Unit Four: Prepare end of period financial reports

This learning guide is developed to provide you the necessary information regarding the
following content coverage and topics:
 Prepare revenue statement
 Prepare balance sheet
 errors for resolution
This guide will also assist you to attain the learning outcomes stated in the cover page.
Specifically, upon completion of this learning guide, you will be able to:
 Understand of financial accounting and management
 Prepare revenue statement
 Prepare balance sheet
 identify and correct, or refer errors resolution's

4.1 Prepare revenue statement

4.1.1 introduction
Financial report reporting period is the span of time covered by a set of financial statements. It
is typically either for a month, quarter, or year. Organizations use the same reporting periods
from year to year, so that their financial statements can be compared to the ones produced for
prior years.
Financial reporting is the comprehensive review of monthly, quarterly, or yearly financial data
to drive better business performance and results. A timely and accurate financial reporting
process helps you understand your company’s performance and identify opportunities to make
the right business decisions for future growth
Financial Reporting Important
The main goal of financial reporting is to help finance, business partners, department leaders,
and stakeholders make strategic decisions about a company’s operations, growth, and future
profitability based on its overall financial health and stability.
At a minimum, quarterly financial reports and annual reports are required for public companies,
while internal measurement is typically performed monthly.
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A periodic valuation of a company’s financial performance and stability helps to accomplish the
following
4.1.2 Preparing financial statements
Financial statements are written records that convey the business activities and the financial
performance of a company. Financial statements are often audited by government agencies,
accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. For-
profit primary financial statements include the balance sheet, income statement, statement of
cash flow, and statement of changes in equity. Nonprofit entities use a similar but different set
of financial statements.
Three financial statements report the financial progress and condition of merchandising
firms.
1. The income statements/ profit or loss statement
2. The capital statement and
3. The balance sheets
4.1.3 Preparing the income statement
Income statement reports the revenue, the cost of merchandise sold, and the expenses of
operating the business and the Net Income.
The income statement prepared for a merchandising business has 3 main sections:
A. Revenue section
B. Cost of merchandise sold section and
C. Expenses section
I. Multiple-Step Income Statement
A multiple-step income statement, contains several sections, subsections, and subtotals.
Revenue from Sales This section of the multiple-step income statement consists of sales, sales
returns and allowances, sales discounts, and net sales. Cost of merchandise sold
 Operating expenses:
 Selling expenses:
 Sales salaries expense
 Advertising expense
 Depreciation expense––store equipment
 Delivery expense

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  Miscellaneous selling expense
 Administrative expenses:
 Office salaries expense
 Rent expense
 Depreciation expense––office equipment
 Insurance expense
 Office supplies expense
 Misc. administrative expense
Sales is the total amount charged customers for merchandise sold, including cash sales and sales on
account.
Sales returns and allowances are granted by the seller to customers for damaged or defective
merchandise. In such cases, the customer may either return the merchandise or accept an allowance from
the seller
Sales discounts are granted by the seller to customers for early payment of amounts owed.
Net sales are determined by subtracting sales returns and allowances and sales discounts from sales.
Some companies report only net sales and report sales, sales returns and allowances, and sales discounts
in notes to the financial statements.
Cost of Merchandise Sold The cost of merchandise sold is the cost of the merchandise sold to
customers. Sellers may grant a buyer sales returns and allowances for returned or damaged merchandise.
From a buyer’s perspective, such allowances are called purchases returns and allowances. Likewise,
sellers may grant a buyer a sales discount for early payment of the amount owed. From a buyer’s
perspective, such discounts are called purchases discounts. Purchases returns and allowances and
purchases discounts are subtracted from purchases to arrive at net purchases as shown below for In the
preceding computation, merchandise inventory at the end of the period is subtracted from the
merchandise available for sale to determine the cost of merchandise sold. The merchandise inventory at
the end of the period is determined by taking a physical count of inventory on hand. This method of
determining the cost of merchandise sold and the amount of merchandise on hand is called the
Periodic inventory system. Under the periodic inventory system, the inventory records do not show the
amount available for sale or the amount sold during the period. Instead, the cost of merchandise sold is
computed and reported as shown in
Under the perpetual inventory system of accounting, each purchase and sale of merchandise is recorded
in the inventory and the cost of merchandise sold accounts. As a result, the amounts of merchandise
available for sale and sold are continuously (perpetually) updated in the inventory records. Because many
retailers use computerized systems, the perpetual inventory system is widely used. For example, such

