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How to prepare the statement of financial position

Definition of statement of financial position

Any report on the financial condition or the financial results of the operations of a company, government, or other institution, the term is often used in a more limited sense in commercial and financial circles to refer to the balance sheet, income statement and statement of retained earnings of a company, the balance sheet as of a particular date shows the number of assets Its types, liabilities and owners’ investment, and the balance sheet indicates the amount of liquidity and its capacity, where liquidity reflects the readiness with which assets can be converted into cash, and its ability reflects the company’s ability to meet its debts when they become due. The financial statements include the following: the balance sheet, the income statement, the statement of changes in net worth, and the statement of cash flows.
How to prepare the statement of financial position
How to prepare the statement of financial position

The importance of the statement of financial position

Comparative balance sheets that show a company's financial position for two years or more reveal financial trends and changes in response to different business conditions and policies on such issues as debt repayment and expansion of investment in property by retained earnings The income statement or earnings statement summarizes those transactions that brought in profit or The loss to the owners over a period of time, usually a year between two consecutive operating budgets, where accountants usually divide this statement into an income statement and a retained earnings statement.

The income statement includes items that do not profit or loss such as dividends or arbitrary reductions in the valuation of fixed property, or items that relate to prior period profits such as a review of a prior year's tax liability, and some accountants consider it inappropriate to make these latter adjustments to prior years' gains or losses In this surplus section lest a reader unskilled in studying earnings over the years overlook them, it is preferable to show these adjustments in the ordinary income statement than to be suitably detailed.

Earnings statements are useful in depicting elements of profitability when details are given about sales or total revenue, cost of goods sold, and expenses such as depreciation, maintenance, taxes, interest, and rents. Other activities such as interest, dividends from investments or other non-performing income, unusual and non-recurring profits and losses, as well as any related income taxes should be mentioned separately, and when total earnings are summarized in a single figure EPS is often preferred Excluding exceptional items This number is a representative or normal measure of earnings.

Components of the statement of financial position

The first step in developing the financial management system is to proactively create the financial statements for the management, as these financial statements must be generated on a monthly basis and knowing how to prepare the statement of financial position, which must include the various financial statements from the income statement, balance sheet and cash flow statement. A report that discloses information related to the sources of the facility’s funds and the uses of these funds. In order to know how to prepare the statement of financial position, it is necessary to know the components of the statement of financial position, which consists of the following:

income statements

The income statement is used to evaluate the performance of the enterprise by matching the revenues for the period with the expenses that occurred to obtain this revenue, and it results in a net profit or a net loss. Accountants prefer to use the net income reform, which can be defined as the increase in sales revenue over the cost of goods sold and operating expenses during For a certain period, the income statements contain the following elements:
  • Sales: is the total revenue generated from selling products minus royalties and allowances, which shows the reduction in the price of discounts that customers get.
  • Cost of Goods Sold: It is the direct cost associated with manufacturing the products. These costs include materials used, direct labor, factory manager salaries, freight, and other costs associated with operating the factory for example utilities, equipment repairs, etc.
  • Gross profit: Gross profit represents the amount of direct profit associated with the actual manufacture of products and is calculated as sales minus the cost of goods sold.
  • Operating Expenses: These are selling, general, and administrative expenses needed to run a business. Examples include office salaries, insurance, advertising, sales, and rent commissions.
  • Depreciation: Depreciation expense is usually included in operating expenses or cost of goods sold, but it deserves special mention because of its unusual nature, as depreciation results when a business purchases a fixed asset and spends it for the life of its planned use and not just in the year in which it was purchased.
  • Operating profit: It is the amount of profit earned during the course of normal operations and is calculated by subtracting operating expenses from the gross profit.
  • Other income and expenses: Other income and expenses are those items that do not occur in the normal course of business so these sources of income are calculated separately and interest expense on debt is also included in this category and the net number is calculated by subtracting other expenses from other income.
  • Net Profit Before Taxes: This number represents the amount of income the company earned before taxes were paid. The number is calculated by adding or subtracting other revenue if other expenses exceed other income to operating profit.
  • Income taxes: The total amount of taxes on federal income paid.
  • Net Profit After Taxes: Calculated by subtracting the taxes paid from the net income before taxes.

