Prepare Financial Statements

Preparing Financial Statements is the process of summarizing financial information about a

business in order to provide the users and other interested parties with useful information
that may impact their economic decision-making.
Financial statements are prepared periodically and presented in a manner and form which is
easy to understand. There are four basic types:-
 Income Statement (Statement of Performance)
 Capital Statement (Statement of Equity)
 Balance Sheet (Statement of Financial Position)
 Statement of Cash Flows

Take note that most of the amounts recorded on the financial statements (except
Statement of Cash Flows) are derived from the Trial Balance.

The 4 Basic Types of Financial Statements

 Income Statement (Statement of Performance) – is the financial statement that
summarizes the performance or operating results of a business for a specific period of
time, usually a month, a quarter, or a year. It is also called Statement of Profit and Loss,
because it shows the profit or loss of a business at the end of an accounting period.
The components of an income statement are the revenue and the expenses for the
period and expressed in the formula:-
Total Revenue – Total Expenses = Net Income / Net Loss
- If Revenue is larger than Expense, the result is a Net Income (or Net Profit).
- If Expense is larger than Revenue, the result is a Net Loss.
There are 2 formats of Income Statement:-
 Single-Step Form – a form of income statement usually prepared for a service-
oriented business. This format basically has two sections, and consists of the total
revenue on the first section followed by the operating expense on the second
section.
 Multiple-Step Form – a form of income statement usually prepared for a
merchandising business or manufacturing business. This format has three sections,
and consists of the total revenue on the first section, subtracted by the cost of goods
sold on the second section to get the gross profit, then subtracted again by the
operating expense on the third section to get the net profit/net loss.
The major components of an Income Statement are:-
 Heading – contains the name of company, title of statement, and the period covered
by the statement.
 Revenue section – contains the type of revenues earned by the business.
 Expense section – contains the type of expenses incurred by the business.
 Net Income/Net Loss – contains the final calculation of a profit or loss, or the
difference between the total revenue and the total expense.

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 Guidelines in preparing the Income Statement:-
1. Place the heading at the center of the statement.
2. Visualize the form to have three imaginary columns:-
a. The left column for the item names/account titles.
b. The center column for the individual amounts.
c. The right column for the sum of the individual amounts.
3. Leave one line space after the heading and list the revenue account/s left aligned
on the next line/s.
- If there is only one revenue account, place the amount directly on the outer
column.
- If there are two or more revenue accounts, place the individual amounts on
the center column, add them up and put the sum on the outer column of the
same line as the last revenue account.
4. Next, write down “Operating Expenses” on the next line.
5. List all the expense accounts sequentially on the succeeding lines with approx. half
inch indention.
6. Place all individual expense amounts on the center column, add them up and place
the sum on the outer column of the same line as the last expense account.
7. Put a peso sign on the first amount in every money column.
8. Double-rule the final Net Income or Net Loss.

Sample Format of Income Statement (Single Step Form)

Sampol Enterprises
Statement of Performance
For the month ended April 30, 20xx

Service Income PhP 20,500

Less: Operating Expenses
Salaries Expense PhP 4,000
Utilities Expense 975 4,975
Net Income PhP 15,525

 Capital Statement (Statement of Equity) – is the financial statement that summarizes all
the changes in owner's equity or capital that occurred during a specific period, usually a
month, a quarter, or a year.
The capital statement serves as the bridge between the income statement and balance
sheet. It contains the beginning capital on the first line, subtracted by the amount of
drawings on the second line to get the net capital, then add or subtract the net income
or net loss as derived from the income statement to determine the Owner's Capital
balance (or Ending Capital) for the period.

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The major components of a Capital Statement are:-
 Heading – contains the name of company, title of statement, and the period
covered by the statement.
 Beginning Capital – contains the capital balance at the beginning of the period.
 Drawings – contains the owner’s total drawings.
 Net Income/Net Loss – contains the final calculation of profit or loss as derived
from the income statement.
 Capital Balance (Ending Capital) – contains the final calculation of the capital
balance at the end of the period.
Guidelines in preparing Capital Statement:-
1. Place the heading at the center of the statement.
2. Visualize the form to have two imaginary columns:-
a. The left column for the item names/account titles.
b. The right column for the amounts.
3. Leave one line space after the heading and write down “Beginning Capital” left
aligned on the next line. Place the amount of the beginning capital on the right
column
4. Write down “Less:” on the next line and list the Drawing account. Place the
amount of the account on the outer column.
5. Write down “Net Capital” on the next line and write the difference of the two
amounts on the right column.
6. Write down “Add: Net Income” or “Less: Net Loss” (as the case may be) on the
next line and write the corresponding amount, as derived from the Income
Statement, on the outer column.
7. List down the capital account (with the ending period) on the next line, compute
the ending capital amount, and write it down on the outer column.
8. Put a peso sign and double-rule the ending capital amount

