module 1, preparing financial statements

What goes into the title of any financial statements?

Three line title:

1. Name of company

2. Name of financial statement

3. The date (For the Year or Month Ended Month day, year)

How should you organize a long list of numbers on a financial statement?

1. List on left, total on right

2. Last line (or important numbers such as total assets or total liabilities) of any statement should always be double underlined

How should you arrange an income statement?

1. Title

2. List revenues (with title “Revenues” above list)

3. List “Total Revenues” if necessary

4. List expenses (with title “Expenses” above list)

5. List “Total Expenses”

6. List Net Profit or Loss (total revenue - total expenses)

How should you arrange a statement of retained earnings?

1. Title

2. List Retained Earnings, date the fiscal year being reported started on

3. List “Add: Net profit / loss” (comes from income statement

4. Add the previous 2 together and put on next line (can name it subtotal)

5. List “Deduct: Dividends”

6. List “Retained Earnings, date of fiscal year end” (subtotal - dividends)

How should you arrange a balance sheet?

1. Title (date is different - only put “Month day, Year”

2. Put heading “Assets”

3. List current assets with title above list (most liquid to least liquid) in left column

4. List total current assets in right column

5. List L-T assets (sometimes called PPE) with title above list (most liquid to least liquid) in left column

6. List total L-T assets in right column

7. List total assets (C + L-T assets)

8. Put heading “Liabilities”

9. Repeat steps 3-7 for liabilities in the right side of the balance sheet or below assets

10. Put heading “Shareholders’ Equity

11. Usually only 2 accounts - common shares (paid in capital is a part of common shares) and R/E (R/E comes from statement of retained earnings end of fiscal year)

12. Add the 2 from previous step to get Total SE

13. List “Total Liabilities and SE” (add total liabilities to total SE)

What ratios go on the balance sheet?

1. Current ratio

2. Debt ratio

3. Equity ratio

Current ratio

CA / CL

Debt ratio

TL / TA

Equity ratio

TSE / TA

What is a good current ratio?

Typically above 1.5

What is a good debt ratio?

Smaller is generally better

What is a good equity ratio?

Higher is generally better, but too high can indicate underutilization of growth leverage