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systems may use bar codes, such as the one on the back of this textbook. An optical scanner reads the bar
code to record merchandise purchased and sold. Businesses using a perpetual inventory system report the
cost of merchandise sold as a single line on the income statement.
Gross Profit Gross profit is computed by subtracting the cost of merchandise sold from net sales, as
shown below.
Income from Operations Income from operations, sometimes called operating income, is determined
by subtracting operating expenses from gross profit. Operating expenses are normally classified as either
selling expenses or administrative expenses.
Selling expenses are incurred directly in the selling of merchandise. Examples of selling expenses include
sales salaries, store supplies used, depreciation of store equipment, delivery expense, and advertising.
Administrative expenses, sometimes called general expenses, are incurred in the administration or
general operations of the business. Examples of administrative expenses include office salaries,
depreciation of office equipment, and office supplies used. Each selling and administrative expense may
be reported separately as show
Other Income and Expense other income and expense items are not related to the primary operations of
the business. Other income is revenue from sources other than the primary operating activity of a
business. Examples of other income include income from interest, rent, and gains resulting from the sale
of fixed assets. Other expense is an expense that cannot be traced directly to the normal operations of the
business. Other income and other expense are offset against each other on the income statement. If the
total of other income exceeds the total of other expense, the difference is added to income from
operations to determine net income. If the reverse is true, the difference is subtracted from income from
operations

II. Single-Step Income Statement

The single-step form emphasizes total revenues and total expenses in determining net income. A criticism
of the single-step form is that gross profit and income from operations are not reported.
EXAMPLE Prepare an income statement for Universal Stationary for the month ended Tir
30, 19X7

Universal Stationary

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 Income Statement
For the month ended Tir 30,19X7
Revenue
Sales 7,910.00
Cost of merchandise sold
Merchandise inventory, Tir 1,19X7 23,250.00
Purchases 3,650.00
Cost of merchandise available for sale 26,900.00
Less of merchandise inventory, Tir 30 24,851.00
19X7
Cost of merchandise sold 2,0
Gross profit on sales 49.00
Expense: - 5,8
Delivery Expense 300.00 61.00
Insurance Expense 450.00
Supplies Expense 250.00
Rent Expense 1,000.00
Salary Expense 150.00
Miscellaneous Expense 110.00
Total Expense 1,9
Net Income 90.00
3,8
71.00
4.1.4 Preparing the capital statement
Capital Statement/Owners’ Equity statement: A financial statement that summarizes the
changes in capital during the fiscal period is called a capital statement. An owner of a business
can reviews the capital statement to determine if and why the capital is increasing or decreasing.
A change in the amount of capital occurs:
1. When additional capital is invested
2. When cash, merchandise or other assets are withdrawn
3. When the business earns a profit or incurs a loss from its operation

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 Preparing the capital statement: Data needed to prepare the capital statement are obtained
from the capital account in the general ledger and from the balance sheet column of the
worksheet. Data from the general ledger capital account include:
1) the beginning balance of capital
2) the additional investments made during the fiscal period
Data from the worksheet include:
1. the withdrawals during the fiscal period, and
2. the net income or net loss for the fiscal period
The Steps in preparing the Capital Statement are:
1. Writing the heading of the capital statement in three lines
2. Write the, name of the owner, capital, and date
3. Calculate the increase in capital in the following manner:
Net income/Net loss ----------------------- xxx
Less: Withdrawal -------------------------------------- xxx
Net change in capital ------------------------------------- xxx
4. Make sure that all figures on the capital statement have been transferred correctly
from the capital account and the work sheet to the capital statement re checks the
additions and the subtractions.
EXAMPLE
Prepare a capital statement for universal Stationary for the month ended Tir 30, 19X7
Universal Stationary
Capital statement
For the month ended Tir 30, 19X7
4.1.5 prepare balance sheet
Diro Kiflu, Capital, Tir 1, 19X7 31,950.00
Net Income for Tir,19X7 3,87
Less: - Withdrawals for Tir,19X7 1.00
Net Increase in capital 99 2,881.00
Diro Kiflu, capital, Tir 30, 19X7 0.00