Sample Format of Capital Statement

Sampol Enterprises
Statement of Equity
For the month ended April 30, 20xx

Beginning Capital PhP 20,000

Less: Sam, Drawing 5,000
Net Capital 15,000
Add: Net Income 15,525
Sam, Capital (April 30, 20xx) PhP 30,525

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 Balance Sheet (Statement of Financial Position) – is the financial statement that
summarizes the amount and nature of a business’ assets, liabilities, and equity (capital)
as of a specific point in time. This statement shows the current financial position or
condition of a business at the end of an accounting period.
In simple terms, the Balance Sheet shows what a company owns and what it owes at a
fixed point in time. As such, the Balance Sheet is the detailed representation of the
Accounting Equation, i.e., Assets = Liabilities + Owner’s Equity.
Henceforth, the Balance Sheet consists of two sections, the Assets Section which
contains all the assets accounts, and the Liabilities and Owner’s Equity section which
contains the liabilities accounts plus the ending capital for the period as derived from
the Capital Statement.
A balance sheet has two formats: Account Form and Report Form
 Report Form – lists Assets followed by Liabilities & Equity in a vertical arrangement.
 Account Form – is like a T-account listing Assets on the left side (debit side) and
Liabilities and Equity on the right side (credit side).
The major components of a Balance Sheet are:-
 Heading – contains the name of the company, title of statement, and the date of the
statement.
 Assets section – contains current asset and non-current asset accounts.
 Liabilities & Owner’s Equity section – contains the current and long-term liabilities
accounts and the ending capital for the period.
Guidelines in preparing Balance Sheet in report form:-
1. Place the heading at the center of the statement.
2. Visualize the form to have three imaginary columns:-
a. The left column for the item names/account titles.
b. The center column for the individual amounts.
c. The right column for the sum of the individual amounts.
3. Leave one line space after the heading and write down “Assets” on the next line and
indented about an inch from the left margin.
4. Write down “Current Assets” on the next line, left aligned on the margin.
5. List down all current assets on the succeeding lines indented about half-inch from
the margin. Write down their corresponding balances as derived from the Trial
Balance on the imaginary center column.
6. Get the sum of all the current asset amounts and write down the net total on the
outer column of the same line as the last current asset account.
7. Write down “Non-Current Assets” on the next line, left aligned on the margin.
8. Follow steps # 5 and #6 for non-current assets. In case there is only one non-current
asset, write down its amount directly on the outer column.
9. Write down “Total Assets” on the next line, get the sum of the total current assets
and total non-current assets and write it down on the outer column.
10. Leave one line space after the Assets section.
11. Write down “Liabilities and Owner’s Equity” on the next line, indented about an inch
from the left margin.

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 12. Write down “Current Liabilities” on the next line, left aligned on the margin.
13. List down all current liabilities on the succeeding lines indented about half-inch from
the margin. Write down their corresponding balances as derived from the Trial
Balance on the imaginary center column. In case there is only one current liability
account, write down its amount directly on the outer column.
14. Get the sum of all the current liabilities amounts and write down the total on the
outer column of the same line as the last current liabilities account.
15. Write down “Non-Current Liabilities” on the next line, left aligned on the margin.
16. Follow steps # 5 and #6 for non-current liabilities. If there is no non-current liabilities
account, ignore steps # 15 and # 16.
17. Write down “Equity” on the next line, left aligned on the margin
18. List down the owner’s capital account on the next line, indented about half an inch
from the left margin, and place the ending capital) as derived from the capital
statement) on the outer column.
19. Write down “Total Liabilities and Owner’s Equity” on the next line, left aligned on the
margin. Get the sum of the total liabilities and ending capital and write it down on
the outer column.
20. Place a peso sign on the first amount in each column and after every summation.
21. If the amounts of “Total Assets” and “Total Liabilities & Owner’s Equity” are balanced
or equal, put peso signs and double-rule both totals.

