Chapter 5

Learning Objectives:
1. Describe the flow of accounting information from the unadjusted
trial balance into the adjusted trial balance and finally, into the income
statement and balance sheet columns of the worksheet.
2. Prepare accurately and in good form a ten-column worksheet.
3. Understand and appreciate the usefulness of financial statements.
4. Develop skills in the preparation of financial statements.
5. Explain how the financial statements are interrelated.

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 The Worksheet
• Helps accountants to transfer data from unadjusted trial balance to the financial
statements
• Simplifies the adjusting and closing process
• Can reveal errors
• Not part of the ledger or the journal, nor it is a financial statement.
• Summary device for the accountant’s convenience

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Preparing the Worksheet
Let’s use the following problem for illustration:

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 Preparing the Worksheet
Step 1: Enter the account balances in the unadjusted trial balance columns and total the amounts

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Preparing the Worksheet
Step 2: Enter the adjusting entries in the adjustments columns and total the amounts

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 Preparing the Worksheet
Step 3: Compute each account’s adjusted balance by combining the unadjusted trial balance and the adjusted figures. Enter the adjusted
amounts in the adjusted trial balance columns

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 Preparing the Worksheet
Step 5: Compute profit or loss as the difference between total revenues and total expenses in the income statement. Enter profit or loss as a
balancing amount in the income statement and in the balance sheet, and compute the final column totals

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ESSENCE OF FINANCIAL STATEMENTS

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

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COMPLETE SET OF FINANCIAL STATEMENTS

Per revised PAS No. 1,:

1. Statement of Financial Position
2. Statement of Financial Performance
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes to Financial Statements
6. Statement of Financial Position as at beg. of the
year when an entity applies an accounting policy
retrospectively.
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 Preparing the
Financial
Statements (Step 6)

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Statement of Financial Performance

Single statement of
comprehensive income

Two statements:
Profit or loss
Components of OCI

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Statement of Changes in Equity

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Statement of Financial Position

Report Format

Account Format

Assets Liabilities
Owner’s
Equity

Liquidity
Financial Flexibility
Solvency 14
 Statement of Cash Flows
Inflows and Outflows of Cash

Cash Flows from Cash Flows from Cash Flows from

Operating Investing Financing
Activities Activities Activities

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Direct method
Indirect method

Profit Pxx
Adjustments for:
Non-Cash Expenses (e.g. Depreciation) xx
Increases in Current Accounts (xx)
Decreases in Liability Accounts (xx)
Decreases in Current Accounts xx
Increases in Current Liability Accounts xx
Cash Flows from Operating Activities xx

Cash Inflows
 receipts from sale of goods and performance of services
 receipts from royalties, fees, commissions and other revenues
 
Cash Outflows
 payments to suppliers of goods and services
 payments to employees
 payments for taxes
 payments for interest expense
 payments for other operating expenses
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 Cash Flows from Investing Activities
◆ Investing activities include making and collecting loans; acquiring and disposing
◆ of investments in debt or equity securities; and obtaining and selling of property
and equipment and other productive assets.
 
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 Flows from Financing Activities
- Financing activities include obtaining resources from owners and creditors.
 
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

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 Relationships among the Financial Statements

Date of Beginning Date at End of

of Period Period

TIME

Statement of Statement of
Financial Position Financial Position
Income Statement
Statement of Cash Flows

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Credits

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 Timeline

Yellow is the color of

Blue is the colour of the Red is the colour of danger Black is the color of ebony gold, butter and ripe White is the color of milk Blue is the colour of the
clear sky and the deep sea and courage and of outer space lemons and fresh snow clear sky and the deep sea

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Yellow is the color of White is the color of milk Blue is the colour of the Red is the colour of danger Black is the color of ebony Yellow is the color of
gold, butter and ripe and fresh snow clear sky and the deep sea and courage and of outer space gold, butter and ripe
lemons lemons

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