Prepare a Financial Statements

Once the adjusting entries have
been made or entered into a
worksheet, the financial
statements can be prepared
using information from the
ledger accounts. Because some
of the financial statements use
data from the other statements,
the following is a logical order
for their preparation:
Income statement
Statement of retained earnings
Balance sheet
Cash flow statement
Income Statement
The income statement reports
revenues, expenses, and the
resulting net income. It is
prepared by transferring the
following ledger account
balances, taking into account any
adjusting entries that have been
or will be made:
Revenue
Expenses
Capital gains or losses
Statement of Retained
Earnings
The retained earnings statement
shows the retained earnings at
the beginning and end of the
accounting period. It is prepared
using the following information:
Beginning retained earnings,
obtained from the previous
statement of retained earnings.
Net income, obtained from the
income statement
Dividends paid during the
accounting period
Balance Sheet
The balance sheet reports the
assets, liabilities, and shareholder
equity of the company. It is
constructed using the following
information:
Balances of all asset accounts
such cash, accounts receivable,
etc.
Balances of all liability accounts
such as accounts payable, notes,
etc.
Capital stock balance
Retained earnings, obtained from
the statement of retained
earnings
Cash Flow Statement
The cash flow statement explains
the reasons for changes in the
cash balance, showing sources
and uses of cash in the
operating, financing, and
investing activities of the firm.
Because the cash flow statement
is a cash-basis report, it cannot
be derived directly from the
ledger account balances of an
accrual accounting system.
Rather, it is derived by converting
the accrual information to a
cash-basis using one of the
following two methods:
Direct method: cash flow
information is derived by directly
subtracting cash disbursements
from cash receipts.
Indirect method: cash flow
information is derived by adding
or subtracting non-cash items
from net income