{"id":70,"date":"2015-03-18T23:07:45","date_gmt":"2015-03-18T23:07:45","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=70"},"modified":"2017-08-22T16:27:44","modified_gmt":"2017-08-22T16:27:44","slug":"preparing-financial-statements","status":"web-only","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/chapter\/preparing-financial-statements\/","title":{"raw":"Preparing Financial Statements","rendered":"Preparing Financial Statements"},"content":{"raw":"After the adjusted trial balance, we will prepare the financial statements.\u00a0 The financial statements are how a business communicates or publishes its story.\u00a0 We previously learned there are 4 financial statements, but\u00a0we will focus on the first three only:\r\n
    \r\n \t
  1. Income Statement<\/strong>:\u00a0 Calculates net income or loss of a company by showing revenues - expenses.\u00a0 If revenues are greater than expenses, you have net income.\u00a0 If revenues are less than expenses, you have net loss.<\/li>\r\n \t
  2. Statement of Retained Earnings<\/strong>:\u00a0 Calculates an ending balance in the retained earnings account using net income or loss calculated on the income statement.\u00a0 This statement takes the beginning balance in retained earnings + net income (or - net loss) - dividends to get the ending retained earnings balance.\u00a0 The ending retained earnings balance is reported on the balance sheet.<\/li>\r\n \t
  3. Balance Sheet<\/strong>:\u00a0 Proves the accounting equation of Assets = Liabilities + Equity and uses ending retained earnings calculated on the statement of retained earnings in equity.<\/li>\r\n<\/ol>\r\nThis video will review the basic financial statements after the adjusted trial balance.\r\n\r\nhttps:\/\/youtu.be\/lWFdvdYOI1I\r\n\r\nThe balance sheet show in the video is the simplified version we learned at the beginning of the course.\u00a0 If you look at the balance sheets produced by companies now, they are a little more detailed.\u00a0 A classified balance sheet<\/strong> adds groupings and subtotals to make the balance sheet easier for investors to read and analyze.\u00a0 The balance sheet can be done in report form where assets are first and liabilities and equity are below.\u00a0 Or in a side-by-side presentation we have done before.\u00a0 The classified balance sheet still proves the accounting equation but it separates assets and liabilities into subgroups:\r\n
      \r\n \t
    • Current Assets<\/strong>:\u00a0 Can be converted to cash within a year or the operating cycle whichever is longer.\u00a0 Current assets include cash, accounts receivable, interest receivable, supplies, inventory, and other prepaid expenses.<\/li>\r\n \t
    • Long Term Investments<\/strong>:\u00a0 Investments that do not come due for more than a year are reported in this section.\u00a0 Long term investments would include notes receivable or investments in bonds or stocks.<\/li>\r\n \t
    • Plant Assets<\/strong>:\u00a0 Plant assets (also called Property, Plant and Equipment or Fixed Assets) refer to property that is tangible (can be seen and touched) and is used in the business to generate revenue.\u00a0 Plant assets include depreciable assets and land used in the business.\u00a0 The plant asset is recorded with its accumulated depreciation (if any) subtracted below it to get the asset's book value.<\/li>\r\n \t
    • Intangible Assets<\/strong>:\u00a0 Intangible assets are items that have a financial value but do not have a physical form.\u00a0 These would be things like trademarks, patents, and copyrights.<\/li>\r\n \t
    • Current Liabilities<\/strong>:\u00a0 Like current assets, these are liabilities that are due to be paid within a year or the operating cycle whichever is longer.\u00a0 Current liabilities include accounts payable, salaries payable, taxes payable, unearned revenue, etc.<\/li>\r\n \t
    • Long Term Liabilities<\/strong>:\u00a0 Liabilities due more than a year from now would be reported here.\u00a0 These would include notes payable, mortgage payable, bonds payable, etc.<\/li>\r\n<\/ul>\r\nThe Equity section of a classified balance sheet does not change.\u00a0 We learn the expanded equity section later in the course.\u00a0 Using the information for MicroTrain, the financial statements would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      MicroTrain Company<\/strong><\/td>\r\n<\/tr>\r\n
