Accounting Training

Chapter 12
Financial Statements

Copyright ©Jerry Belch 2015
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Accounting Terms in This Chapter
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Financial Forms
Income Statement
Cost of Merchandise Sold
Calculate COGS
Gross Profit
Net Profit
Retained Earnings
Balance Sheet


Income Statement

All of the accounting activities: journalizing, posting, trial balance and worksheet have one goal in mind, to report the financial progress and conditions of the business. Most businesses report their financial progress with three forms: income statement, statement of retained earnings, and a balance sheet.
We will be preparing three different financial statements: income statement, statement of retained earnings, and a balance sheet. If you click on the worksheet link and scroll down below the worksheet, you will see these partially completed forms. Your job in this lesson will be to complete these three financial statements. In the last chapter we prepared a worksheet with adjustments for Bromley's Formal Wear. That will make our job a lot easier to prepare financial statements. Remember that the worksheet contains income statement and balance sheet columns. These columns will be the basis for preparing our financial statements. Click on the link above for the worksheet to see the completed worksheet with adjustments that we prepared in the last lesson.

Income Statement

  • An income statement reports the revenue, cost of merchandise sold, the expenses of operating the business, and the net income.
  • Remember how the income statement works.
  • We start out with our sales, and then deduct any refunds from that amount to get net sales.
  • The next section is the cost of merchandise sold section.
  • In a merchandising business, this section is very important, since dealing with the inventory, purchases and cost of goods sold is critical to having an accurate income statement.
  • Service business do not have this section and the income statement is simply sales minus total expenses to arrive at the net income.
  • To calculate cost of goods sold, we start out with the beginning inventory.
  • Then we add any other purchases of merchandise to it to get total cost of merchandise available for sale.
  • From that number, we subtract the ending inventory to get cost of goods sold.
  • To determine gross profit, profit before operating expenses, we subtract cost of goods sold from sales.
  • The next section of the income statement lists all of our expenses, totals them and then subtracts the total expenses from the gross profit to determine net profit.
  • The formulas listed below will help you develop your income statement for Bromley's Formal Wear.

Look at the coordinates on the Income Statement, then enter the formula in that place to transfer the worksheet numbers over to the income statement.
Cell Coordinates and Formulas
Account NameCoordinateFormulas
Net SalesF60=H29-G30
Beginning InventoryD63=F13
Purchase Ret.D65=H33
Net PurchasesD66=D64-D65
Cost of Mdse AvailD67=F13+G32
Ending InventoryE68=E13
Cost of Goods SoldF69=D67-E68
Gross ProfitF70=F60-F69
Salary ExpenseD73=G34
Rent ExpenseD74=G35
Repairs ExpenseD75=G36
Advertising ExpenseD76=G37
Supplies ExpenseD77=G38
Depreciation ExpenseD78=G39
Insurance ExpenseD79=G40
Miscellaneous ExpenseD80=G41
Payroll TaxesD81=G42
Legal & AccountingD82=G43
Alteration ExpenseD84=G45
Interest ExpenseD85=G46
Delivery ExpenseD86=G47
Total ExpensesF87=sum(D73:D86)
Net IncomeF88=F70-F87

  • Formulas may differ slightly. They may come from a number of columns from the worksheet and still be correct.
  • Print this report for your instructor.
  • Now prepare an income statement for your own company and printout a copy for your instructor.

Statement of Retained Earnings
In addition to an income statement and balance sheet, most corporations issue a statement of retained earnings. Click on the worksheet link above and key the formulas in the correct cells to produce this report.
Cell Coordinates and Formulas
Account NameCell CoordinateFormula
Retained Earnings Beginning of YearD94=D27
Net IncomeD95=G50
Less DividendsD97
Retained Earnings End of YearD98=D27+G50-D97

  • Formulas may differ slightly.
  • They may come from a number of columns from the worksheet and still be correct.
  • Print out this report for your instructor.
  • Now prepare a statement of retained earnings for your own company and print out a copy for your instructor.

Balance Sheet

The owners of a business must make many management decisions. It is important for the owner so see the financial condition of the business at a given date. A report that shows this condition is a balance sheet. It summarizes asset, liabilities and stockholders' equity. The information to prepare the balance sheet comes from the balance sheet columns of the worksheet. Listed below is the information needed to prepare a balance sheet.
Cell Coordinates and Formulas
Accounts ReceivableC106=I5
Furniture & FixturesC107=I6
Accum Depreciation Furn & FixturesD108=J7
Office SuppliesC109=I8
Other AssetsC110=I9
Office EquipmentC111=I10
Acc Dep Office Equi.D112=J11
Prepaid InsuranceC113=I12
Mdse. InventoryC114=I13
Total AssetsC115=sum(C105:C114)-sum(D105:D114)
Notes PayableD118=J14
Accounts PayableD119=J15
Workers CompD120=J16
Federal Income TaxD121=J17
Sales TaxD126=J22
State Income TaxD128=J24
State Emp. TrainingD129=J25
Total LiabilitiesD130=sum(D118:D129)
Common StockD133=D26
Retained EarningsD134=G50
Total Stock EquityD135sum(D133:D134)
Total Liab + StockHolders' EquityD136=D130+D135

  • Formulas may differ slightly.
  • They may come from a number of columns from the worksheet and still be correct.
  • When finished make sure that the balance sheet is in balance.
  • Total assets less accumulated depreciation should equal total liabilities plus stockholders' equity.
  • Print out this report for your instructor.
  • Now complete a balance sheet for your own company and print out a copy for your instructor.