CHAPTER 2: Review of Financial Statement Preparation, Analysis, and interpretation: Basic Financial Statements At the end of this lesson, you will be able to: Determine and identify the different basic financial statements. know how to prepare a financial statement. PART 2: TERMINOLOGIES Financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential. The three major financial statement reports are the balance sheet, income statement, and statement of cash flows. Liquidity refers to the company's ability to pay maturing obligation Accounting Equation: ASSETS = LIABILITIES + OWNER'S EQUITY PART 3: DISCUSSION Basic Financial Statements: Statement of Financial Position or Balance Sheet This financial report provides information regarding the liquidity position and capital structure of the company as of a given date. ARSETS Current Cash Putty cash Temporary inwestments Accountie.net Inventory Supplies Prepant insurance Total current assets Investments $ 3.000 a5,00 3.500 2.900 3.100 1,100 3.500 61.000 Example Company Balance Sheet December 31, 2018 LIARILITIES Current 3 2.100 Note 100 Aunts payable 10.000 Why payable 40.500 It payable 21.000 Tupayati 3.BOD Warranty hity 1.500 Uneamed revenue Blog Totul current les 3.000 No payable Zonday 5.500 Total long-term biti 180.000 201.000 Tetab 15.0093 337,000 STOCKHOLDERS EQUITY 105,000 Common stock 200.000 Retained earnings 500.000 Accum other comprehensive income LRUS Treasury och DOW Thuy 52200D Total bidraguly 20.000 400.000 420.000 0.000 485.000 Land La ruments Building EN Les depreciation rupiant une Intangible sota Goodw The names Total intangibles 110,000 220.000 0.000 (50000) ZA DOO To 377 The new to the same tham Statement of Profit or loss or Income Statement provide information regarding the revenues or sales, expenses, and net income of the company over a given accounting time. This accounting period may be for a month, a quarter, or a year. Innovative Products, Inc Income Statement For Yrdin Dec. 2012 Sales 550.00.000 Cost of Goods Sold Materials 7,00,000 Labem 11,00,000 Overhead 6.00.000 25,00.000 Gross Mardin 525,00,000 Operating per Selling Expenses 3,00,000 Administrative Expenses 6,00,000 Depreciation and Amortization 5,00,000 2000000 Operating Income $5,00,000 Other Income Empresa Interest Revenue 50000 Interesse -1,00,000 Extraordinary items 2.00.000 1.50.000 Income before Tax 56,50.000 Income (15) 52.77.500 Net Income 422.500 Statement of Cash Flow provides an explanation regarding the change in cash balance from one accounting period to another. The cash flows are also classified into three main categories: operating, Investing, and financing MAZON.COLINE CONSOLIDATED STATEMENTS OF CANELOW dhewe LUIS !! 3.FI CATAND CAITOTUALENTS, DEGANING OF FAMO OPERATING ACTIVITIES tutti wanted by 06 si 2. 10 00 114 11 21 thalaal Irwin Ahme Art 100 L. 19 10 31 MU LAT 0110 allaterathiar VENTING ACTIVITIES wewe homepage Art Note heter will TETANCING ACTIE decom he cap Nella viti naalanai CASILAND CASILLAGVALT, EXERIOD 3 11.12 16 . u LES Statement of Changes in Stockholders' Equity provides information that explains the changes in the stockholders' equity account from one accounting period to another. These changes may be due to the following: 1. Profit or loss for the accounting period 2. Cash dividend declaration 3. Issuance of new shares of stocks 4. Other transactions that affect the stockholder's equity such as other comprehensive Income, treasury stocks, and revaluation of assets, Notes of Financial Statements The notes of financial statements are integral part of financial statements. Among the additional Information that the notes of financial statements provide are the following: 1. Brief description of the company 2. Summary of significant accounting policies. 3. Breakdown of amounts found in the financial statements. Review of the Process of Financial Statement Preparation 1. Analyzing business transactions In this step, a transaction is analyzed to find out if it affects the company and If it needs to be recorded. Personal transactions of the owners and managers that do not affect the company should not be recorded. In this step, a decision may have to be made to identify If a transaction needs to be recorded in special Journals such as a sale or purchases Journal. 2. Recording in the journals Using the rules of debit and credit, transactions are initially entered in a record called a Journal and the entry made is called a Journal Entry The journal serves as a record of when transactions occurred and were recorded. For repetitive transactions or high-volume transactions (e.g., one thousand sales transactions in one day), Special Journals are made. These special Journals include sales journal, purchases journal, cash receipts journal, and cash disbursements journal. 3. Posting to ledger accounts A transaction is first recorded in a journal. Periodically, the journal entries are transferred to the accounts in the ledger The process of transferring the debits and credits from the journal entries to the accounts is called Posting. Ledgers provide chronological details as to how transactions affect individual accounts. There are two types of ledgers: The General Ledger and Subsidiary Ledger. The general ledger is a summary of the different Subsidiary Ledgers and can serve as a control account. . For example, a general ledger for accounts receivable summarizes the balances found in the different subsidiary ledgers for different customers. 