This document provides an overview of how to prepare three key financial statements: the income statement, balance sheet, and cash flow statement. It discusses the basic formats and components of each statement. The income statement reports a company's revenues, expenses and net income over a period of time. The balance sheet outlines a company's assets, liabilities and equity at a point in time. It categorizes assets as current and non-current and liabilities as current and long-term. The purpose is to analyze a company's financial position and performance.

1. PREPARATION OF
FINANCIAL STATEMENT

2. FINANCIAL STATEMENTS
 This lecture illustrates how to prepare three basic
financial statements

3. FINANCIAL STATEMENTS
 This lecture illustrates how to prepare two basic
financial statements
The Income Statement

4. FINANCIAL STATEMENTS
 This lecture illustrates how to prepare two basic
financial statements
The Income Statement

5. FINANCIAL STATEMENTS
 This lecture illustrates how to prepare two basic
financial statements
The Income Statement
The Balance Sheet

6. FINANCIAL STATEMENTS
 This lecture illustrates how to prepare two basic
financial statements
The Income Statement
The Balance Sheet
The purpose of these statements is
to help users make better decisions.

7. THE INCOME STATEMENT

8. INCOME STATEMENT
 The first statement prepared is the Income
Statement.

9. INCOME STATEMENT
 The first statement prepared is the Income
Statement.
 The Income Statement reports a business’
performance for the period.

10. INCOME STATEMENT
 A simple format for an income statement is:

11. INCOME STATEMENT
 A simple format for an income statement is:
Revenues – Expenses = Net Income

12. INCOME STATEMENT
 A simple format for an income statement is:
Revenues – Expenses = Net Income
 We will look at a more complex format
later.

13. INCOME STATEMENT
 Revenues are earned from the sale of goods or
services. Note that revenues occur when the sale
is made. The payment may or may not have been
received.

14. INCOME STATEMENT
 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.

15. INCOME STATEMENT
 Expenses are incurred when a business receives
goods and services. Like revenues, payment may
or may not have been made.

16. INCOME STATEMENT
 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.

17. INCOME STATEMENT
 Most businesses require more information from
their businesses than a simple income statement
can provide. Therefore, they use a multi-step
income statement format.

18. INCOME STATEMENT
 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:

19. INCOME STATEMENT
Sales revenue
- Cost of goods sold
Gross profit
- Operating expenses
Income from operations
+/- Non-operating items
Net profit

20. INCOME STATEMENT
 Cost of goods sold represents the expense a
business incurred to buy or make a product for
resale.

21. INCOME STATEMENT
 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 Rs.25 and then sells it for Rs.32.
The cost of goods sold is Rs. 25.

22. INCOME STATEMENT
 Operating expenses are the usual expenses
incurred in operating a business.

23. THE BALANCE SHEET

24. BALANCE SHEET
 The purpose of the balance sheet is to report the
financial position of an accounting entity at a
particular point in time.

25. BALANCE SHEET
 The purpose of the balance sheet is to report the
financial position of an accounting entity at a
particular point in time.
The basic format for the balance sheet
is:
Assets = Liabilities + Equity

26. BALANCE SHEET
 Assets are economic resources owned by a
company.

27. BALANCE SHEET
 Assets are economic resources owned by a
company.
Examples include cash, accounts
receivable, supplies, buildings and
equipment.

28. BALANCE SHEET
 Liabilities are the company’s debt or obligations.

29. BALANCE SHEET
 Liabilities are the company’s debt or obligations.
Examples are accounts payable,
unearned revenues and bonds payable.

30. BALANCE SHEET
 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.

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

32. 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

33. BALANCE SHEET
 Current assets are assets that will be used or
turned into cash within one year.

34. BALANCE SHEET
 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.

35. BALANCE SHEET
 Non-current assets comprise the remainder of the
assets.

36. BALANCE SHEET
 Non-current assets comprise the remainder of the
assets.
These include accounts such as:
long-term investments, land,
building, equipment and patents.

37. BALANCE SHEET
 There are two different types of liabilities shown on
a balance sheet – current liabilities and long-term
liabilities.

38. 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

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

40. 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 taxes
payable.

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

42. BALANCE SHEET
 Long-term liabilities are obligations that will not be
paid or satisfied within the year.
Examples include mortgage payable
and bonds payable.

