Ch 6 - WS and FS Presentation

Chapter 6 Financial Statements

Prepared by: Ma. Rona Corda-Prado, CPA

University of St. La Salle

Chapter 6-1 Prepared by: RC Prado

After studying this chapter, you should be able to:

Prepare a work sheet.

Describe the nature and purpose of an adjusted trial balance.

Prepare financial statements.

Chapter Objectives

A work sheet is a multiple-column form that may be used in the adjustment process and in preparing financial statements.

It is a working tool or a supplementary device for the accountant and not a permanent accounting record.

Use of a work sheet should make the preparation of adjusting entries and financial statements easier.

It is not a substitute for financial statements.


Worksheet

The use of a work sheet is optional.

When one is used, financial statements are prepared from the worksheet.

Adjustments are journalized and posted from the work sheet after financial statements are prepared.

Worksheet

Benefits of a Worksheet

Aids the

preparation of

financial

statements.

Reduces

possibility of

errors.

Links

accounts and

their

adjustments.

Assists in

planning and

organizing an

audit.

Helps in

preparing

interim financial

statements.

Shows the

effects of

proposed

transactions.

Not a

required

report.


1. Prepare an unadjusted trial balance on the worksheet.

2. Enter the adjustments in the adjustments columns

3. Enter adjusted balances in the adjusted trial balance columns

4. Extend adjusted trial balance amounts to appropriate financial statement columns

5. Total the statement columns, compute net income (loss), and complete the worksheet

Steps in Preparing a Worksheet

Worksheet Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Balance SheetTrial Balance Adjustments Adjusted Trial Balance Income StatementAccount

Numbers and

Titles

1. Prepare

unadjusted

trial balance

on the

worksheet.

2. Enter

adjustment

data.

3. Enter

adjusted

balances

4. Extend adjusted

balance to appropriate

columns.

5. Calculate income/loss

and complete the

worksheet.


PIONEER ADVERTISING AGENCY

Work Sheet

For the Month Ended October 31, 2002

Adjusted

Trial Balance Adjustments Trial Balance

Account Titles Dr. Cr. Dr. Cr. Dr. Cr.

Cash

Advertising Supplies

Prepaid Insurance

Office Equipment

Notes Payable

Accounts Payable

Unearned Fees

C.R. Byrd, Capital

C.R. Byrd, Drawing

Fees Earned

Salaries Expense

Rent Expense

Totals

Advertising Supplies Expense

Insurance Expense

Accum. Depr. — Office Equip.

Depreciation Expense

Interest Expense

Accounts Receivable

Interest Payable

Salaries Payable

Totals

15,200 2,500 600 5,000 5,000 2,500 1,200 10,000 500 10,000 4,000 900

28,700 28,700

Step1: Prepare an Unadjusted Trial Balance



Work Sheet


Adjusted



Cash 15,200

Advertising Supplies 2,500

Prepaid Insurance 600

Office Equipment 5,000

Notes Payable 5,000

Accounts Payable 2,500

Unearned Fees 1,200

C.R. Byrd, Capital 10,000

C.R. Byrd, Drawing 500

Fees Earned 10,000

Salaries Expense 4,000

Rent Expense 900

Totals 28,700 28,700

Advertising Supplies Expense

Insurance Expense

Accum. Depr. — Office Equip.

Depreciation Expense

Interest Expense

Accounts Receivable

Interest Payable

Salaries Payable

Totals 3,440 3,440

a 1,500 b 50

d 400

d 400 e 200

g 1,200

a 1,500 b 50 c 40 c 40 f 50 e 200 f 50 g 1,200

Step 2: Enter the Adjustments.



Work Sheet


Adjusted



Cash 15,200

Advertising Supplies 2,500 a 1,500

Prepaid Insurance 600 b 50


Notes Payable 5,000


Unearned Fees 1,200 d 400



Fees Earned 10,000 d 400

e 200

Salaries Expense 4,000 g 1,200

Rent Expense 900

Totals 28,700 28,700

Advertising Supplies Expense a 1,500

Insurance Expense b 50

Accum. Depr. — Office Equip. c 40

Depreciation Expense c 40

Interest Expense f 50

Accounts Receivable e 200

Interest Payable f 50

Salaries Payable g 1,200

Totals 3,440 3,440 30,190 30,190

15,200 1,000 550 5,000 5,000 2,500 800 10,000 500 10,600 5,200 900

1,500 50 40 40 50 200 50 1,200

Step 3: Enter Adjusted Balances.



