1. Chapter 5 Topic 2: Preparing Financial Statements

2. Preparing the Income Statement
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

3. Preparing the Related Balance Sheet
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)
Remember the Rules: $
_____ and double underlines
Indents
Proper accounts
Correct Columns and Sub- Columns

4. 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.

5. 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

6. 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 the
balance 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.

7. 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.

8. 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 !!!!

9. 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)

10. 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).

11. 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.

14. Preparing Trial Balance Preparing Worksheet
Originating Data
Journalizing
Posting
Preparing Trial Balance
Preparing Worksheet
Preparing Financial Statements