      Income Statement<\/strong><\/td>\r\n<\/tr>\r\n
      For Year Ended December 31<\/strong><\/td>\r\n<\/tr>\r\n
      Revenues:<\/em><\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Service Revenue<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0$ 36,500<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Interest Revenue<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 600<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0 Total Revenues<\/em><\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0 $ 37,100<\/td>\r\n<\/tr>\r\n
      Expenses:<\/em><\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Salaries Expense<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 18,360<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Rent Expense<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1,200<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Utilities Expense<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Insurance Expense<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 200<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Supplies Expense<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 7,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Depreciation Expense<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 750<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0 Total Expenses<\/em><\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 28,010<\/span><\/td>\r\n<\/tr>\r\n
      Net Income (37,100 - 28,010)<\/strong><\/td>\r\n\u00a0\u00a0\u00a0\u00a0$\u00a0\u00a0 \u00a09,090 <\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe net income gets carried over to the statement of retained earnings.\u00a0 We will also\u00a0use the\u00a0retained earnings balance from the adjusted trial balance as the beginning balance.\u00a0 There are no dividends listed on the adjusted trial balance so MicroTrain did not pay dividends.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      MicroTrain Company<\/strong><\/td>\r\n<\/tr>\r\n
      Statement of Retained Earnings<\/strong><\/td>\r\n<\/tr>\r\n
      For Year Ended December 31<\/strong><\/td>\r\n<\/tr>\r\n
      \u00a0<\/strong><\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Beginning Retained Earnings<\/td>\r\n$ 6,100<\/td>\r\nfrom the adjusted trial balance<\/em><\/span><\/td>\r\n<\/tr>\r\n
      Net Income<\/td>\r\n\u00a0\u00a0 9,090<\/span><\/td>\r\nfrom the income statement<\/em><\/span><\/td>\r\n<\/tr>\r\n
      \u00a0<\/strong><\/td>\r\n$ 15,190<\/td>\r\n\u00a0<\/span><\/td>\r\n<\/tr>\r\n
      Dividends<\/td>\r\n\u00a0\u00a0 - 0\u00a0\u00a0\u00a0\u00a0 <\/span><\/td>\r\nNo dividends paid this year<\/em><\/span><\/td>\r\n<\/tr>\r\n
      Ending Retained Earnings\u00a0 <\/strong><\/td>\r\n$ 15,190<\/strong><\/td>\r\ngoes to the balance sheet<\/em><\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe calculated ending balance will be reported as the Retained Earnings amount on the balance sheet.\u00a0 We are doing the Classified Balance Sheet showing the subgroups for assets and liabilities in report form.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      MicroTrain Company<\/strong><\/td>\r\n<\/tr>\r\n
      Classified Balance Sheet<\/strong><\/td>\r\n<\/tr>\r\n
      December 31<\/strong><\/td>\r\n<\/tr>\r\n
      Assets<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Current Assets<\/em><\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Cash<\/td>\r\n$ 10,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Accounts Receivable<\/td>\r\n\u00a0\u00a0 25,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Interest Receivable<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 600<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Supplies<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0 1,500<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Prepaid Insurance<\/td>\r\n\u00a0\u00a0\u00a0\u00a0 2,200<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0 Total Current Assets<\/em><\/td>\r\n<\/td>\r\n$ 39,300<\/td>\r\n<\/tr>\r\n
      Plant Assets<\/em><\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Trucks<\/td>\r\n\u00a0\u00a0 40,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Less: \u00a0 Accum. Depreciation - Trucks<\/td>\r\n\u00a0\u00a0\u00a0\u00a0 ( 750)<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0 Total Plant Assets<\/em><\/td>\r\n<\/td>\r\n\u00a0\u00a0 39,250<\/span><\/td>\r\n<\/tr>\r\n