Work Sheet


Adjusted Income

Trial Balance Statement Balance Sheet


Cash 15,200




Notes Payable 5,000


Unearned Fees 800



Fees Earned 10,600

Salaries Expense 5,200

Rent Expense 900

Advertising Supplies Expense 1,500

Insurance Expense 50

Accum. Depr. — Office Equip. 40

Depreciation Expense 40

Interest Expense 50

Accounts Receivable 200

Interest Payable 50

Salaries Payable 1,200

Totals 30,190 30,190 7,740 10,600 22,450 19,590

Net Income 2,860 2,860

Totals 10,600 10,600 22,450 22,450

10,600 5,200 900 1,500 50

40 50

Step 4: Extend Adjusted Balances to Income Statement


PIONEER ADVERTISING AGENCY Work Sheet For the Month Ended October 31, 2002

Adjusted Income

Trial Balance Statement Balance Sheet


Cash 15,200




Notes Payable 5,000


Unearned Fees 800



Fees Earned 10,600 10,600

Salaries Expense 5,200 5,200

Rent Expense 900 900

Advertising Supplies Expense 1,500 1,500

Insurance Expense 50 50

Accum. Depr. — Office Equip. 40

Depreciation Expense 40 40

Interest Expense 50 50

Accounts Receivable 200

Interest Payable 50

Salaries Payable 1,200

Totals 30,190 30,190 7,740 10,600 22,450 19,590

Net Income 2,860 2,860

Totals 10,600 10,600 22,450 22,450

15,200 1,000 550 5,000

5,000 2,500 800 10,000 500

40

200

50 1,200

Step 4: Extend Adjusted Balances to Balance Sheet


Dr. Cr. Dr. Cr. Dr. Cr.

Cash 4,350

Accounts receivable -

Supplies 9,720

Prepaid insurance 2,400

Equipment 26,000

Accum. depr. - Equip. -

Accounts payable 6,200

Salaries payable -

Unearned consulting revenue 3,000

C. Taylor, Capital 30,000

C. Taylor, Withdrawals 200

Consulting revenue 5,800

Rental revenue 300

Depr. expense -

Salaries expense 1,400

Insurance expense -

Rent expense 1,000

Supplies expense -

Utilities expense 230

Totals 45,300 45,300

Adjusted

Trial BalanceAdjustments

Unadjusted

Trial Balance

FastForward Work Sheet

For Month Ended December 31, 2007

First, enter

the

unadjusted

amounts to

the

worksheet.


Lecture 4-14 Prepared by: RC Prado


Cash 4,350

Accounts receivable - f 1,800

Supplies 9,720 b 1,050

Prepaid insurance 2,400 a 100

Equipment 26,000

Accum. depr. - Equip. - c 375


Salaries payable - e 210

Unearned consulting revenue 3,000 d 250

C. Taylor, Capital 30,000

C. Taylor, Withdrawals 200

Consulting revenue 5,800 d 250

f 1,800

Rental revenue 300

Depr. expense - c 375

Salaries expense 1,400 e 210

Insurance expense - a 100

Rent expense 1,000

Supplies expense - b 1,050


Totals 45,300 45,300 3,785 3,785

Adjusted


Unadjusted

Trial Balance

Next, enter the

adjustments.




Cash 4,350 4,350

Accounts receivable - f 1,800 1,800

Supplies 9,720 b 1,050 8,670

Prepaid insurance 2,400 a 100 2,300

Equipment 26,000 26,000

Accum. depr. - Equip. - c 375 375

Accounts payable 6,200 6,200

Salaries payable - e 210 210

Unearned consulting revenue 3,000 d 250 2,750

C. Taylor, Capital 30,000 - 30,000

C. Taylor, Withdrawals 200 200

Consulting revenue 5,800 d 250 7,850

f 1,800

Rental revenue 300 300

Depr. expense - c 375 375

Salaries expense 1,400 e 210 1,610

Insurance expense - a 100 100

Rent expense 1,000 1,000

Supplies expense - b 1,050 1,050

Utilities expense 230 230

Totals 45,300 45,300 3,785 3,785 47,685 47,685

Adjusted


Unadjusted

Trial Balance

Prepare

adjusted trial

balance.







Extend adjusted trial balance

amounts to financial statements.


Cash 4,350 4,350

Accounts receivable 1,800 1,800

Supplies 8,670 8,670

Prepaid insurance 2,300 2,300

Equipment 26,000 26,000

Accum. depr. - Equip. 375 375


Salaries payable 210 210

Unearned consulting revenue 2,750 2,750

C. Taylor, Capital 30,000 30,000


Consulting revenue 7,850 7,850


Depr. expense 375 375

Salaries expense 1,610 1,610

Insurance expense 100 100


Supplies expense 1,050 1,050


Totals 47,685 47,685 4,365 8,150 43,320 39,535

Balance Sheet &

Statement of EquityStatement

Adjusted

Trial Balance

Income



Cash 4,350 4,350

Accounts receivable 1,800 1,800

Supplies 8,670 8,670

Prepaid insurance 2,300 2,300

Equipment 26,000 26,000

Accum. depr. - Equip. 375 375


Salaries payable 210 210

Unearned consulting revenue 2,750 2,750

C. Taylor, Capital 30,000 30,000


Consulting revenue 7,850 7,850


Depr. expense 375 375

Salaries expense 1,610 1,610

Insurance expense 100 100


Supplies expense 1,050 1,050


Totals 47,685 47,685 4,365 8,150 43,320 39,535

Net income 3,785 3,785

8,150 8,150 43,320 43,320

Balance Sheet &

Statement of EquityStatement

Adjusted

Trial Balance

Income

Total statement columns, compute income or loss, and

balance columns.



