Prepare Financial Statements Using the Adjusted Trial Balance

Once all accounts have balances in the adjusted trial balance columns, add the debits and credits to make sure they are equal. In the case of Printing Plus, the ... Skiptocontent TheAdjustmentProcess 23PrepareFinancialStatementsUsingtheAdjustedTrialBalance Onceyouhavepreparedtheadjustedtrialbalance,youarereadytopreparethefinancialstatements.Preparingfinancialstatementsistheseventhstepintheaccountingcycle.Rememberthatwehavefourfinancialstatementstoprepare:anincomestatement,astatementofretainedearnings,abalancesheet,andthestatementofcashflows.ThesefinancialstatementswereintroducedinIntroductiontoFinancialStatementsandStatementofCashFlowsdedicatesin-depthdiscussiontothatstatement. Topreparethefinancialstatements,acompanywilllookattheadjustedtrialbalanceforaccountinformation.Fromthisinformation,thecompanywillbeginconstructingeachofthestatements,beginningwiththeincomestatement.Incomestatementswillincludeallrevenueandexpenseaccounts.Thestatementofretainedearningswillincludebeginningretainedearnings,anynetincome(loss)(foundontheincomestatement),anddividends.Thebalancesheetisgoingtoincludeassets,contraassets,liabilities,andstockholderequityaccounts,includingendingretainedearningsandcommonstock. MagnificentAdjustedTrialBalance GoovertheadjustedtrialbalanceforMagnificentLandscapingService.Identifywhichfinancialstatementeachaccountwillgoon:BalanceSheet,StatementofRetainedEarnings,orIncomeStatement. Solution BalanceSheet:Cash,accountsreceivable,officesupplied,prepaidinsurance,equipment,accumulateddepreciation(equipment),accountspayable,salariespayable,unearnedlawnmowingrevenue,andcommonstock.StatementofRetainedEarnings:Dividends.IncomeStatement:Lawnmowingrevenue,gasexpense,advertisingexpense,depreciationexpense(equipment),suppliesexpense,andsalariesexpense. IncomeStatement Anincomestatementshowstheorganization’sfinancialperformanceforagivenperiodoftime.Whenpreparinganincomestatement,revenueswillalwayscomebeforeexpensesinthepresentation.ForPrintingPlus,thefollowingisitsJanuary2019IncomeStatement. Revenueandexpenseinformationistakenfromtheadjustedtrialbalanceasfollows: Totalrevenuesare$10,240,whiletotalexpensesare$5,575.Totalexpensesaresubtractedfromtotalrevenuestogetanetincomeof$4,665.Iftotalexpensesweremorethantotalrevenues,PrintingPluswouldhaveanetlossratherthananetincome.Thisnetincomefigureisusedtopreparethestatementofretainedearnings. TheImportanceofAccurateFinancialStatements Financialstatementsgiveaglimpseintotheoperationsofacompany,andinvestors,lenders,owners,andothersrelyontheaccuracyofthisinformationwhenmakingfutureinvesting,lending,andgrowthdecisions.Whenoneofthesestatementsisinaccurate,thefinancialimplicationsaregreat. Forexample,CeladonGroupmisreportedrevenuesoverthespanofthreeyearsandelevatedearningsduringthoseyears.Thetotaloverreportedincomewasapproximately$200–$250million.ThisgrossmisreportingmisledinvestorsandledtotheremovalofCeladonGroupfromtheNewYorkStockExchange.NotonlydidthisnegativelyimpactCeladonGroup’sstockpriceandleadtocriminalinvestigations,butinvestorsandlenderswerelefttowonderwhatmighthappentotheirinvestment. Thatiswhyitissoimportanttogothroughthedetailedaccountingprocesstoreduceerrorsearlyonandhopefullypreventmisinformationfromreachingfinancialstatements.Thebusinessmusthavestronginternalcontrolsandbestpracticestoensuretheinformationispresentedfairly.1 StatementofRetainedEarnings