This document discusses how to prepare three basic financial statements: the income statement, statement of retained earnings, and balance sheet. It provides examples of the components and format of each statement. The income statement reports revenues, expenses and net income. The statement of retained earnings shows the changes in retained earnings from net income and dividends. The balance sheet lists assets, liabilities, and equity on a specific date. Preparing these statements helps users make better financial decisions.

1. Financial Statement Preparation

7. The Income Statement

28. The Statement of Retained Earnings

30. Statement of Retained Earnings The format of the statement is:

31. Statement of Retained Earnings The format of the statement is: Beg. balance, retained earnings + Net income - Dividends End. balance, retained earnings

34. The Balance Sheet

60. Income Statement Net income Statement of Retained Earnings Beginning Retained Earnings + Net income – Dividends Ending retained earnings Balance Sheet Ending Balance Retained Earnings Order of Preparation

62. 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%

64. 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%

65. 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%

66. 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%

67. 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%

68. 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%

70. Income Statement Sales 100,000 - Cost of Goods Sold -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

71. Income Statement Operating expenses include: Utility expense 8,000 Salaries expense 16,000 Supplies expense 3,000 Sales 100,000 - Cost of Goods Sold -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

72. Income Statement Non-operating items include: Interest expense 5,000 Sales 100,000 - Cost of Goods Sold -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

73. Income Statement Income taxes = Income before taxes * Income tax rate 10,000 * 30% = 3,000 Sales 100,000 - Cost of Goods Sold -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

75. Statement of Retained Earnings Net Income is brought forward from the Income Statement. Beginning Balance, Retained Earnings 5,000 + Net Income +7,000 - Dividends -0 Ending Balance, Retained Earnings 12,000

77. Balance Sheet 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’ Equity: Non-Current Assets: Common Stock 45,000 Buildings 65,000 Additional Paid in Capital 20,000 Retained Earnings 12,000 Total Assets 129,000 Total Liabilities and Equity 129,000

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

79. The End