Reading: Lesson 3 - Preparing financial statements from the work sheet

When the work sheet is completed, all the necessary information to prepare the income statement, statement of retained earnings, and balance sheet is readily available. Now, you need only recast the information into the appropriate financial statement format. The information you need to prepare the income statement in Exhibit 21 is in the work sheet's Income Statement columns in Exhibit 20.

The information you need to prepare the statement of retained earnings is taken from the Statement of Retained Earnings columns in the work sheet. Look at Exhibit 22, MicroTrain Company's statement of retained earnings for the month ended 2010 December 31. To prepare this statement, use the beginning Retained Earnings account balance (Account No. 310), add the net income (or deduct the net loss), and then subtract the Dividends (Account No. 320). Carry the ending Retained Earnings balance forward to the balance sheet. Remember that the statement of retained earnings helps to relate income statement information to balance sheet information. It does this by indicating how net income on the income statement relates to retained earnings on the balance sheet.

The information needed to prepare a balance sheet comes from the Balance Sheet columns of MicroTrain's work sheet (Exhibit 20). As stated earlier, the correct amount for the ending retained earnings appears on the statement of retained earnings. See the completed balance sheet for MicroTrain in Exhibit 23.