insurance Expense Accum. Depr. Office Equip. Depreciation Expense Interest Expense Accounts Receivable Interest Payable Salaries Payable Totals Net Income Totals Adjusted Trial Balance Dr. Cr. 15,200 1,000 550 5,000 5,000 2,500 800 10,000 500 10,600 5,200 900 1,500 50 40 40 50 200 50 1,200 30,190 30,190 Income Statement Dr. Cr. Balance Sheet Dr. Cr.
15,200 1,000 550 5,000 5,000 2,500 800 10,000 500

10,600 5,200 900 1,500 50 40 50

40 200 50 1,200

7,740 2,860 10,600

10,600 10,600

22,450 22,450

19,590 2,860 22,450 Prepared by: RC Prado

Chapter 6-12

FastForward Work Sheet For Month Ended December 31, 2007

Unadjusted Trial Balance Dr. Cr. 4,350 9,720 2,400 26,000 6,200 3,000 30,000 200 5,800 300 1,400 1,000 230 45,300 Adjustments Dr. Cr. Adjusted Trial Balance Dr. Cr.

Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals

First, enter the unadjusted amounts to the worksheet.

45,300

Chapter 6-13

Prepared by: RC Prado

FastForward Work Sheet For Month Ended December 31, 2007

Unadjusted Trial Balance Dr. Cr. 4,350 9,720 2,400 26,000 Adjustments Dr. Cr. f 1,800 b a c e 250 1,050 100 375 210

Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals Lecture 4-14

Next, enter the adjustments.

Adjusted Trial Balance Dr. Cr.

6,200 3,000 d 30,000 200 5,800 300 1,400 1,000 230 Prepared 45,300 c e a b

d f 375 210 100 1,050

250 1,800

by: RC Prado 45,300 3,785

3,785

Prepare adjusted trial balance.

Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals

FastForward Work Sheet For Month Ended December 31, 2007

Unadjusted Trial Balance Dr. Cr. 4,350 9,720 2,400 26,000 Adjustments Dr. Cr. f 1,800 b a c e 250 200 d f c e a b 45,300 375 210 100 1,050 3,785 3,785 250 1,800 375 1,610 100 1,000 1,050 230 47,685 1,050 100 375 210 Adjusted Trial Balance Dr. Cr. 4,350 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000 7,850 300

6,200 3,000 d 30,000 200 5,800 300 1,400 1,000 230 45,300

47,685

Chapter 6-15

Prepared by: RC Prado

FastForward Extend adjusted trial balance Work Sheet amounts to financial statements. For MonthAdjusted December 31, 2007 Ended Income
Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals Trial Balance Dr. Cr. 4,350 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000 200 7,850 300 375 1,610 100 1,000 1,050 230 47,685 375 1,610 100 1,000 1,050 230 4,365 7,850 300 Statement Dr. Cr. Balance Sheet & Statement of Equity Dr. Cr. 4,350 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000 200

47,685

8,150

43,320

39,535

Lecture 4-16

Prepared by: RC Prado

FastForward Work Sheet For Month Ended December 31, 2007

Adjusted Trial Balance Dr. Cr. 4,350 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000 Income Statement Dr. Cr. Balance Sheet & Statement of Equity Dr. Cr. 4,350 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000 200

Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals Net income
Lecture 4-17

Total statement columns, compute income or loss, and 200 balance columns. 7,850 7,850
300 375 1,610 100 1,000 1,050 230 47,685 375 1,610 100 1,000 1,050 230 4,365 3,785 8,150 300

47,685

8,150 8,150

43,320 43,320

39,535 3,785 43,320

Prepared by: RC Prado

Adjusted Trial Balance

The adjusting process starts with the unadjusted trial balance. Adjusting entries are made at the end of the accounting period and then an adjusted trial balance is prepared. The adjusted trial balance serves as the basis for the preparation of the financial statements. Its purpose is to prove the equality of debit balances and credit balances in the ledger.

Chapter 6-18

Prepared by: RC Prado

The Adjusted Trial Balance

Which of the following statements is incorrect concerning the adjusted trial balance?
a) An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. b) The adjusted trial balance provides the primary basis for the preparation of financial statements. c) The adjusted trial balance lists the account balances segregated by assets and liabilities.

d) The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.
Chapter 6-19 Prepared by: RC Prado

Accounting reports, called financial statements, provide summarized information to the owner.