Sample Format of Balance Sheet (Report Form)

Sampol Enterprises
Statement of Financial Position
April 30, 20xx

ASSETS
Current Assets
Cash PhP 31,025
Accounts Receivable 5,000
Supplies 9,000 PhP 45,025
Non-current Assets
Office Equipment 25,000
Total Assets PhP 70,025

LIABILITIES & OWNER'S EQUITY

Current Liabilities
Accounts Payable 9,500
Notes Payable 30,000 39,500
Equity
Sam, Capital 30,525
Total Liabilities & Owner's Equity PhP 70,025

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 Statement of Cash Flows (or Cash Flows Statement) – is the financial statement that
shows the movement of money in and out of the business. It presents cash inflows
(receipts) and outflows (payments) in the three activities of business: operating,
investing, and financing.
1. Operating activities evaluates cash movements from the main operations of the
company such as rendering of professional services, sales of goods, collection of
accounts, purchases of merchandise and supplies, payment of accounts to suppliers,
and others. Generally speaking, operating activities refer to those activities that
involve current assets and current liabilities.
2. Investing activities reports movement of cash from purchases of fixed assets such as
property, plant and equipment. Selling these assets is also considered investing
activities. In general, investing activities include transactions that involve non-
current assets. This section may also be summed up as: "where the company puts its
money for long-term purposes".
3. Financing activities refer to cash flow trends of all money related to financing the
business, such as investment of the owner/s, and cash proceeds from bank loan,
owner’s drawing, payment of bank loans and other long-term payables. Generally,
financing activities include those that affect non-current liabilities and capital. This
section may also be summed up as: "where the company gets its funds".
4. All inflows are presented in positive figures while all outflows in negative (or
enclosed in parentheses).
5. After all inflows and outflows are presented, the net increase or decrease in cash is
computed. Then it is added to the beginning cash balance to get the ending cash for
the period. In simple sense, this report presents the cash balance before, the
changes to the balance, and the resulting balance thereafter.
6. To verify that the resulting cash balance at the end is correct, it should be the same
amount as the cash balance presented on the Trial Balance or the Balance Sheet.
7. Take note that the amounts to be recorded in this financial statement will have to be
derived from the transactions, and NOT from the trial balance.
Guidelines in preparing Statement of Cash Flows:-
1. Place the heading at the center of the statement.
2. Visualize the form to have three imaginary columns:-
a. The left column for the item names/account titles.
b. The center column for the individual amounts.
c. The right column for the sum of the individual amounts.
3. Leave one line space after the heading and write down “Cash Flows from Operating
Activities” on the next line, left aligned on the margin.
4. List down the following items on the succeeding lines indented about half-inch from
the margin.
 Received from customers – cash directly received from customers at the time
the service was provided.
 Receivable collections – cash collected from customers thru accounts receivables
 Supplies bought – cash paid for the purchase of supplies
 Operating expenses – cash paid for general and administrative expenses.

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5. Write down their corresponding amounts on the imaginary center column.
6. Get the sum of all the amounts and write down the net cash flows on the outer
column of the same line as the last item.
7. Leave a line space and write down “Cash Flows from Investing Activities” on the next
line, left aligned on the margin.
8. Follow steps #4, #5, & #6 but use the following items to identify the amounts (If
there is only one item, write down its amount directly on the right column):-
 Paid for fixed assets (separate line for every fixed asset) – cash paid for the
purchase of fixed assets.
 Proceeds from sale of fixed assets (separate line for every fixed asset) – cash
received from the sale of fixed assets.
9. Leave a line space and write down “Cash Flows from Financing Activities” on the next
line, left aligned on the margin.
10. Follow steps #4, #5, & #6 but use the following items to identify the amounts:-
 Investments – cash investments by the owner.
 Bank Loans – cash loan received from bank.
 Withdrawals – cash withdrawn by the owner.
 Payment for bank loans – cash paid for bank loans.
11. Write down “Net Increase/Decrease in Cash” on the next line and write the sum of
all the net cash flows on the outer column.
12. Write “Add: Cash, (beginning of the month)”, if there is any, and write the amount,
as derived from the Cash ledger, on the outer column.
13. Write “Cash, (ending of the month)”, get the sum of the “net increase/decrease in
cash” and the “beginning cash amount”, and write it down on the outer column.
14. If the ending cash is the same as the cash amount shown on the Trial Balance or the
Balance Sheet, place a peso sign and double-rule the amount.
Sample Format of Statement of Cash Flows
Sampol Enterprises
Statement of Cash Flows
For the month ended April 30, 20xx

Cash Flows from Operating Activities:

Received from customers PhP 12,500
Receivables collections 3,000
Supplies bought (9,000)
Operating expenses (4,975) PhP 1,525

Cash Flows from Investing Activities:

Paid for equipment (15,500)

Cash Flows from Financing Activities:

Investments 20,000
Bank loans 30,000
Withdrawals (5,000) 45,000
Net increase in cash PhP 31,025
Add: Cash, April 1, 20xx -
Cash, April 30, 20xx PhP 31,025