34,831.00

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 Preparing the Balance Sheet
Balance sheet is a financial statement that reports the assets, liabilities and capital of a
business on a specific date.
Forms of Balance Sheet
 Account Form
 Reports the assets on the left-hand and the liabilities and capital on the right –
hand side.
 Report Form
 Reports the assets, liabilities and capital in a vertical arrangement.
Steps in preparing the balance sheet: -
1. Write the heading of the balance sheet on three lines
2. Prepare the assets section of the balance sheet
3. Prepare the liabilities section of the balance sheet
4. Prepare the capital section of the balance sheet
5. Total the liabilities and capital section of the balance sheet or double line
EXAMPLE
Prepare a Report Form of Balance Sheet for universal Stationary as of Tir 30, 19X7.
Universal Stationary
Balance Sheet
Tir 30,19X7
1. Assets
Cash 10,880.00
Accounts Receivable 1,050.00
Merchandise Inventory 24,851.00
Supplies 1,000.00
Prepaid Insurance 1,150.00
Total Assets Br. 38,931.00
2. Liabilities
Accounts payable 4,100.00
3. Capital
Diro Kiflu, Capital 34,831.00
Total Liabilities and Br. 38,931.00
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Capital
Journalizing and posting closing entries
Closing entries are prepared: -
1. To transfer the balances of the revenue, the cost and the expense accounts to the
income summary account
2. To bring the owners capital account up – to –date
3. Transferring the balance of the income summary account
4. Transferring the balance of the drawing account
Closing entry, No 1 Closing Income Statement accounts with credit Balances.
1. Sales
2. Purchases Return and allowance
3. Purchases Discount is closed by transferring its balance to the credit side of
Income Summary account.
Closing entry, No 2. Closing Income Statement accounts with debit balance
1. Expense
2. Sales returns and allowances
3. Sales Discounts
4. Purchases are closed by transferring their balances to debit side of the income
summary account in one journal entry.
Closing entry, No 3. Closing the income summary account
By recording the NI (NL), balance of the income summary account in the capital account.
Closing entry, No 4. Closing the drawing account into owner’s capital account by
transferring its balance to debit side of the capital account. General Journal
Page 1
Genera
A/P Post l A/R
gen
eral Dat
Dr Dr e Account Title Ref Cr Cr
19X7 Closing Entries
7,910 Tir 30 Sales
Income Summary 7,910

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 5,640 30 Income Summary 00
Purchases 3,650 00
Delivery expense 30 00
Insurance expense 450 00
Supplies expense 250 00
Rent expense 1,000 00
Salary expense 150 00
Miscellaneous
expense 110 00
00
3,871 30 Income Summary 00
Diro Kiflu, Capital 3,871 00
00
990 30 Diro Kiflu, Capital 00
Diro Kiflu, Drawing 990 00

4.1.4 Post – Closing Trial Balance

A Post – closing trial balance is taken to prove the equality of debits and credits in the
ledger
Universal Stationary
Post – Closing Trial Balance
Tir 30, 19X7

Acc
Account Title Debit Credit
No

Accounts Receivable 12 1,050

Merchandise Inventory 13 24,851
Supplies 14 1,000
Prepaid Insurance 15 1,150
Accounts payable 21 4,100

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 Diro Kiflu. Capital 22 34,831

38,931 38,931

4.3. correct, or refer errors

4.3.1 Error Resolution
Error resolution is a procedure that allows consumers to dispute bookkeeping errors or
unauthorized transactions related to their bank accounts.
 Error resolution is the formal process followed by banks in response to errors reported by
customers.
 Banks are required to investigate the error within a limited period of time, and they may
also need to reimburse the customer for any affected funds while the investigation takes
place.
 Customers, meanwhile, are required to notify the bank promptly when an error has
occurred, while also providing supporting information to help the bank investigate the
error.

4.3.2 Understanding Error Resolution

Regulation E requires that financial institutions investigate all complaints and re-credit all funds
debited in error. The financial institution usually has between 10 and 45 days to investigate
complaints. Federal regulations limit consumers' account liability to $50 if the bank is notified of
the error, but it can go as high as $500 otherwise.
There are many types of errors that can trigger the requirements of Regulation E. These include
incorrect electronic funds transfers (EFTs) to or from a customer's account; unauthorized
withdrawals, whether electronically or through an automated teller machine (ATM); inaccurate
withdrawals from an ATM, such as when the ATM dispenses less funds than were requested by
the customer; inaccurate or incomplete account statements; and mistakes in the bank's
bookkeeping or calculations.
When customers wish to initiate the error resolution process, they must issue a notice of error to
the bank, which includes their name and account number as well as any additional information
about the error they can provide. The customer should identify the nature of the error, the date at

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which it occurred, and the amount of money affected. Customers have 60 days in order to make
such claims, counting from the first day in which the error appeared on the customer's bank
statements.
4.1.3 Real World Example of Error Resolution
Generally, banks have 10 days in which to complete their investigation of the error once
appropriate notice has been given by the customer. Although some banks may require customers
to give additional written notice even if they have already given notice of the error verbally, the
10-day time limit nonetheless begins once the verbal notice is given.
Under certain circumstances, banks can extend their investigation deadline to 45 days. However,
this is only permitted under situations in which the bank has already provisionally approved a
reimbursement to the customer which resolves the effects of the error. Moreover, in order to
benefit from an extension, the bank would need to have notified the customer that such a
reimbursement has been given, and the reimbursed funds would need to be available to the
customer during the period in which the investigation takes place.
If, however, the error in question was related to an out-of-state EFT, a debit card transaction at
a point of sale (POS) terminal, or an account which was opened within 30 days of the reported
error, then the bank can take up to 90 days to complete its investigation.

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