Thestatementofretainedearnings(whichisoftenacomponentofthestatementofstockholders’equity)showshowtheequity(orvalue)oftheorganizationhaschangedoveraperiodoftime.Thestatementofretainedearningsispreparedsecondtodeterminetheendingretainedearningsbalancefortheperiod.Thestatementofretainedearningsispreparedbeforethebalancesheetbecausetheendingretainedearningsamountisarequiredelementofthebalancesheet.ThefollowingistheStatementofRetainedEarningsforPrintingPlus. Netincomeinformationistakenfromtheincomestatement,anddividendsinformationistakenfromtheadjustedtrialbalanceasfollows. Thestatementofretainedearningsalwaysleadswithbeginningretainedearnings.Beginningretainedearningscarryoverfromthepreviousperiod’sendingretainedearningsbalance.SincethisisthefirstmonthofbusinessforPrintingPlus,thereisnobeginningretainedearningsbalance.Noticethenetincomeof$4,665fromtheincomestatementiscarriedovertothestatementofretainedearnings.Dividendsaretakenawayfromthesumofbeginningretainedearningsandnetincometogettheendingretainedearningsbalanceof$4,565forJanuary.Thisendingretainedearningsbalanceistransferredtothebalancesheet. ConceptsStatementsgivetheFinancialAccountingStandardsBoard(FASB)aguidetocreatingaccountingprinciplesandconsiderthelimitationsoffinancialstatementreporting.SeetheFASB’s“ConceptsStatements”pagetolearnmore. BalanceSheet Thebalancesheetisthethirdstatementpreparedafterthestatementofretainedearningsandlistswhattheorganizationowns(assets),whatitowes(liabilities),andwhattheshareholderscontrol(equity)onaspecificdate.Rememberthatthebalancesheetrepresentstheaccountingequation,whereassetsequalliabilitiesplusstockholders’equity.ThefollowingistheBalanceSheetforPrintingPlus. Endingretainedearningsinformationistakenfromthestatementofretainedearnings,andasset,liability,andcommonstockinformationistakenfromtheadjustedtrialbalanceasfollows. Lookingattheassetsectionofthebalancesheet,AccumulatedDepreciation–Equipmentisincludedasacontraassetaccounttoequipment.Theaccumulateddepreciation($75)istakenawayfromtheoriginalcostoftheequipment($3,500)toshowthebookvalueofequipment($3,425).Theaccountingequationisbalanced,asshownonthebalancesheet,becausetotalassetsequal$29,965asdothetotalliabilitiesandstockholders’equity. Thereisaworksheetapproachacompanymayusetomakesureend-of-periodadjustmentstranslatetothecorrectfinancialstatements. FinancialStatements BothUS-basedcompaniesandthoseheadquarteredinothercountriesproducethesameprimaryfinancialstatements—IncomeStatement,BalanceSheet,andStatementofCashFlows.ThepresentationofthesethreeprimaryfinancialstatementsislargelysimilarwithrespecttowhatshouldbereportedunderUSGAAPandIFRS,butsomeinterestingdifferencescanarise,especiallywhenpresentingtheBalanceSheet. WhilebothUSGAAPandIFRSrequirethesameminimumelementsthatmustbereportedontheIncomeStatement,suchasrevenues,expenses,taxes,andnetincome,tonameafew,publiclytradedcompaniesintheUnitedStateshavefurtherrequirementsplacedbytheSEConthereportingoffinancialstatements.Forexample,IFRS-basedfinancialstatementsareonlyrequiredtoreportthecurrentperiodofinformationandtheinformationforthepriorperiod.USGAAPhasnorequirementforreportingpriorperiods,buttheSECrequiresthatcompaniespresentonepriorperiodfortheBalanceSheetandthreepriorperiodsfortheIncomeStatement.UnderbothIFRSandUSGAAP,companiescanreportmorethantheminimumrequirements. PresentationdifferencesaremostnoticeablebetweenthetwoformsofGAAPintheBalanceSheet.UnderUSGAAPthereisnospecificrequirementonhowaccountsshouldbepresented.However,theSECrequiresthatcompaniespresenttheirBalanceSheetinformationinliquidityorder,whichmeanscurrentassetslistedfirstwithcashbeingthefirstaccountpresented,asitisacompany’smostliquidaccount.Liquidityreferstohoweasilyanitemcanbeconvertedtocash.IFRSrequiresthataccountsbeclassifiedintocurrentandnoncurrentcategoriesforbothassetsandliabilities,butnospecificpresentationformatisrequired.Thus,forUScompanies,thefirstcategoryalwaysseenonaBalanceSheetisCurrentAssets,andthefirstaccountbalancereportediscash.ThisisnotalwaysthecaseunderIFRS.WhilemanyBalanceSheetsofinternationalcompanieswillbepresentedinthesamemannerasthoseofaUScompany,thelackofarequiredformatmeansthatacompanycanpresentnoncurrentassetsfirst,followedbycurrentassets.TheaccountsofaBalanceSheetusingIFRSmightappearasshownhere. ReviewtheannualreportofStoraEnsowhichisaninternationalcompanythatutilizestheillustratedformatinpresentingitsBalanceSheet,alsocalledtheStatementofFinancialPosition.TheBalanceSheetisfoundonpage31ofthereport. SomeofthebiggestdifferencesthatoccuronfinancialstatementspreparedunderUSGAAPversusIFRSrelateprimarilytomeasurementortimingissues:inotherwords,howatransactionisvaluedandwhenitisrecorded. Ten-ColumnWorksheets The10-columnworksheetisanall-in-onespreadsheetshowingthetransitionofaccountinformationfromthetrialbalancethroughthefinancialstatements.Accountantsusethe10-columnworksheettohelpcalculateend-of-periodadjustments.Usinga10-columnworksheetisanoptionalstepcompaniesmayuseintheiraccountingprocess. Hereisapictureofa10-columnworksheetforPrintingPlus. Therearefivesetsofcolumns,eachsethavingacolumnfordebitandcredit,foratotalof10columns.Thefivecolumnsetsarethetrialbalance,adjustments,adjustedtrialbalance,incomestatement,andthebalancesheet.Afteracompanypostsitsday-to-dayjournalentries,itcanbegintransferringthatinformationtothetrialbalancecolumnsofthe10-columnworksheet. ThetrialbalanceinformationforPrintingPlusisshownpreviously.Noticethatthedebitandcreditcolumnsbothequal$34,000.IfwegobackandlookatthetrialbalanceforPrintingPlus,weseethatthetrialbalanceshowsdebitsandcreditsequalto$34,000. Oncethetrialbalanceinformationisontheworksheet,thenextstepistofillintheadjustinginformationfromthepostedadjustedjournalentries. Theadjustmentstotalof$2,415balancesinthedebitandcreditcolumns. Thenextstepistorecordinformationintheadjustedtrialbalancecolumns. Togetthenumbersinthesecolumns,youtakethenumberinthetrialbalancecolumnandaddorsubtractanynumberfoundintheadjustmentcolumn.Forexample,Cashshowsanunadjustedbalanceof$24,800.Thereisnoadjustmentintheadjustmentcolumns,sotheCashbalancefromtheunadjustedbalancecolumnistransferredovertotheadjustedtrialbalancecolumnsat$24,800.InterestReceivabledidnotexistinthetrialbalanceinformation,sothebalanceintheadjustmentcolumnof$140istransferredovertotheadjustedtrialbalancecolumn. Unearnedrevenuehadacreditbalanceof$4,000inthetrialbalancecolumn,andadebitadjustmentof$600intheadjustmentcolumn.Rememberthataddingdebitsandcreditsislikeaddingpositiveandnegativenumbers.Thismeansthe$600debitissubtractedfromthe$4,000credittogetacreditbalanceof$3,400thatistranslatedtotheadjustedtrialbalancecolumn. ServiceRevenuehada$9,500creditbalanceinthetrialbalancecolumn,anda$600creditbalanceintheAdjustmentscolumn.Togetthe$10,100creditbalanceintheadjustedtrialbalancecolumnrequiresaddingtogetherbothcreditsinthetrialbalanceandadjustmentcolumns(9,500+600).Youwilldothesameprocessforallaccounts.Onceallaccountshavebalancesintheadjustedtrialbalancecolumns,addthedebitsandcreditstomakesuretheyareequal.InthecaseofPrintingPlus,thebalancesequal$35,715.IfyouchecktheadjustedtrialbalanceforPrintingPlus,youwillseethesameequalbalanceispresent. Nextyouwilltakeallofthefiguresintheadjustedtrialbalancecolumnsandcarrythemovertoeithertheincomestatementcolumnsorthebalancesheetcolumns. IncomeStatementandBalanceSheet Takeacoupleofminutesandfillintheincomestatementandbalancesheetcolumns.Totalthemwhenyouaredone.Donotpanicwhentheydonotbalance.Theywillnotbalanceatthistime. Solution