CHAPTER 5 TOPIC 2:

PREPARING FINANCIAL STATEMENTS

■ This section deals with preparing financial statements from a completed worksheet.

■ Preparing the Income Statement– First financial statement to be prepared is the income statement.– Transfer the revenue and expenses from the trial balance to the

income statement column.

■ Preparing the Related Balance Sheet– Prepared after the income statement– The data for the balance sheet are found in the columns headed

Balance Sheet on the worksheet.– A=L+OE– Two ways of creating a balance sheet: Account Form (the way

you have done it to date) and Report Form

Preparing the Related Balance Sheet■ Remember the Rules:

■ $

■ _____ and double underlines

■ Indents

■ Proper accounts

■ Correct Columns and Sub-Columns

■ Account Form: a balance sheet with assets on the left side, and the claims against them on the right.

■ Report Form: a balance sheet with assets, liabilities, and owner's equity arranged vertically.

■ Notes for Report Form:– Heading (who, what, when -

as at)– Body (A=L+OE are

reported vertically)

Classified Balance Sheet■Classified balance sheet:

– one in which assets and liabilities are reported under meaningful groups or classes.

■Assets may be put into as many as six classes, but only two are used in this semester. Current Assets and Fixed Assets.

■Liabilities may be put into as many as four classes, but only one class is used at the moment Current Liabilities.

Reporting Current Assets

■The meaning of current assets reflects the liquidity order of reporting assets - that assets are reported in the order of how easily they can be converted into cash.

■Current Assets: – assets which can be converted into cash within

one year of the balance sheet date. – Ex: cash, Canada Savings Bonds, Accounts

Receivable

Reporting Fixed Assets■ Are also known as long-lived assets, operational assets,

plant assets, or property, plant, and equipment. Less permanent in nature. They are kept in the business to assist in revenue-making activities for several years beyond thebalance sheet date.

■ Fixed Assets: – tangible, long-lived assets held for use within the firm

to support revenue-making activities for several years beyond the balance sheet date.

■ "at cost" - put there because of the GAAP called cost principle.

GAAP for Cost■ All assets purchased by a

business must be recorded as follows:

■ 1) The cost of all assets is the original purchase price. This price is known as the cost price or cost value.

■ 2) The original cost values of assets must be retained throughout the accounting.

■ Cost price (sometimes known as historical cost price): – The price originally agreed

upon by buyer and seller.

Reporting Current Liabilities

■ Liabilities, like assets, are reported on a balance sheet under groups or classes of accounts. A common group is current liabilities.

■ Current Liabilities: – debts owing which will fall due within one year of the

balance sheet.– Examples: Bank loan payable "on demand"; Accounts

payable; any amount payable to a creditor within the year (ex: current mortgage payable)

■ Page 177 !!!!

Notes:

■When the balance sheet is to be included in a published annual report, most Canadian businesses prefer to use the report form (vertical).

■Sub-columns (accounts receivable)

■Single line = calculation

■The final total = double underline

■Liability Section (current liabilities and long-term liabilities)

Mortgage (Long Term Liabilities)

■ Long-Term Liabilities: debts which, in the ordinary course of business, are not liquidated within one year of the balance sheet date.

■ Mortgage: – Is a pledge of property to a

creditor as security against a debt (the loan of money).

■ When you buy a house, you take out a mortgage/loan, however, if you don't pay the bank gets the house.

■ The mortgage is "secured by land and building" this means that the lender of the money will have a claim on the firm's land and building if the borrower fails to make payments.

■ Usually get 15, 20 or 25 year mortgages.

■ Interest rate - You will need to pay interest on the money you borrow (how the bank makes money).

Mortgage Continued■ Asset side

– fixed asset you will find the land and building (with a note saying it is secured) - pledged as securities.

■ Current portion of the long-term debt is reported under Current Liabilities. – The amount of the debt that is due within the year out of

current funds!

■ You will notice that the current portion of the mortgage payble is reported twice: under Current Liabilities as a current liability and also under Long Term Liabilities as a deduction form the original long-term debt

■ Long-Term Liabilities– shows the amount to be paid beyond a year form the balance

sheet date.

Originating Data

Journalizing

PostingPreparing

Trial Balance

Preparing Workshee

t

Preparing Financial Statemen

ts