How To Prepare Your Business’ Financial Statements

Financial statement preparation is a crucial aspect of a company’s financial management, involving the recording and reporting of its financial transactions and activities. The accountant can, if so directed by management, create and issue just one financial statement (e.g., income statement). To fully understand the accounting cycle, it’s important to have a solid understanding of the basic accounting principles. You need to know about revenue recognition (when a company can record sales revenue), the matching principle (matching expenses to revenues), and the accrual principle. In ExxonMobil’s statement of changes in equity, the company also records activity for acquisitions, dispositions, amortization of stock-based awards, and other financial activity. This information is useful to analyze to determine how much money is being retained by the company for future growth as opposed to being distributed externally.

  • Investing activities include any sources and uses of cash from a company’s investments in the long-term future of the company.
  • Liabilities are debts you owe to other individuals, such as businesses, organizations, or agencies.
  • 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.
  • 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.
  • Retained earnings are the profits that the company has kept after paying out dividends.

Conduct a bank reconciliation, and create journal entries to record all adjustments required to match the accounting records to the bank statement. Net income is either retained by the firm for growth or paid out as dividends to how to write accounting policy and procedure the firm’s owners and investors, depending on the company’s dividend policy. The income statement also shows any revenue during the time period in question from assets, such as gains on sales of equipment or interest income.

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Cash generated from operations includes sales, collections on accounts receivable and other sources of income. Investing activities involve buying and selling investments, such as stocks and bonds. Financing activities involve taking out loans, issuing stock and repaying debt. The fundamental concepts above will enable you to construct an income statement, balance sheet, and cash flow statement, which are the most important steps in the accounting cycle. In other words, the concept financial reporting and the process of the accounting cycle are focused on providing external users with useful information in the form of financial statements. These statements are the end product of the accounting system in any company.

  • It is considered essential to the user’s understanding of such information.
  • Conduct an ending physical inventory count, or use an alternative method to estimate the ending inventory balance.
  • Expenses include the cost of goods sold (COGS), selling, general and administrative expenses (SG&A), depreciation or amortization, and research and development (R&D).
  • A third party may not know that an external accountant was involved in preparing the statements if the “no assurance is provided” legend is used and the firm’s name is not included.

Such assistance is often provided in an online bookkeeping software such as QuickBooks. Preparing general-purpose financial statements can be simple or complex depending on the size of the company. Some statements need footnote disclosures while other can be presented without any. Details like this generally depend on the purpose of the financial statements. The adjustments total of $2,415 balances in the debit and credit columns.

Draft Financial Statements

A balance sheet is like a photograph; it captures the financial position of a company at a particular point in time. As you study about the assets, liabilities, and stockholders’ equity contained in a balance sheet, you will understand why this financial statement provides information about the solvency of the business. To ensure that financial statements are prepared in the correct sequence, there are certain steps that should be taken. First, it’s important to use Generally Accepted Accounting Principles (GAAP) when preparing financial statements. GAAP is a set of guidelines and rules that help accountants maintain consistency when recording and reporting financial information.

Step 2 of 3

There is more technical information about how to prepare financial statements in the next section of my accounting course. 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. 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. You may notice that dividends are included in our 10-column worksheet balance sheet columns even though this account is not included on a balance sheet.

Ask Any Financial Question

The following video summarizes the four financial statements required by GAAP. Below is a portion of ExxonMobil Corporation’s cash flow statement for fiscal year 2021, reported as of Dec. 31, 2021. We can see the three areas of the cash flow statement and their results. Primary expenses are incurred during the process of earning revenue from the primary activity of the business. Expenses include the cost of goods sold (COGS), selling, general and administrative expenses (SG&A), depreciation or amortization, and research and development (R&D). Calculate depreciation expense and amortization expense for all fixed assets in the accounting records.

Order of Financial Statements

These principles provide a framework for financial statement preparation and ensure that financial statements are consistent, reliable, and comparable. This process ensures that all information is accurate, complete, and compliant with the relevant accounting standards. Once finalized, the financial statements are presented to the company’s management, board of directors, and other stakeholders. A cash flow statement reveals how much money is flowing into and out of the business. It includes the cash generated from operations, investing activities and financing activities.

The balance sheet reports a company’s financial health through its liquidity and solvency, while the income statement reports a company’s profitability. A statement of cash flow ties these two together by tracking sources and uses of cash. Together, financial statements communicate how a company is doing over time and against its competitors. Your balance sheet is a complete list of your assets, liabilities, and equity.

The statements are open to interpretation, and as a result, investors often draw vastly different conclusions about a company’s financial performance. The operating activities on the CFS include any sources and uses of cash from running the business and selling its products or services. Cash from operations includes any changes made in cash accounts receivable, depreciation, inventory, and accounts payable.


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