Preparing a financial statement is important and one of the final steps in the accounting cycle. A Financial statement is like a performance sheet for a company, and it shows how well a company has performed over the year by the numbers. A financial statement has to be carefully prepared in a set sequence that has to be followed as the information in one is linked to the next one. Four steps are involved in preparing the financial statement, and this is better explained below.
Income Statement: The income statement is the first financial statement that is prepared at the end of the accounting cycle. The income statement reports the company’s income and revenue for the year including net income, which is revenue less expenses. There are two methods to prepare an income statement; the Single-Step method is used by small companies with straightforward finances and the Multi-Step method is preferred by companies needing more detailed financial statements.
Prepare the Statement of Retained Earnings: After the net profit or loss has been calculated, the Statement of Retained Earnings is prepared. It shows the retained earnings at the beginning and end of the accounting period along with showing the distribution of profit between retained earnings and dividends. Income that is retained by the company to be reinvested instead of being paid out as dividends to stockholders forms the Statement of Retained earnings.
Balance Sheet: A balance sheet sums up an organization’s assets, liabilities and shareholder equity at a particular point of time. It is a summarization of an organization’s overall financial position. The entries on the balance sheet come from the general ledger and the format mirrors the accounting equation. The last line of the balance sheet gives the total amount of liabilities and equities, which must be equal to the total assets on hand.
Prepare the Statement of Cash Flow: The statement of cash flow clarifies the reasons for changes in the cash balance, showing sources and uses of cash in the operating, financing and investing activities of an organization. An organization’s financial stability and its ability to pay its creditors are measured against the statement of cash flows.
Meticulously preparing a Financial Statement is essential as it acts as a scorecard that tells the story of the company in detail. By interpreting it correctly, a Financial Statement really can give you the big picture, so those that prepare it have to know how to go about doing it correctly to give a complete insight into a company’s activities.