In transferring accounts and amounts from the final trial balance, the preparer must remember to close the temporary accounts to the appropriate equity account, That is, whatever the net income or loss is, per the income statement, must be added to or subtracted from equity (in this case, the Retained Earnings account.) Failure to do this will result in a balance sheet that doesn’t balance. In fact, it will be out of balance by the net income or loss amount.
Financial Close and Reporting Berry Talbot Royer’s Seminar Series 14 The balance sheet is the second ‐ easiest financial statement to prepare. With the exception of the equity account to which net income (loss) was closed, it simply takes the final trial balance amounts for all balance sheet accounts and arranges them in the proper format. Notice in the example above that Retained Earnings is $5,049 more than what it shows on the final trial balance. This is the net income amount that has been closed to retained earnings. Accounting applications will be able to prepare this for you automatically. Just be sure to have all of your adjustments posted – otherwise the balance sheet will not be complete or accurate.
Financial Close and Reporting Berry Talbot Royer’s Seminar Series 15 The statement of cash flows is the most difficult statement to prepare. It requires management to: Identify non ‐ cash items in the income statement and understand their effects on net income Use the prior ‐ period balance sheet to determine how operating assets and liabilities have changed from the prior period to the current period Obtain and understand information about cash transactions occurring during the period that are not reported on the income statement Understand the difference between operating activities, investing activities, and financing activities The statement of cash flows describes how cash has changed from the prior period to the current period and segregates those changes among three activity categories: operating activities, investing activities, and financing activities. The end result – cash, end of year – should match the amount on the period ‐ end balance sheet. Most accounting applications are able to prepare a statement of cash flows for you automatically. However, there may be some “cash flow mappings” that are required for the application to categorize the cash transactions properly among operating, investing, and financing activities.
Financial Close and Reporting Berry Talbot Royer’s Seminar Series 16 Once all the other statements have been prepared, the statement of owners’ equity is relatively easy to prepare. The statement of changes in owners’ equity describes how the different components of equity have changed from the prior period to the current period. By contrast, the income statement describes how equity has changed only as a result of operating and non ‐ operating activities (revenue, expenses, and other revenue and expenses). The statement of owners’ equity, though, includes other changes to equity components – like proceeds from contributions to equity, payments of dividends, conversions of equity components (e.g., from preferred stock to common stock), and
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- Fall '17
- Berry Talbot Royer