Comprehensive Financial Statement Preparation
Statement Order
Arrange the following in the correct order
➛ Balance Sheet
➛ Income Statement
➛ Statement of Owner’s Equity
Correct order of preparation
1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
Identify the Source Statement
Where does each item come from?
Item
Net Income
Ending Capital
Cash Balance
Expenses
Net Income
Ending Capital
Cash Balance
Expenses
Source Statement
Income Statement
Statement of Owner’s Equity
Balance Sheet
Income Statement
Income Statement
Statement of Owner’s Equity
Balance Sheet
Income Statement
Mini Comprehensive Practice
The following information relates to Moonlight Services
Service Revenue
Expenses
Beginning Capital
Additional Investment
Drawings
Assets
Liabilities
Expenses
Beginning Capital
Additional Investment
Drawings
Assets
Liabilities
25,000
15,000
40,000
5,000
8,000
70,000
20,000
15,000
40,000
5,000
8,000
70,000
20,000
Task
➛ Calculate net income
➛ Prepare the Statement of Owner’s Equity
➛ Calculate ending capital
➛ Confirm the Balance Sheet balances
1. Net Income Calculation
Net Income = Revenue − Expenses
Net Income = 25,000 − 15,000 = 10,000
Net Income = 10,000
2. Statement of Owner’s Equity
Moonlight Services
Statement of Owner’s Equity
Beginning Capital
+ Additional Investment
+ Net Income
- Drawings
Ending Capital
+ Additional Investment
+ Net Income
- Drawings
Ending Capital
40,000
5,000
10,000
8,000
47,000
5,000
10,000
8,000
47,000
3. Ending Capital
Ending Capital = 47,000
4. Balance Sheet Check
Given
Assets = 70,000
Liabilities = 20,000
Equity = Assets − Liabilities
Equity = 70,000 − 20,000 = 50,000
Explanation:
The calculated equity (50,000) does NOT match ending capital (47,000).
➛ Balance Sheet does NOT balance
➛ Missing or incorrect data exists | likely drawings or liabilities understated
This confirms why cross-checking statements is essential.
True or False
Financial statements are prepared directly from the ledger.
➛ False
Ending capital appears on the Balance Sheet.
➛ True
Net income affects owner’s equity.
➛ True
Balance Sheet is prepared first.
➛ False
All statements must be internally consistent.
➛ True
Mini Case Study
A business owner receives three financial statements at year-end.
Questions
Which statement shows profitability?
➛ Income Statement
Which statement explains changes in capital?
➛ Statement of Owner’s Equity
Which statement shows financial position?
➛ Balance Sheet
Why must the statements agree with each other?
➛ They are interconnected and based on the same data
What could cause the balance sheet not to balance?
➛ Missing adjustments
➛ Incorrect transfers
➛ Calculation errors
Quick Quiz
What is the correct order of financial statements?
➛ Income Statement ➧ Statement of Owner’s Equity ➧ Balance Sheet
Where does net income flow after the Income Statement?
➛ Statement of Owner’s Equity
Balance Sheet uses ending capital.
➛ True
Which statement uses adjusted trial balance figures?
➛ All financial statements
What is the final check before issuing statements?
➛ Adjusted Trial Balance
Closing Entries ➧ Here