 Hello and welcome to the session. This is Professor Farhad in which we would look at journal entries and preparing financial statements from A to Z. The reason I say from A to Z, because we're going to be preparing those financial statements based on the journal entries. So this exercise is very beneficial for students who are taking financial accounting and students who are preparing for the CPA exam using the FAR section as well. Farhadlectures.com is a supplemental tool that will help you if you're studying for your CPA or your accounting courses. Now what is the difference between Farhadlectures and your typical CPA prep course? In your CPA prep course, they assume a certain level of knowledge and accounting. I don't assume anything. I teach you the material from scratch. So I don't replace your CPA course. I help you learn the basics, fill in those gaps that you did not learn in college or you learned a long time ago and you need to brush up on it. So please visit farhadlectures.com if you are a CPA candidate. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1,800 plus accounting, auditing, tax, finance, as well as Excel tutorials. If you like my lectures, please like them and share them, connect with me on Instagram, like my Facebook page. Always, I'm going to remind you to go to farhadlectures.com for additional resources for your CPA, accounting, and finance courses. So this is what we are going to be doing. This looks very intimidating. We're going to take this step by step. We have a company, ARC, that was formed on January 1st, 2014. And we have those transaction A through H. I'm going to go over each transaction separately. I'm going to break them down transaction by transaction. We're going to go over each transaction separately. Then we are going to prepare the income statement. We're going to prepare the balance sheet. We're going to prepare the statement of cash flow using the indirect method. Lot of information. This is basically a big portion of your financial accounting 101. So you have to know where each transaction goes. You have to know basic journal entries. Let's go ahead and get started by analyzing those transaction, looking at the first transaction. On January 1st, ARC issued no-par common stock for 450,000. And usually this is the first transaction when the company is created. When the company is created, they issue stocks to the investor. So the investor contribute money. So what happened? Cash is increased. Cash is a debit. So we're going to debit cash 450,000 and cash is a balance sheet account. So cash is a balance sheet account and we increase common stock. Common stock is a credit. We increase common stock. If you don't know your debits and your credits, go and check out my tutorial for debits and credits. Common stock is also a balance sheet account. Both of these are balance sheet account. Now what I suggest you do is something like this. Keep track of your cash. Now we have $450,000 in cash and keep track of your common stock. I'm just going to tell you, we're not going to be changing common stock, but we're going to be changing cash a lot. Second, after the company received the cash and the company started early in January, the IRC made the following cash payment. They paid for fixture, for store fixture, 53,000. So we're going to debit. We're going to increase debiting store furniture, which is an asset, which it goes on the balance sheet. And by the way, cash is also an asset. I don't have to tell you this, but maybe I have to. And common stock is equity. And the reason I'm doing this because these are going to end up on different financial statements. So you need to know what goes where. We paid for merchandise, 340,000. That's also an asset. And it goes on the balance sheet and that's increasing, it's a debit. We paid for rent on a building 20,000. Rent is an expense. Expenses goes on the income statement and it's an expense. And we paid all of those in cash. Therefore, we credit cash 413. So notice, we debited cash for 50, cash went up, then we paid cash 413, cash went down. Now, if we want to, we can keep track of our balance, the difference between those two, which will be a debit balance. Later in the year, ARC purchased inventory on account, more inventory for 239,000. Well, we debit inventory if we bought more inventory. So notice what you have to do, keep track of your inventory account as well. Credit accounts payable. Also what we need to do, keep track of accounts payable, which we have 239,000. It means we bought them and we're gonna pay it later. Okay? Before year end, ARC paid 139,000 on account for the payable. So we paid 139,000. And by the way, ignore this, we're gonna do this on a different page. So when we paid the accounts payable, we debit accounts payable, 139. Now what we have of accounts payable is really only 100,000 remaining. And we reduce cash. We credit cash because we paid our payable with cash. This is a balance sheet. This is a balance sheet. This is a balance sheet. This is a balance sheet. They're all balance sheet. This is an asset. This is a liability. Obviously this is a liability. And obviously this is an asset. And why do I need to remind you? Because at the end, we have to prepare the financial statements. During the year, ARC sold 2,400 units of merchandise for $275 each. So we debit account receivable credit sales. Why? We sold 2,400 units at 2,75. And that's gonna give us 660,000. We increase account receivable, which is an asset on the balance sheet. And we increase sales, which is an income statement account, which is a sales account. So we debit account receivable credit sales. Now, before year end, the company collected 85% of the amount of the cash. Well, if we take 660,000 of account receivable, multiplied by 85%, it's gonna give us 561. Therefore, they paid us cash 561. So cash will go up. It's a debit. And account receivable will go down, which a credit. Again, cash is an asset. It goes on the balance sheet. Account receivable is an asset. It goes on the balance sheet. Now bear in mind, hopefully you are keeping track of your cash because it's going up and down, up and down. We're gonna see what the balance is at the end. The store employs three people. Oh, sorry. We missed some information here. Also, what they told us at this point, they told us that cost of goods sold, cost of goods sold is 250,000. So they told us here cost of goods sold is 250, and ending inventory is 329. So they did the count of ending inventory and they find out ending inventory 329, and cost of goods sold, which is an expense account is 250. So this is information that we're gonna be using later on on the financial statements. The store employs three people. The combined annual payroll is 96,000, of which ARC still owes 3,000. Therefore, salary expense is 96,000. They paid 93,000 