Lecture Notes: Preparing Financial Statements

Overview

• This lesson focuses on preparing financial statements using an adjusted trial balance.
• Previous chapter covered preparing and posting adjusting entries and preparing an adjusted trial balance.

Steps to Prepare Financial Statements

1. Income Statement

   • Calculate Net Income: Revenues - Expenses.
   • Utilize adjusted trial balance for revenue and expense figures.
   • Time period must be specified (e.g., "Two Months Ended December 31 of Year 1").

2. Statement of Retained Earnings

   • Start with beginning retained earnings.
   • Add net income or subtract net loss.
   • Subtract dividends paid.
   • Ending retained earnings is essential for the balance sheet.

3. Balance Sheet

   • Show assets, liabilities, and stockholders' equity on a specific date.
   • Format: Assets = Liabilities + Stockholders' Equity.
   • Requires ending retained earnings from the Statement of Retained Earnings.

Adjusted Trial Balance

• Components:
  • Balance sheet accounts: assets, liabilities, equity.
  • Dividends account.
  • Revenues and expenses.

Classified Balance Sheet

• More detailed than a standard balance sheet.
• Assets and liabilities categorized as "current" or "long-term".
• Current Assets are used or converted to cash within one year.
• Long-term Assets include investments, property, plant, equipment (PPE), intangible assets.

Asset Liquidity Order

• Cash is most liquid; listed first on balance sheet.
• Accounts Receivable follows, then Office Supplies and Prepaid Expenses.

Liabilities

• Current Liabilities: Paid within one year or operating cycle (e.g., Accounts Payable).
• Long-term Liabilities: Not due within the year (e.g., Notes Payable).

Stockholders' Equity

• Split into "Contributed Capital" and "Retained Earnings".
• Contributed Capital: money received from issuing stock.
• Retained Earnings: cumulative net income minus dividends.

Example: Smart Touch Learning

• Used adjusted trial balance as of December 31, Year 1.
• Income Statement: $8,550 net income for two months.
• Statement of Retained Earnings: Ending retained earnings, $3,550.
• Balance Sheet: Total assets and liabilities, $113,550 each.
• Classified Balance Sheet:
  • Current Assets: $16,100.
  • Plant Assets: $97,450.
  • Total Liabilities: $62,000.
  • Stockholders' Equity: Common Stock $48,000; Retained Earnings $3,550.

Conclusion

• This tutorial guides through using an adjusted trial balance to prepare financial statements.
• Emphasized usage of classified balance sheet moving forward.