CHAPTER 5
TOPIC 2:
PREPARING FINANCIAL
STATEMENTS
■ This section deals with preparing financial statements from a completed
worksheet.
■ Preparing the Income Statement
– First financial statement to be prepared is the income statement.
– Transfer the revenue and expenses from the trial balance to the income
statement column.
■ Preparing the Related Balance Sheet
– Prepared after the income statement
– The data for the balance sheet are found in the columns headed Balance
Sheet on the worksheet.
– A=L+OE
– Two ways of creating a balance sheet: Account Form (the way you have
done it to date) and Report Form
Preparing the Related Balance Sheet
■ Remember the Rules:
■ $
■ _____ and double underlines
■ Indents
■ Proper accounts
■ Correct Columns and SubColumns
■ Account Form: a balance sheet
with assets on the left side, and
the claims against them on the
right.
■ Report Form: a balance sheet
with assets, liabilities, and owner's
equity arranged vertically.
■ Notes for Report Form:
– Heading (who, what, when as at)
– Body (A=L+OE are reported
vertically)
Classified Balance Sheet
■ Classified balance sheet:
– one in which assets and liabilities are reported under
meaningful groups or classes.
■ Assets may be put into as many as six classes, but only
two are used in this semester. Current Assets and
Fixed Assets.
■ Liabilities may be put into as many as four classes, but
only one class is used at the moment Current
Liabilities.
Reporting Current Assets
■ The meaning of current assets reflects the liquidity
order of reporting assets - that assets are reported in the
order of how easily they can be converted into cash.
■ Current Assets:
– assets which can be converted into cash within one
year of the balance sheet date.
– Ex: cash, Canada Savings Bonds, Accounts
Receivable
Reporting Fixed Assets
■ Are also known as long-lived assets, operational assets, plant
assets, or property, plant, and equipment. Less permanent in
nature. They are kept in the business to assist in revenue-making
activities for several years beyond the balance sheet date.
■ Fixed Assets:
– tangible, long-lived assets held for use within the firm to
support revenue-making activities for several years beyond
the balance sheet date.
■ "at cost" - put there because of the GAAP called cost principle.
GAAP for Cost
■ All assets purchased by a
business must be recorded as
follows:
■ 1) The cost of all assets is the
original purchase price. This
price is known as the cost price
or cost value.
■ 2) The original cost values of
assets must be retained
throughout the accounting.
■ Cost price (sometimes known
as historical cost price):
– The price originally agreed
upon by buyer and seller.
Reporting Current Liabilities
■ Liabilities, like assets, are reported on a balance sheet under
groups or classes of accounts. A common group is current
liabilities.
■ Current Liabilities:
– debts owing which will fall due within one year of the balance
sheet.
– Examples: Bank loan payable "on demand"; Accounts
payable; any amount payable to a creditor within the year
(ex: current mortgage payable)
■ Page 177 !!!!
Notes:
■ When the balance sheet is to be included in a published
annual report, most Canadian businesses prefer to use
the report form (vertical).
■ Sub-columns (accounts receivable)
■ Single line = calculation
■ The final total = double underline
■ Liability Section (current liabilities and long-term
liabilities)
Mortgage (Long Term Liabilities)
■ Long-Term Liabilities: debts
which, in the ordinary course of
business, are not liquidated within
one year of the balance sheet date.
■ Mortgage:
– Is a pledge of property to a
creditor as security against a
debt (the loan of money).
■ When you buy a house, you take
out a mortgage/loan, however, if
you don't pay the bank gets the
house.
■ The mortgage is "secured by land
and building" this means that the
lender of the money will have a
claim on the firm's land and building
if the borrower fails to make
payments.
■ Usually get 15, 20 or 25 year
mortgages.
■ Interest rate - You will need to pay
interest on the money you borrow
(how the bank makes money).
Mortgage Continued
■ Asset side
– fixed asset you will find the land and building (with a note saying it is
secured) - pledged as securities.
■ Current portion of the long-term debt is reported under Current
Liabilities.
– The amount of the debt that is due within the year out of current
funds!
■ You will notice that the current portion of the mortgage payble is
reported twice: under Current Liabilities as a current liability and also
under Long Term Liabilities as a deduction form the original long-term
debt
■ Long-Term Liabilities
– shows the amount to be paid beyond a year form the balance sheet
date.
Preparing
Financial
Statements
Preparing
Worksheet
Preparing
Trial
Balance
Originating
Data
Journalizing
Posting