balance sheet

The balance sheet provides a snapshot of the company’s assets, liabilities, and owner’s equity for a specific period of time. The company’s management seeks to prepare it to forecast the company’s financial position in the next financial period. To know how to prepare the statement of financial position, it is necessary to know the main components of the balance sheet, which consists of the following:
  • Current Assets: Assets that can be converted to cash in one year or less and include cash, stocks, other liquid investments, accounts receivable, inventory, and prepaid expenses.
  • Fixed assets: They are the tangible assets of the company that will not be converted into cash within a year. They are used for long-term use and include land, buildings, leasehold improvements, equipment, machinery, and vehicles.
  • Intangible assets: They are the assets that cannot be touched or seen but have value and intangible assets include royalties, goodwill, non-reserve agreements, patents, and many other items.
  • Other Assets: There are many assets that can be categorized as other assets and most business balance sheets have another asset class. Some of the other most common assets include the cash value of life insurance, long-term investment property, and compensation owed from employees.
  • Current Liabilities: Business commitments that mature within one year. Current liabilities include notes payable on credit lines or other short-term loans, current maturities of long-term debt, accounts payable to trade creditors, accrued expenses, taxes, and amounts owed to shareholders.
  • Long-Term Liabilities: These are business commitments that are not due for at least one year and long-term liabilities usually consist of all bank loans or shareholder loans that are due outside the next 12-month period.

cash flow statement

The cash flow statement is designed to convert the accrual basis of accounting used to prepare the income statement and balance sheet back on a cash basis, and the accrual basis of accounting is generally preferred in the income statement and balance sheet, because it matches more accurately the revenue sources with the expenses incurred that generate those specific sources For revenue, however, it is also important to analyze the actual level of cash flows in and out of the company such as the income statement where the cash flow statement measures financial activity over a period and the cash flow statement also tracks the effects of changes in balance sheet accounts the cash flow statement is one of the tools of financial management The most useful cash flow statement is divided into four categories:
  • Net cash flow from operating activities: Operating activities are the day-to-day internal activities of a company that requires or generate cash. These cash groups from customers include cash paid to suppliers and employees, cash paid to cover operating expenses, interest, taxes, and cash income from interest earnings.
  • Net cash flow from investing activities: Investing activities are discretionary investments made by management and consist primarily of the purchase or sale of equipment.
  • Net cash flow from financing activities: Financing activities are those external sources and uses of cash that affect cash flow and include: sales of common stock, changes in short- or long-term loans, and dividends paid.
  • The net change in cash and marketable securities: The results of the first three calculations are used to determine the total change in cash and marketable securities due to fluctuations in operating, investing, and financing cash flows. This number is then checked against the change in cash reflected in the balance sheet from one period to another to verify that the calculation has been done correctly.

How to prepare the statement of financial position

Financial statements are the official record of the company’s financial activity. The main components of the financial statement are the balance sheet, income statement, and cash flow statement. The balance sheet displays assets, liabilities, and shareholders’ equity at a specific time. On the other hand, the income statement shows revenues, expenses, and income or loss for a period of time. The statement of cash flows shows the cash balance at the beginning of a period, the inflows and outflows of cash during a specified period, and the final cash balance. The following shows how the statement of financial position is prepared:

Balance sheet preparation

The balance sheet is called this because it shows the company's balance between assets and liabilities, which appears through the following basic accounting equation, which is assets = liabilities + equity, the balance sheet reflects this relationship where all assets and liabilities are included and added to the balance sheet, then liabilities are subtracted from assets to arrive At the number of shareholders' rights, budgets may be created using an accounting program or by creating a spreadsheet or written list with two columns that can be used for total assets and liabilities by category, and the balance sheet is built as follows:
  • Assets identification: Current assets include cash on hand and what can be quickly liquidated usually within one year. This category will include accounts such as accounts receivable and any securities that are due for a year such as bonds or savings and inventory accounts. It can also include prepayments or deposits such as insurance for the next year. As well as tangible fixed assets, known as property, plant, and equipment, these are assets with a useful life of more than one year, and there are also intangible assets that can be kept in the balance sheet, and these include patents, brand recognition, and copyrights along with other intangible assets, This information must be elaborated.
  • Defining liabilities: It is what the company owes or paid to other companies or people, including employees. In other words, it is the company’s debts. These assets are also divided into current and “long-term” categories, where each of the current obligations must be accounted for in the main categories such as loans and mortgages. real estate, etc.” In the long-term liabilities section, liabilities are listed by category and the value of each category is included next to its name.
  • Subtract Own Liabilities from Own Assets: To find out what is owed to shareholders, a positive value of equity indicates that the company has financed its operations with its own money or investors' money rather than relying heavily on debt.
  • Expansion of shareholders’ equity: There is a section where it shows what are the shareholders’ rights. This section includes the elements that represent the interests of the shareholders in the company, for example, ordinary shares, preferred shares, excess capital, and retained earnings are all classes of ordinary shares of shareholders. When listing these categories, they must be summarized to reach Total equity, many balance sheets are organized so that assets are grouped on the left and stockholders' equity and shareholder equity are grouped on the right.