Adjusted Trial Balance

The adjusting process starts with the unadjusted trial balance.

Adjusting entries are made at the end of the accounting period and then an adjusted trial balance is prepared.

The adjusted trial balance serves as the basis for the preparation of the financial statements.

Its purpose is to prove the equality of debit balances and credit balances in the ledger.


Chapter 6-19

Which of the following statements is incorrect concerning the adjusted trial balance?

a) An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.

b) The adjusted trial balance provides the primary basis for the preparation of financial statements.

c) The adjusted trial balance lists the account balances segregated by assets and liabilities.

d) The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.

The Adjusted Trial Balance

Prepared by: RC Prado

Accounting reports, called

financial statements,

provide summarized

information to the owner.


Purpose of Financial Statements

Financial statements are the means by which information accumulated and processed in financial accounting is periodically communicated to the users

Purpose (per PAS No. 1): To provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions


Components of Financial Statements

Statement of Financial Position

(Balance Sheet) - A list of the assets,

liabilities, and owner’s equity as of a

specific date.

Statement of Comprehensive Income

(Income Statement) - A summary of the

revenue and expenses for a specific

period of time.

Statement of Changes in Equity - A

summary of the changes in the owner’s

equity that have occurred during a

specific period of time.


Statement of cash flows - A

summary of the cash receipts and

disbursements for a specific

period of time.

Notes - Summary of significant

accounting policies and other

explanatory notes (i.e.

Disaggregation of items

presented in the statements)

Components of Financial Statements


Financial statements shall be presented at least

annually.

If reports are presented for a period longer or shorter

than one year, the entity shall disclose:

Period covered by the financial statements

Reason for using a longer or shorter period

Timing of Financial Statements


Statement of Comprehensive Income

Two statements – Income statement showing the components of income and

expenses that are recognized in profit and loss

– Statement of comprehensive income beginning with net income or loss as shown in the income statement plus or minus the components of other comprehensive income

Single statement - showing all components of net income or loss and all components of other comprehensive income.

– Combined income statement and statement of comprehensive income


FastForward

Income Statement

For the Month Ended December 31, 2007

Revenues:

Consulting revenue 7,850$

Rental revenue 300

Operating expenses:

Depr. expense - Equip. 375$


Insurance expense 100

Rent expense 1,000

Supplies expense 1,050


Total expenses 4,365

Net income 3,785$

Dr. Cr.

Cash 3,950$

Accounts receivable 1,800

Supplies 8,670


Equipment 26,000

Accum. depr. - Equip. 375$


Salaries payable 210

Unearned revenue 2,750

Capital 30,000

Withdrawals 600


Rental revenue 300

Depr. expense 375



Rent expense 1,000



Totals 47,685$ 47,685$

Adjusted

December 31, 2007

Trial Balance

Income Statement

Equity

Sole Proprietorship - Owner’s Capital

Partnership - Partners’ Capital

Corporation - Shareholders’ Equity


Owner’s

withdrawals

Expenses

Decreased by

Owner’s Equity

Effects of Transactions on Owner’s

Equity

Increased by

Owner’s

investments

Revenues

Net

income or

loss Chapter 6-28

Prepared by: RC Prado

Statement of Changes

in Owner’s Equity

Note: Net Income from the Income

Statement carries to the Statement of

Changes in Owner’s Equity.

FastForward

Income Statement


Revenues:

Consulting revenue 7,850$

Rental revenue 300

Operating expenses:

Depr. expense - Equip. 375$



Rent expense 1,000



Total expenses 4,365

Net income 3,785$

FastForward

Statement of Changes in Owner's Equity


C. Taylor, Capital 12/1/07 $ -0-

Add: Net income 3,785$

Investment by owner 30,000 33,785

Total 33,785

Less: Withdrawal by owner 600

C. Taylor, Capital 12/31/07 33,185$

Dr. Cr.

Cash 3,950$


Supplies 8,670


Equipment 26,000





Capital 30,000

Withdrawals 600


Rental revenue 300

Depr. expense 375



Rent expense 1,000



Totals 47,685$ 47,685$

Adjusted

December 31, 2007

Trial Balance

Statement of Financial Position

Statement that reports a company’s financial position as at the end of the period

Formal statement that shows the three elements comprising financial position namely assets, liabilities, and equity at a point in time

Provides information useful for assessing future cashflows, liquidity, financial flexibility and solvency.