43. BALANCE SHEET
 Capital is divided into two categories: contributed
capital and retained earnings.
Contributed capital
+ Retained earnings
Capital

44. BALANCE SHEET
 Contributed capital is the amount of cash (or other
assets) provided by the owner.

45. BALANCE SHEET
 Contributed capital is the amount of cash (or other
assets) provided by the owner.
Capital and Additional Paid in
Capital are accounts in this
section.

46. BALANCE SHEET
 Retained earnings is the total earnings

47. THE BALANCE SHEET
Current assets
+ Non-current assets
Total assets
Current liabilities
+ Long-term liabilities
+ owner’s equity

48. Income
Statement
Net income
Balance Sheet
Ending Balance
Retained
Earnings
Order of Preparation

49.  Income statement—A summary of the revenue and
expenses for a specific period of time.
 Balance sheet—A list of the assets, liabilities, and
owner’s equity as of a specific date.
Review

50. EXAMPLE PROBLEM
Cash 5,000 Sales 100,000
Utility Expense 8,000 Buildings 65,000
capital 45,000 Accounts Payable 12,000
Supplies stock 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid in
Capital
20,000
Bills Payable 40,000 Supplies Expense 3,000
Salaries Expense 16,000 Accounts Receivable 10,000
Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

51. STEP ONE
 Classify the accounts as assets, liabilities, equity,
revenue or expenses.

52. ASSETS
Cash 5,000 Sales 100,000
Utility Expense 8,000 Buildings 65,000
Capital 45,000 Accounts Payable 12,000
Supplies stock 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid in
Capital
20,000
Bills Payable 40,000 Supplies Expense 3,000
Salaries Expense 16,000 Accounts Receivable 10,000
Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

53. ASSETS, LIABILITIES,
Cash 5,000 Sales 100,000
Utility Expense 8,000 Buildings 65,000
capital 45,000 Accounts Payable 12,000
Supplies stock 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid in
Capital
20,000
Bills Payable 40,000 Supplies Expense 3,000
Salaries Expense 16,000 Accounts Receivable 10,000
Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

54. ASSETS, LIABILITIES, EQUITY
Cash 5,000 Sales 100,000
Utility Expense 8,000 Buildings 65,000
Capital 45,000 Accounts Payable 12,000
Supplies stock 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid in
Capital
20,000
Bills Payable 40,000 Supplies Expense 3,000
Salaries Expense 16,000 Accounts Receivable 10,000
Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

55. ASSETS, LIABILITIES, EQUITY, REVENUES
Cash 5,000 Sales 100,000
Utility Expense 8,000 Buildings 65,000
Capital 45,000 Accounts Payable 12,000
Supplies stock 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid in
Capital
20,000
Bills Payable 40,000 Supplies Expense 3,000
Salaries Expense 16,000 Accounts Receivable 10,000
Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

56. ASSETS, LIABILITIES, EQUITY, REVENUES,
EXPENSES
Cash 5,000 Sales 100,000
Utility Expense 8,000 Buildings 65,000
capital 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
Bills Payable 40,000 Supplies Expense 3,000
Salaries Expense 16,000 Accounts Receivable 10,000
Inventories 45,000 Retained Earnings 5,000 (beg. bal.)

57. STEP TWO
 Prepare the Income Statement.
Sales revenue
- Cost of goods sold
Gross profit
- Operating expenses
Income from operations
+/- Non-operating items

58. 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
Net Income 7,000

59. 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
Net Income 10000
Operating expenses include:
Utility expense 8,000
Salaries expense 16,000
Supplies expense 3,000

60. 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
Net income 10,000
Non-operating items include:
Interest expense 5,000

61. STEPTHREE
 Prepare the Balance Sheet.
Current assets
+ Non-current assets
Total assets
Current liabilities
+ Long-term liabilities
+ owners’ equity
Total liabilities

62. BALANCE SHEET
Non-Current Assets:
Buildings 65,000
Current Assets:
Inventories 45,000
Accounts Receivable 10,000
Supplies stock 4,000
Cash 5,000
Total Assets 129,000
owners’ Equity:
Capital 45,000
Additional Paid in Capital 20,000
Retained Earnings 12,000
Current Liabilities:
Accounts Payable 12,000
Bills Payable 40,000

63. THE END