Chapter 6-20

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Purpose of Financial Statements

Financial statements are the means by which information accumulated and processed in financial accounting is periodically communicated to the users Purpose (per PAS No. 1): To provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions

Chapter 6-21

Prepared by: RC Prado

Components of Financial Statements

Statement of Financial Position (Balance Sheet) - A list of the assets, liabilities, and owners equity as of a specific date. Statement of Comprehensive Income (Income Statement) - A summary of the revenue and expenses for a specific period of time. Statement of Changes in Equity - A summary of the changes in the owners equity that have occurred during a specific period of time.
Chapter 6-22 Prepared by: RC Prado

Components of Financial Statements

Statement of cash flows - A summary of the cash receipts and disbursements for a specific period of time. Notes - Summary of significant accounting policies and other explanatory notes (i.e. Disaggregation of items presented in the statements)
Chapter 6-23 Prepared by: RC Prado

Timing of Financial Statements

Financial statements shall be presented at least annually. If reports are presented for a period longer or shorter than one year, the entity shall disclose:

Period covered by the financial statements Reason for using a longer or shorter period

Chapter 6-24

Prepared by: RC Prado

Statement of Comprehensive Income

Two statements

Income statement showing the components of income and expenses that are recognized in profit and loss Statement of comprehensive income beginning with net income or loss as shown in the income statement plus or minus the components of other comprehensive income

Single statement - showing all components of net income or loss and all components of other comprehensive income.

Combined income statement and statement of comprehensive income

Chapter 6-25

Prepared by: RC Prado

Income Statement
Adjusted Trial Balance December 31, 2007 Dr. Cr. Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue Capital Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals
$ 3,950 1,800 8,670 2,300 26,000 $ 375 6,200 210 2,750 30,000 7,850 300 375 1,610 100 1,000 1,050 230 47,685

600

47,685

FastForward Income Statement For the Month Ended December 31, Revenues: Consulting revenue $ Rental revenue Operating expenses: Depr. expense - Equip. $ 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Total expenses Net income $

2007 7,850 300

4,365 3,785

Equity
Sole Proprietorship - Owners Capital Partnership - Partners Capital Corporation - Shareholders Equity

Chapter 6-27

Prepared by: RC Prado

Effects of Transactions on Owners Equity

Owners Equity Decreased by Increased by

Owners withdrawals Expenses

Net income or loss
Chapter 6-28

Owners investments Revenues

Prepared by: RC Prado

FastForward Income Statement For the Month Ended December 31, 2007 Revenues: Consulting revenue $ 7,850 Rental revenue 300 Operating expenses: Depr. expense - Equip. $ 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Total expenses 4,365 Net income $ 3,785
Adjusted Trial Balance December 31, 2007 Dr. Cr. Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue Capital Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals
$ 3,950 1,800 8,670 2,300 26,000 $ 375 6,200 210 2,750 30,000 7,850 300 375 1,610 100 1,000 1,050 230 47,685

Statement of Changes in Owners Equity

Note: Net Income from the Income Statement carries to the Statement of Changes in Owners Equity.
FastForward Statement of Changes in Owner's Equity For the Month Ended December 31, 2007 C. Taylor, Capital 12/1/07 Add: Net income $ Investment by owner Total Less: Withdrawal by owner C. Taylor, Capital 12/31/07 $ 3,785 30,000 -0-

600

33,785 33,785 600 $ 33,185

47,685

Statement of Financial Position

Statement that reports a companys financial position as at the end of the period Formal statement that shows the three elements comprising financial position namely assets, liabilities, and equity at a point in time Provides information useful for assessing future cashflows, liquidity, financial flexibility and solvency. Also called the balance sheet

Chapter 6-30

Prepared by: RC Prado

Liquidity

Period of time before an asset is converted to cash Availability of cash in the near future after taking account of the financial commitments over this period

Chapter 6-31

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Financial Flexibility

Ability of the company to alter cash flows in order to take advantage of unexpected investment opportunities and needs Includes the ability to raise new capital or get into unused lines of credit

Chapter 6-32

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Long-Term Solvency

Riskiness of a company with regard to the amount of liabilities in its capital structure Ability to pay long term debts as they come due Risk to an investor increases as the percentage of liabilities relative to equity increase

Chapter 6-33

Prepared by: RC Prado

When the balance sheet displays the liabilities and owners equity below the assets, the report form is being used.

