Once you have prepared the adjusted trial balance, you are ready to prepare the financial statements. Preparing financial statements is the seventh step in the accounting cycle. Remember that we have four financial statements to prepare: an income statement, a statement of retained earnings, a balance sheet, and the statement of cash flows. These financial statements were introduced in Introduction to Financial Statements and Statement of Cash Flows dedicates in-depth discussion to that statement.
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To prepare the financial statements, a company will look at the adjusted trial balance for account information. From this information, the company will begin constructing each of the statements, beginning with the income statement. Income statements will include all revenue and expense accounts. The statement of retained earnings will include beginning retained earnings, any net income (loss) (found on the income statement), and dividends. The balance sheet is going to include assets, contra assets, liabilities, and stockholder equity accounts, including ending retained earnings and common stock.
Magnificent Adjusted Trial Balance
Revenue and expense information is taken from the adjusted trial balance as follows:
Net income information is taken from the income statement, and dividends information is taken from the adjusted trial balance as follows.
Ending retained earnings information is taken from the statement of retained earnings, and asset, liability, and common stock information is taken from the adjusted trial balance as follows.
Review the annual report of Stora Enso which is an international company that utilizes the illustrated format in presenting its Balance Sheet, also called the Statement of Financial Position. The Balance Sheet is found on page 31 of the report.
Some of the biggest differences that occur on financial statements prepared under US GAAP versus IFRS relate primarily to measurement or timing issues: in other words, how a transaction is valued and when it is recorded.
The 10-column worksheet is an all-in-one spreadsheet showing the transition of account information from the trial balance through the financial statements. Accountants use the 10-column worksheet to help calculate end-of-period adjustments. Using a 10-column worksheet is an optional step companies may use in their accounting process.
Here is a picture of a 10-column worksheet for Printing Plus.
The trial balance information for Printing Plus is shown previously. Notice that the debit and credit columns both equal $34,000. If we go back and look at the trial balance for Printing Plus, we see that the trial balance shows debits and credits equal to $34,000.
The adjustments total of $2,415 balances in the debit and credit columns.
The next step is to record information in the adjusted trial balance columns.
Next you will take all of the figures in the adjusted trial balance columns and carry them over to either the income statement columns or the balance sheet columns.
Looking at the income statement columns, we see that all revenue and expense accounts are listed in either the debit or credit column. This is a reminder that the income statement itself does not organize information into debits and credits, but we do use this presentation on a 10-column worksheet.
You will not see a similarity between the 10-column worksheet and the balance sheet, because the 10-column worksheet is categorizing all accounts by the type of balance they have, debit or credit. This leads to a final balance of $30,140.
The balance sheet is classifying the accounts by type of accounts, assets and contra assets, liabilities, and equity. This leads to a final balance of $29,965. Even though they are the same numbers in the accounts, the totals on the worksheet and the totals on the balance sheet will be different because of the different presentation methods.
Publicly traded companies release their financial statements quarterly for open viewing by the general public, which can usually be viewed on their websites. One such company is Alphabet, Inc. (trade name Google). Take a look at Alphabet’s quarter ended March 31, 2018, financial statements from the SEC Form 10-Q.
What amount of net income/loss does Frank have?
In Completing the Accounting Cycle, we continue our discussion of the accounting cycle, completing the last steps of journalizing and posting closing entries and preparing a post-closing trial balance.
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Key Concepts and SummaryIncome Statement: The income statement shows the net income or loss as a result of revenue and expense activities occurring in a period.Statement of Retained Earnings: The statement of retained earnings shows the effects of net income (loss) and dividends on the earnings the company maintains.Balance Sheet: The balance sheet visually represents the accounting equation, showing that assets balance with liabilities and equity.10-column worksheet: The 10-column worksheet organizes data from the trial balance all the way through the financial statements.
(Figure)On which financial statement would the Supplies account appear?