Also called the balance sheet


Liquidity

Period of time before an asset is converted to cash

Availability of cash in the near future after taking account of the financial commitments over this period


Financial Flexibility

Ability of the company to alter cash flows in order to take advantage of unexpected investment opportunities and needs

Includes the ability to raise new capital or get into unused lines of credit


Long-Term Solvency

Riskiness of a company with regard to the amount of liabilities in its capital structure

Ability to pay long term debts as they come due

Risk to an investor increases as the percentage of liabilities relative to equity increase


When the balance sheet

displays the liabilities and

owner’s equity below the

assets, the report form is being

used.


When the balance sheet

displays the liabilities and

owner’s equity to the right of

assets, the account form is

being used.


Current Assets Presentation

Usually listed in the decreasing order of liquidity – Cash and cash equivalents

– Financial assets, such as trading securities, available for sale securities and other marketable instruments

– Trade and other receivables

– Inventories

– Prepaid Expenses


Non Current Assets

An entity shall classify all other assets not classified as current as noncurrent

Includes the following: – Property, plant and equipment

– Long-term investments

– Intangible assets

– Other noncurrent assets


Liabilities

Liabilities are generally classified and presented based in time of maturity such that obligations which are currently due are listed first


FastForward

Balance Sheet

12/31/07

Assets

Cash 3,950$

Accounts Receivable 1,800

Supplies 8,670

Prepaid Insurance 2,300

Equipment 26,000$

Accumulated Depreciation 375 25,625

Total assets 42,345$

Liabilities


Salaries Payable 210

Unearned Revenue 2,750

Total Liabilities 9,160

Equity

C Taylor, Capital 33,185

Total liabilities and Equity 42,345$

Balance Sheet

FastForward

Statement of Changes in Owner's Equity


C. Taylor, Capital 12/1/07 $ -0-

Add: Net income 3,785$

Investment by owner 30,000 33,785

Total 33,785

Less: Withdrawal by owner 600

C. Taylor, Capital 12/31/07 33,185$

Dr. Cr.

Cash 3,950$


Supplies 8,670


Equipment 26,000





Capital 30,000

Withdrawals 600


Rental revenue 300

Depr. expense 375



Rent expense 1,000



Totals 47,685$ 47,685$

Adjusted

December 31, 2007

Trial Balance

Statement of Cash Flows

Provides information about

the cash receipts and cash

payments of an entity during

the period;

Shows the net increase or

decrease in cash during the

period and the cash balance

at the end of the period;

Helps project the future net

cash flows of an entity


Elements of Statement of Cash Flows

Cash Flows from Operating Activities - Reports a

summary of cash receipts (inflows) and cash payments

(outflows) from operations.

Cash Flows from Investing Activities - Cash

transactions for the acquisition and sale of relatively

permanent assets as well as from lending money and

collection on loans.

Cash Flows from Financing Activities - Reports the

cash transactions related to cash investments by the

owner, borrowings, and cash withdrawals by the owner.

Chapter 6-41

Cash from Operating Activities

Cash Inflows

Receipts from sale of goods and performance of services

Receipts from other revenues (royalties, commissions, etc)

Cash Outflows

• Payments to suppliers of goods and services

• Payments to employees

• Payments for taxes

• Payments for interest expense

• Payments for other operating expenses


Direct Method

Entity’s net cash provided by (used in) operating activities is obtained by adding the individual operating cash inflows then subtracting the individual operating cash outflows

Preferred method


Indirect Method

Derives net cash provided by (used in) operating activities by adjusting profit for income and expenses not resulting from cash transactions

The adjustment begins with net income followed by addition of expenses and charges that did not involve cash payments (i.e depreciation)


Cash from Investing Activities

Cash Inflows

• Receipts from sale of property and equipment

• Receipts from sale of investments in debt or equity securities

• Receipts from collections on notes receivable

Cash Outflows

• Payments to acquire property and equipment

• Payments to acquire debt or equity securities

• Payments to make loans to others generally in the form of notes receivable


Cash from Financing Activities

Cash Inflows

Receipts from investments by owners

Receipts from issuance of notes payable

Cash Outflows

Payments to owners in the form of withdrawals

Payments to settle notes payable


Notes to Financial Statements

Used to report information that does not fit into the body of the statements in order to enhance the understandability of the statements

Notes contain information in addition to that presented in the statement of financial position, comprehensive income, statement of changes in equity and statement of cash flows

Provides narrative description or

Disaggregation of items presented in the financial statements and information about items that do not qualify for recognition


Notes to the Income Statement

End of the Chapter

Documents

Ch 6 - WS and FS Presentation