Prepare income statement

It is a list that is prepared to know the result of the enterprise’s work from profit or loss at the end of the financial period and this is done by matching revenues with expenses and the difference between them will be either profit or loss. Income in one of two ways, either in an abbreviated way, and it is called the single-stage income statement, or in several stages, and it is called the multi-stage income statement. The two methods give the same result in order to know how to prepare the statement of financial position and this is done as follows:
  • Starting with net sales: As a general rule the first number listed on a company's balance sheet is net sales for the period in question The income statement may consist of sales or revenue only but the number used is net sales where net sales represent total sales minus any returns, discounts or allowances for merchandise Lost or damaged, other than budget The income statement covers financial activity for the entire period in question whether it is this month, quarter or year, and the income statement is organized as a reduction in net sales with various expenses the company faces to arrive at net income.
  • Gross profit calculation: The first account in the income statement will be for gross profit where gross profit represents the company's profit after considering the cost of goods sold or services provided and the cost of goods sold includes the cost of all materials and labor that were directed directly towards producing the products sold during the period Sum this amount and subtract it from net sales to arrive at the gross profit.
  • List of operating expenses of the company: In the balance sheet, the expenses are divided into two main categories: operating and non-operating expenses, and this includes the cost of selling advertising products, administrative costs, and wages for workers in these departments, and also includes general expenses such as utilities, rent and salaries of managers, and these expenses are separated into three categories Principal: Selling expenses, general expenses, and administrative expenses and after writing each amount they are added to find total operating expenses, then subtract total operating expenses from total earnings to arrive at operating income.
  • List of non-operating expenses: The other category of expenses in the income statement is non-operating expenses, which are those expenses that are not directly related to operations and include: interest, amortization, depreciation, and tax expenses as well as a section for other expenses that may relate to an unusual gain or loss that may arise from a huge amount stockpile theft.
  • Putting the income statement: Putting each piece of the income statement where the net sales will be at the top and each piece will follow in sequential order and then put the net sales on one line followed by the cost of sales, then the cost of sales is subtracted from the net sales to get the gross profit, and the costs are put Operating in general categories under Gross profit Generally selling costs and general and administrative costs are grouped into one section and then operating income is derived by subtracting operating costs from gross profit, then both interest and taxes are underlined and can be subtracted separately or together, where the separate figure provides more accurate data, and in the last line is the net income.

Prepare a statement of cash flows

The main objective of preparing the statement of cash flows is to provide users of the accounting data with information about the cash received and the cash paid during the financial period, and thus it is possible to rely on such information to predict the company’s ability to obtain the necessary financing from cash or something similar, as the historical cash flows help as a basis for forecasting future cash flows, as it is one of the important steps when going to know how to prepare the statement of financial position, and this is done through several steps as follows:
  • Starting with Net Income: Cash flow is a key figure for a company because it identifies actual cash in hand and differs from income because income includes non-cash expenses and assets that don't affect the actual cash balance, however in order to create a statement of cash flows a completed income statement and balance sheet must be available From this period and the previous period, the statement of cash flows is divided into three parts: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.
  • Start calculating cash flows from operating activities: This step differs from the previous ones because the data in it includes non-cash items, in other words, some things must be added back to the net income because they were not already cash expenses and therefore will not affect the money that is being worked on at the time Current such as depreciation and amortization.
  • Determining cash flows from investing activities: At this stage, it is necessary to study how the investment affects the overall cash flow. This category focuses on long-term investments such as equipment and buildings. It mainly focuses on where the money went in the current year when it was invested.
  • Cash Available from Financing: This section focuses on money used to finance a business such as loans, and also relates to stock and shareholder options and how this affects cash flow, as loans are added to the total cash, however.
To create a statement of cash flows, start with net income and then move down through the three categories. It is best to keep the three categories separate so that people who read the statement of cash flows can see where expenses go in and out and then subtract and add cash as needed in each category to arrive at the net increase or Shortage of cash for this year.
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