Lookingattheincomestatementcolumns,weseethatallrevenueandexpenseaccountsarelistedineitherthedebitorcreditcolumn.Thisisareminderthattheincomestatementitselfdoesnotorganizeinformationintodebitsandcredits,butwedousethispresentationona10-columnworksheet. Youwillnoticethatwhendebitandcreditincomestatementcolumnsaretotaled,thebalancesarenotthesame.Thedebitbalanceequals$5,575,andthecreditbalanceequals$10,240.Whydotheynotbalance? Ifthedebitandcreditcolumnsequaleachother,itmeanstheexpensesequaltherevenues.Thiswouldhappenifacompanybrokeeven,meaningthecompanydidnotmakeorloseanymoney.Ifthereisadifferencebetweenthetwonumbers,thatdifferenceistheamountofnetincome,ornetloss,thecompanyhasearned. InthePrintingPluscase,thecreditsideisthehigherfigureat$10,240.Thecreditsiderepresentsrevenues.Thismeansrevenuesexceedexpenses,thusgivingthecompanyanetincome.Ifthedebitcolumnwerelarger,thiswouldmeantheexpenseswerelargerthanrevenues,leadingtoanetloss.Youwanttocalculatethenetincomeandenteritontotheworksheet.The$4,665netincomeisfoundbytakingthecreditof$10,240andsubtractingthedebitof$5,575.Whenenteringnetincome,itshouldbewritteninthecolumnwiththelowertotal.Inthisinstance,thatwouldbethedebitside.Youthenaddtogetherthe$5,575and$4,665togetatotalof$10,240.Thisbalancesthetwocolumnsfortheincomestatement.Ifyoureviewtheincomestatement,youseethatnetincomeisinfact$4,665. Wenowconsiderthelasttwocolumnsforthebalancesheet.Inthesecolumnswerecordallasset,liability,andequityaccounts. Whenaddingthetotaldebitsandcredits,younoticetheydonotbalance.Thedebitcolumnequals$30,140,andthecreditcolumnequals$25,475.Howdowegetthecolumnstobalance? Treattheincomestatementandbalancesheetcolumnslikeadouble-entryaccountingsystem,whereifyouhaveadebitontheincomestatementside,youmusthaveacreditequalingthesameamountonthecreditside.Inthiscaseweaddedadebitof$4,665totheincomestatementcolumn.Thismeanswemustaddacreditof$4,665tothebalancesheetcolumn.Onceweaddthe$4,665tothecreditsideofthebalancesheetcolumn,thetwocolumnsequal$30,140. Youmaynoticethatdividendsareincludedinour10-columnworksheetbalancesheetcolumnseventhoughthisaccountisnotincludedonabalancesheet.Sowhyisitincludedhere?Thereisactuallyaverygoodreasonweputdividendsinthebalancesheetcolumns. Whenyouprepareabalancesheet,youmustfirsthavethemostupdatedretainedearningsbalance.Togetthatbalance,youtakethebeginningretainedearningsbalance+netincome–dividends.IfyoulookattheworksheetforPrintingPlus,youwillnoticethereisnoretainedearningsaccount.Thatisbecausetheyjuststartedbusinessthismonthandhavenobeginningretainedearningsbalance. Ifyoulookinthebalancesheetcolumns,wedohavethenew,up-to-dateretainedearnings,butitisspreadoutthroughtwonumbers.Youhavethedividendsbalanceof$100andnetincomeof$4,665.Ifyoucombinethesetwoindividualnumbers($4,665–$100),youwillhaveyourupdatedretainedearningsbalanceof$4,565,asseenonthestatementofretainedearnings. Youwillnotseeasimilaritybetweenthe10-columnworksheetandthebalancesheet,becausethe10-columnworksheetiscategorizingallaccountsbythetypeofbalancetheyhave,debitorcredit.Thisleadstoafinalbalanceof$30,140. Thebalancesheetisclassifyingtheaccountsbytypeofaccounts,assetsandcontraassets,liabilities,andequity.Thisleadstoafinalbalanceof$29,965.Eventhoughtheyarethesamenumbersintheaccounts,thetotalsontheworksheetandthetotalsonthebalancesheetwillbedifferentbecauseofthedifferentpresentationmethods. Publiclytradedcompaniesreleasetheirfinancialstatementsquarterlyforopenviewingbythegeneralpublic,whichcanusuallybeviewedontheirwebsites.OnesuchcompanyisAlphabet,Inc.