Financial Statement Preparation: A Tutorial

Prepared by LOU V. FOJA, CPA Director Financial Management Services, Romblon State University

Financial Statements

This tutorial illustrates how to prepare three basic financial statements

Financial Statements

This tutorial illustrates how to prepare three basic financial statements

The Income Statement

Financial Statements

This tutorial illustrates how to prepare three basic financial statements

The Income Statement The Balance Sheet

Financial Statements

This tutorial illustrates how to prepare three basic financial statements

The Income Statement The Balance Sheet The Statement of Cash Flows

Financial Statements

This tutorial illustrates how to prepare three basic financial statements

The Income Statement The Balance Sheet The Statement of Cash Flows

The purpose of these statements is to help users make better decisions.

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Order of Preparation
Income Statement

Balance Sheet Statement of Cash Flows

Net income
Ending Balance Retained Surplus

Ending Balance Cash

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The Financial Accounting Process

Source documents

Journal entries in the journal

Post entries to the ledger

Trial balance

Financial Statements

Adjusting Entries
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The Income Statement

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Income Statement

The first statement prepared is the Income Statement.

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Income Statement

The first statement prepared is the Income Statement. The Income Statement reports an organizations performance for the period.

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Income Statement

A simple format for an income statement is:

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Income Statement

A simple format for an income statement is:

Revenues Expenses = Net Income

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Income Statement

Revenues represent collections of fees from students and receipt of grants/donations. Note that revenues should be recorded whether the fees have been received or not.
Note:

When fees are uncollected, these are recorded as receivables, but these are deemed to be revenues for the period.

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Income Statement

Expenses are incurred when an organization receives goods and services. Like revenues, payment may or may not have been made.

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Income Statement

Expenses are incurred when a organization receives goods and services. Like revenues, payment may or may not have been made.

Examples of expenses include honoraria, wages, office supplies expense, transportation expenses, repairs and maintenance, grants-in-aid, office equipment, buildings and structures.
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Income Statement
Your organizations income statement must categorize your expenses (for easy understanding) as follows:

Personal Services Operating Expenses Capital Outlay

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Income Statement

Personal Services expenses paid for services rendered, e.g. honoraria, wages Operating Expenses expenses paid for the daily operation of the organization, e.g. office supplies, water expenses, telephone expenses, repairs and maintenance, transportation expenses Capital Outlay major expenditures involving large amount of capital, e.g. construction of buildings and other structures, furniture & fixtures, appliances.
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Name of Organization Income Statement Year Ended December 31, 2011

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The Balance Sheet

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Balance Sheet

The purpose of the balance sheet is to report the financial position of an organization at a particular point in time.

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Balance Sheet

The purpose of the balance sheet is to report the financial position of an organization at a particular point in time.

The basic format for the balance sheet is: Assets = Liabilities + Equity
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Balance Sheet

Assets are economic resources owned by an organization.

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Balance Sheet

Assets are economic resources owned by an organization.

Examples include cash, accounts receivable, unused office supplies, buildings and office equipment.

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Balance Sheet

Liabilities are the organizations debt or obligations.

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Balance Sheet

Liabilities are the organizations debt or obligations.

Examples are accounts payable, wages payable.

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Balance Sheet

Equity is the residual balance. Assets liabilities = equity.

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Balance Sheet

There are two different types of assets shown on a balance sheet. These are current assets and non-current assets.

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Balance Sheet

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

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Balance Sheet

Current assets are assets that will be used or turned into cash within one year.

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Balance Sheet

Current assets are assets that will be used or turned into cash within one year.

Examples include cash, accounts receivable, short-term investments, unused supplies.

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Balance Sheet

Non-current assets comprise the remainder of the assets.

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Balance Sheet

Non-current assets comprise the remainder of the assets.

These include accounts such as: buildings and structures, office equipment , furniture and fixtures.

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Balance Sheet

There are two different types of liabilities shown on a balance sheet current liabilities and long-term liabilities.

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Balance Sheet

There are two different types of liabilities shown on a balance sheet current liabilities and long-term liabilities.
Current liabilities + Long-term liabilities Total liabilities
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Balance Sheet

Current liabilities are obligations that will be paid in cash (or other services) or satisfied by providing service within the coming year.

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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 wages payable.
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Balance Sheet

Long-term liabilities are obligations that will not be paid or satisfied within the year.

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Balance Sheet

Long-term liabilities are obligations that will not be paid or satisfied within the year.

Examples include mortgage payable and loans payable.

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Balance Sheet

Equity is divided into two categories: contributed capital-beginning balance and retained surplus (income).
Contributed capital -Beginning + Retained surplus Total Equity

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Balance Sheet

Contributed capital is the amount of cash and other assets at the end of the previous year (this is now the beginning balance for the current year).

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Balance Sheet

Retained surplus is the net income for the period.

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The Balance Sheet

Current assets + Non-current assets Total assets Current liabilities + Long-term liabilities + Equity Total liabilities and equity

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Balance Sheet

The Balance Sheet must be prepared after the Income Statement in order for the determination of the income (loss) and to calculate the ending balance of the Retained Surplus.

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Name of Organization Balance Sheet December 31, 2011

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The Statement of Cash Flows

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The Statement of Cash Flows

The Statement of Cash flows presents:

Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities

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Purpose of the Statement of Cash Flows

Are cash flows sufficient to support ongoing operations? Will the organization have to borrow money to make needed investments? Why is there a difference between net income and net cash flow?

Can we meet our obligations to creditors?

Can we pay dividends?

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The Full-Fledged Statement of Cash Flows: Operating Activities Operating activities are those activities that enter into the determination of net income.
1. Transactions affecting current assets 3. Changes in noncurrent balance sheet accounts that directly affect net income

2. Transactions affecting current liabilities

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The Full-Fledged Statement of Cash Flows: Investing Activities

Investing activities relate to transactions involving the acquiring or disposing of noncurrent assets.

1. Acquiring or selling property, plant and equipment

2. Acquiring or selling securities

3. Lending money to another entity and subsequently collecting on the loan

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The Full-Fledged Statement of Cash Flows: Financing Activities

Financing activities relate to transactions involving borrowing from creditors or repaying creditors and engaging in transactions with the companys owners.
1. Issuing stock and purchasing treasury stock 3. Payment of dividends (note that interest on debt is classified as an operating activity)

2. Issuing longterm debt and repayment of debt.

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Name of Organization Statement of Cash Flows Year Ended December 31, 2011

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TO PREPARE AN ACCURATE FINANCIAL REPORT YOU THE FOLLOWING:

General Journal to record your transactions. General Ledger to summarize similar accounts.

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FINANCIAL PLANNING

Beginning Balance P xxxx Expected Collections .. xxxx Total Revenues .. P xxxx Estimated Expenditures . xxxx Balance .. P xxxx

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The End

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