Chapter 6-34

Prepared by: RC Prado

When the balance sheet displays the liabilities and owners equity to the right of assets, the account form is being used.

Chapter 6-35

Prepared by: RC Prado

Current Assets Presentation

Usually listed in the decreasing order of liquidity

Cash and cash equivalents Financial assets, such as trading securities, available for sale securities and other marketable instruments Trade and other receivables Inventories Prepaid Expenses

Chapter 6-36

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Non Current Assets

An entity shall classify all other assets not classified as current as noncurrent Includes the following:

Property, plant and equipment Long-term investments Intangible assets Other noncurrent assets

Chapter 6-37

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Liabilities

Liabilities are generally classified and presented based in time of maturity such that obligations which are currently due are listed first

Chapter 6-38

Prepared by: RC Prado

FastForward Statement of Changes in Owner's Equity For the Month Ended December 31, 2007 C. Taylor, Capital 12/1/07 Add: Net income $ Investment by owner Total Less: Withdrawal by owner C. Taylor, Capital 12/31/07 $ 3,785 30,000 -0-

Balance Sheet
FastForward Balance Sheet 12/31/07 Assets
Cash Accounts Receivable Supplies Prepaid Insurance Equipment $ Accumulated Depreciation Total assets Liabilities Accounts Payable Salaries Payable Unearned Revenue Total Liabilities Equity C Taylor, Capital Total liabilities and Equity 6,200 210 2,750 9,160 33,185 42,345 $ 3,950 1,800 8,670 2,300 25,625 42,345

33,785 33,785 600 $ 33,185

Adjusted Trial Balance December 31, 2007 Dr. Cr. Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue Capital Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals
$ 3,950 1,800 8,670 2,300 26,000 $ 375 6,200 210 2,750 30,000 7,850 300 375 1,610 100 1,000 1,050 230 47,685

26,000 375 $

600

47,685

Statement of Cash Flows

Provides information about the cash receipts and cash payments of an entity during the period;
Shows the net increase or decrease in cash during the period and the cash balance at the end of the period; Helps project the future net cash flows of an entity

Chapter 6-40

Prepared by: RC Prado

Elements of Statement of Cash Flows

Cash Flows from Operating Activities - Reports a summary of cash receipts (inflows) and cash payments (outflows) from operations. Cash Flows from Investing Activities - Cash transactions for the acquisition and sale of relatively permanent assets as well as from lending money and collection on loans. Cash Flows from Financing Activities - Reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.
Chapter 6-41

Cash from Operating Activities

Cash Inflows Receipts from sale of goods and performance of services Receipts from other revenues (royalties, commissions, etc) Cash Outflows Payments to suppliers of goods and services Payments to employees Payments for taxes Payments for interest expense Payments for other operating expenses

Chapter 6-42

Prepared by: RC Prado

Direct Method
Entitys net cash provided by (used in) operating activities is obtained by adding the individual operating cash inflows then subtracting the individual operating cash outflows Preferred method

Chapter 6-43

Prepared by: RC Prado

Indirect Method

Derives net cash provided by (used in) operating activities by adjusting profit for income and expenses not resulting from cash transactions The adjustment begins with net income followed by addition of expenses and charges that did not involve cash payments (i.e depreciation)

Chapter 6-44

Prepared by: RC Prado

Cash from Investing Activities

Cash Inflows Receipts from sale of property and equipment Receipts from sale of investments in debt or equity securities Receipts from collections on notes receivable Cash Outflows Payments to acquire property and equipment Payments to acquire debt or equity securities Payments to make loans to others generally in the form of notes receivable

Chapter 6-45

Prepared by: RC Prado

Cash from Financing Activities

Cash Inflows Receipts from investments by owners Receipts from issuance of notes payable
Cash Outflows Payments to owners in the form of withdrawals Payments to settle notes payable

Chapter 6-46

Prepared by: RC Prado

Notes to Financial Statements

Used to report information that does not fit into the body of the statements in order to enhance the understandability of the statements Notes contain information in addition to that presented in the statement of financial position, comprehensive income, statement of changes in equity and statement of cash flows Provides narrative description or Disaggregation of items presented in the financial statements and information about items that do not qualify for recognition

Chapter 6-47

Prepared by: RC Prado

Notes to the Income Statement

End of the Chapter