Chapter 2 & 3

Worksheet and Financial

Statements
K M Nazmul Islam
Assistant Professor
IFESCU
www.ifescu.ac.bd
 Financial Statements
• This tutorial illustrates how to prepare three
basic financial statements
 Financial Statements
• This tutorial illustrates how to prepare three
basic financial statements

The Income Statement

 Financial Statements
• This tutorial illustrates how to prepare three
basic financial statements

The Income Statement

The Statement of Retained Earnings
 Financial Statements
• This tutorial illustrates how to prepare three
basic financial statements

The Income Statement

The Statement of Retained Earnings
The Balance Sheet
 Financial Statements
• This tutorial illustrates how to prepare three
basic financial statements

The Income Statement

The Statement of Retained Earnings
The Balance Sheet

The purpose of these statements is

to help users make better decisions.
The Income Statement
 Income Statement
• The first statement prepared is the Income
Statement.
 Income Statement
• The first statement prepared is the Income
Statement.
• The Income Statement reports a business’
performance for the period.
 Income Statement
• A simple format for an income statement is:
 Income Statement
• A simple format for an income
statement is:

Revenues – Expenses = Net Income

 Income Statement
• A simple format for an income
statement is:

Revenues – Expenses = Net Income

 We will look at a more complex format

later.
 Income Statement
• 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.
 Income Statement
• 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.
 Income Statement
• Expenses are incurred when a business
receives goods and services. Like revenues,
payment may or may not have been made.
 Income Statement
• 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.
 Income Statement
• Most businesses require more information
from their businesses than a simple income
statement can provide. Therefore, they use
a multi-step income statement format.
 Income Statement
• 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:
 Income Statement
Sales revenue
- Cost of goods sold
Gross profit
- Operating expenses
Income from operations
+/- Non-operating items
Income before taxes
- Income taxes
Net income
 Income Statement
• Cost of goods sold represents the expense a
business incurred to buy or make a product
for resale.
 Income Statement
• 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.
 Income Statement
• Operating expenses are the usual expenses
incurred in operating a business.
 Income Statement
• 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.
 Income Statement
• Non-operating items are revenue,
expenses, gains and losses that do not relate
to the company’s primary operations.
 Income Statement
• 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.
 Income Statement
• Income taxes are computed by multiplying
Income before taxes by the income tax rate.
 Income Statement
• 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.
The Statement of Retained
Earnings
 Statement of Retained Earnings
• The Statement of Retained Earnings reports
how net income and dividends affected a
company’s financial position during the
period.
Statement of Retained Earnings

The format of the statement is:

Statement of Retained Earnings

The format of the statement is:

Beg. balance, retained earnings

+ Net income
- Dividends
End. balance, retained earnings
 Statement of Retained Earnings
• Note that the Income Statement must be
prepared before the Statement of Retained
Earnings.
 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.
The Balance Sheet
 Balance Sheet
• The purpose of the balance sheet is to report
the financial position of an accounting
entity at a particular point in time.
 Balance Sheet
• The purpose of the balance sheet is to report
the financial position of an accounting
entity at a particular point in time.

The basic format for the balance sheet is:

Assets = Liabilities + Equity
 Balance Sheet
• Assets are economic resources owned by a
company.
 Balance Sheet
• Assets are economic resources owned by a
company.

Examples include cash, accounts receivable,

supplies, buildings and equipment.
 Balance Sheet
• Liabilities are the company’s debt or
obligations.
 Balance Sheet
• Liabilities are the company’s debt or
obligations.

Examples are accounts payable, unearned

revenues and bonds payable.
 Balance Sheet
• 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.
 Balance Sheet
• There are two different types of assets
shown on a balance sheet. These are
current assets and non-current assets.
 Balance Sheet
• 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
 Balance Sheet
• Current assets are assets that will be used
or turned into cash within one year.
 Balance Sheet
• 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.
 Balance Sheet
• Non-current assets comprise the remainder
of the assets.
 Balance Sheet
• Non-current assets comprise the remainder
of the assets.

These include accounts such as: long-term

investments, land, building, equipment and
patents.
 Balance Sheet
• There are two different types of liabilities
shown on a balance sheet – current
liabilities and long-term liabilities.
 Balance Sheet
• There are two different types of liabilities
shown on a balance sheet – current
liabilities and long-term liabilities.

Current liabilities
+ Long-term liabilities
Total liabilities
 Balance Sheet
• Current liabilities are obligations that will
be paid in cash (or other services) or
satisfied by providing service within the
coming year.
 Balance Sheet
• 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.
 Balance Sheet
• Long-term liabilities are obligations that
will not be paid or satisfied within the year.
 Balance Sheet
• Long-term liabilities are obligations that
will not be paid or satisfied within the year.

Examples include mortgage payable and

bonds payable.
 Balance Sheet
• Stockholders’ Equity is divided into two
categories: contributed capital and retained
earnings.

Contributed capital
+ Retained earnings
Total stockholders’ equity
 Balance Sheet
• Contributed capital is the amount of cash
(or other assets) provided by the
shareholders.
 Balance Sheet
• 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.
 Balance Sheet
• Retained earnings is the total earnings that
have not been distributed to owners as
dividends.
 The Balance Sheet

Current assets
+ Non-current assets
Total assets
Current liabilities
+ Long-term liabilities
+ Stockholders’ equity
Total liabilities and
stockholders’ equity
 Balance Sheet
• The Balance Sheet must be prepared after
the Statement of Retained Earnings in order
to have calculated the ending balance of
Retained Earnings.
 Order of Preparation

Income
Statement
Statement of Retained
Earnings Balance Sheet
Net income Beginning Retained
Earnings
+ Net income
– Dividends
Ending retained earnings Ending Balance
Retained
Earnings
 Review

 Income statement—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.
 Balance sheet—A list of the assets, liabilities, and
owner’s equity as of a specific date.