How to Prepare Financial Statements | Financial Accounting Course | CPA EXAM FAR ch 1 p 6

In this video, I explain how to prepare financial statements. Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. Financial statements include: Balance sheet

Hello and welcome to the session this is professor farhad in this session we would look at how to prepare financial statement this topic is covered in financial accounting basically an introductory course also the topics are covered on the cpa exam but this is very basic explanation of the topic as always i would like to remind you to connect with me only then

If you haven’t done so youtube is worried you would need to subscribe i have one thousand six hundred plus accounting auditing finance and tax lectures this is a list of all the courses that i covered including hundreds if not thousands of cpa questions on my website for had lectures calm you will have access to additional courses material powerpoint slides to

False multiple-choice and if you’re studying for your cpa exam two thousand plus cpa questions i strongly encourage you to check out my website so the first thing we’re gonna look at is the four major financial statements and all purposes that i’m gonna illustrate in an example how do we prepare each financial statement so the first statement we’re gonna look at

Is called the income statement what is the income statement simply put the income statement looks at your revenues minus your expenses so your revenues minus expenses it described the company’s revenues and expenses and compute net income or loss so if you have more revenues than expenses let’s assume you have ten thousand and revenues seven thousand in expenses

Then you have three thousand of net income because your revenues are greater but if you have ten thousand of revenues and twelve thousand of expenses then you have a net loss of two thousand simply put it tells you whether you are profitable or not for a particular period okay over a period of time period means not at point in time it’s for a period of time for

Example a month a year a quarter okay so this is what the income statement and obviously we’re gonna look at an income statement in a moment the second financial statement we’re gonna be looking at is called the statement of retained earnings and if you remember we talked about retained earnings and what did we say let’s go let’s go with this example if revenues

Were ten thousand expenses were seven the company made a profit or net income of three thousand now what can the company do do with this net income they can distribute some of it for example they can let’s do 50 50 they can distribute one thousand five hundred and dividend and they can keep the one thousand five hundred right so the amount that they keep is called

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Retained earnings the amount that you keep from your earnings is called retained earnings so the statement of retained earnings explained the changes and retained earnings so it’s gonna start with retained earnings and we’re gonna look at it look at it look at a look at an actual retained earning but basically it’s gonna start with retained earnings it’s gonna be

Beginning the eg beginning retained earnings plus net income minus dividend and that’s gonna give us ending retained earnings so this is the whole purpose of this statement of retained earnings that’s gonna explain to you what happened those are the changes the changes in retained earnings okay so that’s the purpose of retained earning and obviously we’re going

To look at an example the third financial statement is called the balance sheet a balance sheet and by the way retained earning also for a period of time just like the income statement the balance she described the company’s financial position it tells you how much assets you have liabilities and equity at a point and time point means one point one day a point

In time a point in time so what does what does the balance sheet shows us the balance sheet shows us the assets equal to liabilities plus equity that’s the balance sheet and those two should equal to each other now what is equity you’re gonna see that earnings as part of equity we’ll see that in an example we’re gonna look at a balance sheet the last financial

Statements which i don’t cover in financial accounting that’s called the statement of cash flows it identifies the cash inflows and the cash outflows if you are looking to learn about this statement you have to go to my intermediate accounting course specifically chapter 23 there’s a one whole chapter about this topic or google or youtube for hat statement of cash

Flows or for hat chapter 23 statement of cash flows okay so so to prepare the financial statements we’re going to be looking at these summaries of transaction that we prepared in the prior session and in the prior session what we did is we looked at all these transactions all of them okay we looked at all these friends actions and what we end up is with the ending

Balances of these accounts cash accounts receivable zero supplies equipment accounts payable common stock dividend revenues and expenses so we’re going to be looking at these ending balances and from these ending balances we will be preparing the financial statements what’s which statement do we prepare first first we’re gonna prepare the income statement so for

Every financial statement you’re gonna have three headings it’s gonna be name of the statement fast forward the name of the statement income statement and the date notice it’s a period of time so the the the income statement is for a period of time in this is for the month in that december 31st so it’s not a point in time it’s not any silver thirty-first it’s for