4. Preparing the unadjusted trial balance Errors may occur in posting debits and credits from the journal to the ledger. One way to detect such errors is by preparing a trial balance. Double-entry accounting requires that debits must always equal credits. The trial balance verifies this equality. The steps in preparing a trial balance are as follows: 1. List the name of the company, the title of the trial balance, and the date the trial balance is prepared. 2. List the accounts from the ledger and enter their debit or credit balance in the Debitor Credit column of the trial balance 3. Total the Debit and Credit columns of the trial balance. 4. Verify that the total of the Debit column equals the total of the credit column. 5. Making the adjusting entries . At the end of the accounting period, many of the account balances in the ledger can be reported in the financial statements without change . For example, the balances of the cash and land accounts are normally the amount reported on the balance sheet. However, some accounts in the ledger require updating This updating is required for the following reasons: 1. Some expenses are not recorded daily. For example, the daily use of supplies would require many entries with small amounts. Also, managers usually do not need to know the amount of supplies on hand on a day-to-day basis. 2. Some revenues and expenses are earned as time passes rather than as separate transactions. For example, rent received in advance (unearned rent) expires and becomes revenue with the passage of time. Likewise, prepaid insurance expires and becomes an expense with the passage of time 3. Some revenues and expenses may be unrecorded. For example, a company may have provided services to customers that are has not billed or recorded at the end of the accounting period. Likewise, a company may not pay its employees until the next accounting period even though the employees have earned their wages in the current period. The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the Adjusting Process. The journal entries that bring the accounts up to date at the end of the accounting period are called Adjusting Entries. The following are normally adjusted at the end of a period: - Accruals. These include unpaid salaries for the accounting period, unpaid Interest expense, or unpaid utility expenses. - Prepayments. If a company has prepaid expenses such as prepaid rent or prepaid insurance then the correct balances for these accounts have to be established at the end of each accounting period to reflect their correct balances. - Depreciation and amortization expenses. Depreciation expenses are recognized at the end of each accounting period through adjusting entries. If there are intangible assets such as franchise, the allocation of their costs which is called amortization expense, is also recognized at the end of each accounting period through adjusting entries. - Allowance for uncollectible accounts. Bad debt expense from accounts receivable is also recognized through adjusting entries 6. Preparing the adjusted trial balance An adjusted trial balance is prepared after taking into consideration the effects of the adjusting entries. Again, this is to ensure that the total debit balances equal the credit balances after posting and journalizing adjusting entries made. 7. Preparing the financial statements From the adjusted trial balance, the financial statements can then be prepared. These are the statement of financial position, statement of profit or loss, and the statement of cash flows. 8. Making the closing entries Upon closing: - If the revenues exceed expenses during an accounting period, retained earnings will increase. - The reverse is true which means that if the expenses exceed revenues, the retained earnings will decrease. In closing temporary accounts: - Revenue account balances are transferred to an account called Income Summary Account (sometimes profit or loss summary). - Expense account balances are also transferred to the Income Summary Account. - The balance of the Income Summary (net income or net loss) is transferred to the owner's capital account - The balance of the owner's drawing account is transferred to the owner's capital account. 9. Post-closing trial balance A Post-Closing Trial Balance shows the accounts that are permanent or real. These are the accounts that can be seen in your balance sheet. The post-dosing trial balance is prepared to test if the debit balances equal the credit balances after closing entries are considered. PART 4: ACTIVITY/ APPLICATION Make a diagram showing the difference between the Balance Sheet, Income Statements, and Statement of Cash Flow. PART 5: QUIZZES/ EVALUATION Prepare a balance sheet using the following (scrambled) accounts: Accounts Payable Accrued Expenses Accumulated Depreciation Additional Paid-in Capital Allowance for Doubtful Accounts Cash Common Stock (PHPO.20 par) Current Portion of LT. Debt Gross Accounts Receivable Gross Fixed Assets Inventories Long-Term Debt Net Accounts Receivable Net Fixed Assets Retained Earnings Short-Term Bank Loan (Notes Payable) 39,000 8,000 51,000 86,000 2,000 23,000 45,000 6,000 40,000 486,000 54,000 210,000 38,000 435,000 138,000 18,000