Accounting: The Language of Business - Vol. 2 (Intermediate: Part 33)

If you look at the Forbes 400, they are paying a lower rate, accounting payroll taxes, than their secretary or - whomever around their office.

Warren Buffett

Review of the Accounting Cycle (part J)

by

Charles Lamson

Step 7: Prepare Financial Statements

After completing the adjusted trial balance (part 32), the company can prepare financial statements, a process we will explore in depth in subsequent posts. First, It prepares the statement of net income, which presents the financial results of operations, using the revenue and expense accounts. We will not consider the statement of comprehensive income in this post. We will cover comprehensive income in depth in a later post.

Accountants occasionally use a worksheet to facilitate the preparation of the adjusting entries in financial statements (discussed in a future post). Accountants may also use reversing entries as part of the accounting cycle (also discussed in a future post).

Exhibit 4.15 presents the sequence of financial statement preparation.

EXHIBIT 4.15 Sequence of Preparation of Financial Statements

Example 4.11 Financial Statements 

PROBLEMS: Using the adjusted trial balance for Plush Service Corporation in Example 4.10 from part 32, prepare a statement of net income, a statement of stockholders' equity, and a balance sheet.

SOLUTION: the financial statements are presented here. We first identify the income statement accounts and include them on the statement of net income. Net income is completed as revenues less expenses.

Net income is needed to prepare the statement of stockholders equity.

Note that the ending retained earnings balance is $131,500. We use this balance in the balance sheet as follows. The other accounts are obtained directly from the adjusted trial balance from part 32.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 115-117*

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