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Month in that it means it covers the whole month of the summer now what goes on the income statement well what goes on the income statements your revenues minus your expenses so first you have your revenues heading and on the revenues you could have one or more revenues in this example we have two revenues we have consulting revenue and we have rental revenue a

Total of six thousand one hundred six thousand one hundred now what did this would would these numbers came from well they came from here they came from the transactions and this is the this is the rental revenue and the consulting ravin okay so we have rental and consulting and this is what we did so all these numbers are coming from that from that exhibit in

Case you are wondering so this is our total revenue 6100 then we deduct our expenses that we have an expense heading then we have but before i proceed single underline means we are performing the computation so 550 300 plus 300 equal to 6100 then we have expenses then we indent a little one we have a list rent expense we have salaries expense those are those our two

Expenses then we add them up 1,000 plus 700 notice we add them up equal to 1700 now we’re going to take the difference between revenues and expenses and that’s gonna be net income so notice under net income the 4400 is double underlined to indicate this is the last number on the financial statement so this is the income statement what does that tell us it tells us

That during the month of december of 2019 we generated more revenues than expenses four thousand four hundred more revenues and expenses how so well the revenues were 6100 the expenses were seventeen hundred the difference is positive forty four hundred is that good of course is good we want to generate we want to generate positive net income we want to generate

More revenues than expenses so that’s the income statement in the in the real world sometimes this is called the p&l profit and loss statement then we’re going to look at the statement of retained earnings same thing the name the name of the company just like the income statement this is the name of the statement statement of retained earnings then the date the

Date is the same as the income statement it’s for a period of time for a period of time now how do we how do we prepare the statement of retained earnings the statement of retained earnings explained the changes in retained earnings what does it mean it’s means gonna look at the beginning and look at the end and tells you tells you what happened in between so the

Beginning was zero when we started this company we did not have any retained earnings it happens to be zero because the company was brand-new then we had income of 4,400 income increases retained earnings then we paid out dividend less dividend of 200 so they made a profit of 4400 and they only took a small amount out of the profit so the ending retained earnings

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Is four thousand two hundred and noticed this number is underlined to indicate this is the last number on this financial statement simply put we had no retained earnings now we have four thousand two hundred and retained earnings so this is the statement of retained earnings the third financial statement is the balance sheet and on the balance sheet we’re going

To have the name of the company the name of the statement balance sheet and the date now i want to make sure you understand that the date is for a point in time in contrast to the other two statement it’s important it’s only a point in time the balance sheet that’s going to show us our assets and our liabilities in equity so our assets are forty eight hundred nine

Thousand six hundred twenty six thousand total assets of forty forty thousand four hundred notice forty thousand four hundred is double underline in case you’re wondering where these numbers are coming from again it’s from the previous slide when i started so you list all your assets in order of liquidity later on we would look at a classified balance sheet then we

Look at our liabilities we only have one liability accounts payable then we look at our equity now our equity is composed of two things common stock is one what the investors put in the company and retained earning that’s coming from the statement of retained earnings then we have total equity of thirty thirty four thousand two hundred liabilities plus equity equal

To forty thousand four hundred assets equal to liabilities plus equity now notice we have to prepare those financial statement and order first the income statement then the statement of retained earning because it feeds into the statement of victor income statement feeds in the statement of retained earnings through the income statement then the balance sheet

Lost because we need the retained earning to complete the balance sheet so this is an in a nutshell how we prepare financial statement now in an intermediate accounting course you’re gonna have one whole chapter about the income statement one whole chapter about the balance sheet it’s gonna little b gonna be a little bit more involved if you have any questions

Any comments about this topic please let me know as always i would like to remind you to visit my website for additional resources especially if you are studying for your accounting courses or cpa exam invest in your career it’s it’s worth it it’s a lifetime investment study hard and good luck

Transcribed from video
How to Prepare Financial Statements | Financial Accounting Course | CPA EXAM FAR ch 1 p 6 By Farhat’s Accounting Lectures