Financial Accounting

1. Preparation of Financial
Statement
Instructor :Liban Ali Abdinur

2. 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.

3. Statement of comprehensive
Income (Income Statement)

4. 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.

5. 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.

6. 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.

7. 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.

8. 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:

9. 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

10. 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.

11. 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.

12. 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.

13. 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.

14. The Statement of Retained
Earnings

15. Statement of Retained Earnings
The Statement of Retained Earnings
reports how net income and dividends
affected a company’s financial
position during the period.

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

17. 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.

18. STATEMENT OF
FINANCIAL POSITION
(BALANCE SHEET)

19. 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

20. Statement of Financial Position
Assets are economic resources owned
by a company.
Examples include cash, accounts
receivable, supplies, buildings and
equipment.

21. Statement of Financial Position
Liabilities are the company’s debt or
obligations.
Examples are accounts payable, unearned
revenues and bonds payable.

22. 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.

23. 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

24. Statement of Financial Position
Current assets are assets that will
be used or turned into cash within
one year.

25. 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.

26. 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.

27. 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

28. 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.

29. 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.

30. Statement of Financial Position
Stockholders’ Equity is divided into
two categories: contributed capital
and retained earnings.
Contributed capital
+ Retained earnings
Total stockholders’ equity

31. 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.

32. Statement of Financial Position
Retained earnings is the total
earnings that have not been
distributed to owners as dividends.

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

34. 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.

35. Statement of
comprehensive
income
Net income
Statement of Retained
Earnings
Beginning Retained
Earnings
+ Net income
– Dividends
Ending retained earnings
Statement of
financial position
Ending Balance
Retained Earnings
Order of Preparation

36.  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.
Review

37. 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%

38. Step One
Classify the accounts as assets,
liabilities, equity, revenue or
expenses.

39. 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%

40. 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

41. Statement of comprehensive
income
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
Operating expenses
include:
Utility expense
8,000
Salaries expense
16,000
Supplies expense
3,000

42. Statement of comprehensive
income
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
Non-operating items
include:
Interest expense
5,000

43. Statement of comprehensive
income
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
Income taxes =
Income before taxes
* Income tax rate
10,000 * 30% =
3,000

44. Step Three
Prepare the Statement of Retained
Earnings.
Beg. balance, retained earnings
+ Net income
- Dividends
End. balance, retained earnings

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

46. 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

47. 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’
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
End. Bal.
is brought
forward
from the
Statement
of
Retained
Earnings

48. The End