      TOTAL ASSETS<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n$\u00a0 78,550<\/strong><\/td>\r\n<\/tr>\r\n
      <\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Liabilities and Equity<\/strong><\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Current Liabilities<\/em><\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Accounts Payable<\/td>\r\n\u00a025,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Unearned Revenue<\/td>\r\n\u00a0\u00a0 3,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Salaries Payable<\/td>\r\n\u00a0\u00a0\u00a0\u00a0 360<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0 Total Current Liabilities<\/em><\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0 28,360<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Equity<\/em><\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Common Stock<\/td>\r\n\u00a0 35,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      Retained Earnings<\/td>\r\n\u00a0 15,190<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0 \u00a0 Total Equity<\/em><\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0 50,190<\/span><\/td>\r\n<\/tr>\r\n
      TOTAL LIABILITIES AND EQUITY<\/strong>\u00a0<\/strong><\/td>\r\n\u00a0$\u00a0 78,550<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNotice how accumulated depreciation, a contra-account, reduces the asset account it is related to in the plant asset section.\u00a0 Remember, the balance sheet proves the accounting equation (ASSETS = LIABILITIES + EQUITY) and must always be in balance.\u00a0 Why do we need these groupings?\u00a0 It makes it easier for investors to quickly calculate ratios, for example the current ratio<\/strong>.\r\n\r\nThe current ratio measures how much in assets the company has available now to pay liabilities due in the next year.\u00a0 The current\u00a0ratio uses current assets and current liabilities:\r\n\r\n\r\n\r\n\r\n
      Current Ratio =<\/td>\r\nCurrent Assets\u00a0\u00a0\u00a0\u00a0 <\/span><\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0 Current Liabilities<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe can calculate MicroTrain's current ratio as follows:\r\n\r\n\r\n\r\n\r\n
      \u00a0 Current Assets\u00a0 <\/span>\u00a0 =<\/td>\r\n\u00a039,300<\/span> =<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1.39<\/td>\r\n<\/tr>\r\n
      Current Liabilities<\/td>\r\n\u00a028,360<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe current ratio has been rounded to 2-decimal places to get a current ratio of 1.39 or 1.39 to 1.\u00a0 This means MicroTrain has approximately $1.39 in current assets available to pay every $1 of current liabilities.\u00a0 Investors like to see a ratio of between 1.5 and 2 so MicroTrain's current ratio is a little low but still good since we have more assets than liabilities.\r\n\r\nAnswer the following questions and remember to rate your confidence to check the answer!\r\n\r\nhttp:\/\/www.openassessments.org\/assessments\/1261","rendered":"

      After the adjusted trial balance, we will prepare the financial statements.\u00a0 The financial statements are how a business communicates or publishes its story.\u00a0 We previously learned there are 4 financial statements, but\u00a0we will focus on the first three only:<\/p>\n

        \n
      1. Income Statement<\/strong>:\u00a0 Calculates net income or loss of a company by showing revenues – expenses.\u00a0 If revenues are greater than expenses, you have net income.\u00a0 If revenues are less than expenses, you have net loss.<\/li>\n
      2. Statement of Retained Earnings<\/strong>:\u00a0 Calculates an ending balance in the retained earnings account using net income or loss calculated on the income statement.\u00a0 This statement takes the beginning balance in retained earnings + net income (or – net loss) – dividends to get the ending retained earnings balance.\u00a0 The ending retained earnings balance is reported on the balance sheet.<\/li>\n
      3. Balance Sheet<\/strong>:\u00a0 Proves the accounting equation of Assets = Liabilities + Equity and uses ending retained earnings calculated on the statement of retained earnings in equity.<\/li>\n<\/ol>\n

        This video will review the basic financial statements after the adjusted trial balance.<\/p>\n