(tradenameGoogle).TakealookatAlphabet’squarterendedMarch31,2018,financialstatementsfromtheSECForm10-Q. Frank’sNetIncomeandLoss Whatamountofnetincome/lossdoesFrankhave? Solution InCompletingtheAccountingCycle,wecontinueourdiscussionoftheaccountingcycle,completingthelaststepsofjournalizingandpostingclosingentriesandpreparingapost-closingtrialbalance. KeyConceptsandSummary IncomeStatement:Theincomestatementshowsthenetincomeorlossasaresultofrevenueandexpenseactivitiesoccurringinaperiod. StatementofRetainedEarnings:Thestatementofretainedearningsshowstheeffectsofnetincome(loss)anddividendsontheearningsthecompanymaintains. BalanceSheet:Thebalancesheetvisuallyrepresentstheaccountingequation,showingthatassetsbalancewithliabilitiesandequity. 10-columnworksheet:The10-columnworksheetorganizesdatafromthetrialbalanceallthewaythroughthefinancialstatements. MultipleChoice (Figure)OnwhichfinancialstatementwouldtheSuppliesaccountappear? BalanceSheet IncomeStatement RetainedEarningsStatement StatementofCashFlows (Figure)OnwhichfinancialstatementwouldtheDividendsaccountappear? BalanceSheet IncomeStatement RetainedEarningsStatement StatementofCashFlows C (Figure)OnwhichfinancialstatementwouldtheAccumulatedDepreciationaccountappear? BalanceSheet IncomeStatement RetainedEarningsStatement StatementofCashFlows (Figure)OnwhichtwofinancialstatementswouldtheRetainedEarningsaccountappear? BalanceSheet IncomeStatement RetainedEarningsStatement StatementofCashFlows AandC Questions (Figure)Indicateonwhichfinancialstatementthefollowingaccounts(fromtheadjustedtrialbalance)wouldappear:(A)SalesRevenue;(B)UnearnedRentRevenue;(C)PrepaidAdvertising;(D)AdvertisingExpense;(E)Dividends;(F)Cash. (A)IncomeStatement;(B)BalanceSheet;(C)BalanceSheet;(D)IncomeStatement;(E)RetainedEarningsStatement;(F)BalanceSheet ExerciseSetA (Figure)FromthefollowingCompanyAadjustedtrialbalance,preparesimplefinancialstatements,asfollows: IncomeStatement RetainedEarningsStatement BalanceSheet ExerciseSetB (Figure)FromthefollowingCompanyBadjustedtrialbalance,preparesimplefinancialstatements,asfollows: IncomeStatement RetainedEarningsStatement BalanceSheet ProblemSetA (Figure)UsingthefollowingCompanyWinformation,prepareaRetainedEarningsStatement. RetainedearningsbalanceJanuary1,2019,$43,500 Netincomeforyear2019,$55,289 Dividendsdeclaredandpaidforyear2019,$18,000 (Figure)FromthefollowingCompanyYadjustedtrialbalance,preparesimplefinancialstatements,asfollows: IncomeStatement RetainedEarningsStatement BalanceSheet ProblemSetB (Figure)UsingthefollowingCompanyXinformation,prepareaRetainedEarningsStatement: RetainedearningsbalanceJanuary1,2019,$121,500 Netincomeforyear2019,$145,800 Dividendsdeclaredandpaidforyear2019,$53,000 (Figure)FromthefollowingCompanyZadjustedtrialbalance,preparesimplefinancialstatements,asfollows: IncomeStatement RetainedEarningsStatement BalanceSheet ThoughtProvokers (Figure)SearchtheSECwebsite(https://www.sec.gov/edgar/searchedgar/companysearch.html)andlocatethelatestForm10-Kforacompanyyouwouldliketoanalyze.Submitashortmemo: Statethenameandtickersymbolofthecompanyyouhavechosen. Reviewthecompany’send-of-periodBalanceSheet,IncomeStatement,andStatementofRetainedEarnings. Reconstructanadjustedtrialbalanceforthecompany,fromtheinformationpresentedinthethreespecifiedfinancialstatements. Providetheweblinktothecompany’sForm10-K,toallowaccurateverificationofyouranswers. Footnotes 1JamesJaillet.“CeladonunderCriminalInvestigationoverFinancialStatements.”CommercialCarrierJournal.July25,2018.https://www.ccjdigital.com/200520-2/ Glossary 10-columnworksheet all-in-onespreadsheetshowingthetransitionofaccountinformationfromthetrialbalancethroughthefinancialstatements Previous:UsetheLedgerBalancestoPrepareanAdjustedTrialBalance Next:WhyItMatters Backtotop License PrinciplesofAccounting,Volume1:FinancialAccountingbyOSCRiceUniversityislicensedunderaCreativeCommonsAttribution-NonCommercial-ShareAlike4.0InternationalLicense,exceptwhereotherwisenoted. ShareThisBook ShareonTwitter