in cash and remaining a salary spable because it's not paid. So this is an expense, this is an asset, and this is a liability expenses go up, cash goes down, liability goes up. Liabilities go up because it gets a credit, okay? At year end, the company paid their income tax of 17,000. We paid it in cash. Debit income tax expense, credit cash. This is an expense and this is an asset. This goes on the income statement. This end up on the balance sheet. The cash end up on the balance sheet. Late in the year, ARC paid dividend of 44,000. We debit dividend, credit cash of 44,000. Dividend is an equity account to be more specifically retained earnings account, but it's an equity account, cash is an asset. For store fixture, ARC uses the straight line depreciation method over five years with zero of salvage value. Now we have to know how much we paid for the office furniture. Let's go back and find out how much we paid for the office furniture. We paid for the office furniture, 53,000. It's gonna be depreciated over five years. So each year, if my math is right is 10,600. If my math is right, let's see if I, if my math is right and 10,600, my math is right. So I debit depreciation expense, which is an expense account goes on the income statement, credit accumulated depreciation, which is a Contra asset account, a Contra asset that goes on the balance sheet. Now I am ready to prepare my financial statements. The first financial statement you prepare is the income statement, the name of the company, income statement and year ended December 31st, 2024. First, you list revenues. How much would our revenues? Well, we sold 2,400 unit times 275. This is total revenues. Then you list your expenses, cost of goods sold. This was giving in the problem, salaries and wages, depreciation, rent expense and income tax expense. You should be familiar with all these numbers because we did process those journal entries. Our total expenses, 393, notice we single underline to add up all the expenses. Then we take revenues minus expenses to give us net income. Notice we double underline the last number, which is 266,400. Now remember, from this net income, 266,400, we paid 40,000 and, I'm sorry, not 40, we paid, how much did we pay in dividend? Let me go back and check. We paid in dividend, 44,000. So for this number, we're gonna be subtracting 44,000. Okay, so it's gonna give us 2,200 to 400 and that's gonna be retained earnings. The earnings that we kept retained because we made 266,400 from operating the business, then we paid dividend of 44,000. Therefore, net income minus dividend keeps you with retained earnings, which is, we're gonna see this number later on on the balance sheet. Let's look at the balance sheet, same thing. We have the name of the company, the name balance sheet, then the date. So notice the date here is a point in time. It means it's a date for one day, December 31st. Versus the income statement, it says year and December 31st. So these numbers reflect the whole activities throughout the year. The balance sheet numbers shows just the date of December 31st. First, we list our current assets, which include cash. Now how did we end up with cash? Well, the best thing to do is to go back, look at your cash account, every time is debited, you debit, every time is credited, you credit. And at the end, you're gonna see this number, 305. You can check that out yourself. Account receivable, we sold 660,000. We received 85% remaining uncollected, this 15, that's gonna constitute account receivable, 99,000. Our merchandise inventory, this number was given, 329. Therefore, total current assets, 733. Property, plant, and equipment, we only had store fixture, and it was depreciated at 10,500. Remember, we call this number, book value. Current assets plus the property, plant, and equipment gives us total asset of 775,400. Our liabilities, starting with current liabilities, we had account spable of 100,000. We purchased 239 on account. We paid 139, the remaining is 100,000. We had salary spable of 3,000. Total current liabilities is 103. Then we have stockholders' equity. We have common stock of 450. This is the first transaction. Retained earning is 220,400. I showed you how we came up with that number. Retained earning, which was net income minus dividend. And stockholders' equity total of 672,400, 103, plus 672,400 equal to 775,500, which is equal to assets. So notice assets equal to liabilities plus owners' equity. Now we still have one financial statement to complete, and that's the cash flow statement. Now remember, for this company, the prior year is everything is zero. So the prior year for account receivable is zero, merchandise inventory is zero. Everything is zero for the prior year because the company started this year. So how do we complete the cash flow statement? I have plenty of tutorial about the cash flow statement, but this is just an exercise. So again, we prepare the headings with year end, just like the income statement, the cash flow statement. And what we do in the cash flow statement, we are converting net income to cash net income. Therefore, we start with net income. Net income is 266,400. Then we make certain adjustments to reconcile, starting with any non-cash expenses. Depreciation expense is an expense that's considered non-cash. It means we took the expense, but it did not reduce our cash. Therefore, we add depreciation expense. Then account receivable went up. When account receivable went up, it means your cash flow goes down. It means you sold on account, but you did not receive 99,000. Therefore, you reduced the 99,000 from your net income because your account receivable went up. It means you sold, but you did not receive the money. The opposite would have been true. If your account receivable went down, your cash flow would have went up. It means you collected more cash than what you sold, okay? So account receivable went up. Your cash flow goes down. Your everything's here. Everything's gonna go up because this is the first year. Inventory went up. Again, if your inventory went up, it means you purchased more inventory than you sold, 329, increase in accounts payable. When your liabilities, when your current liabilities goes up, your cash flow goes up. Why? Because you are buying and you're not paying. Therefore, you have more cash. Therefore, it's a positive. Again, you have to go to my cash flow tutorial to see those. Again, increase in salaries payable. It means you are expensing the salaries, but you're not paying them. Remember, we owe the employees 3,000. So therefore, we add them all up. We take net income minus 3,14,400 and we have net cash used. From a cash flow perspective, we used more money than we generated. From a cash flow, really, we didn't do very well, right? From a cruel perspective, we generated positive net income, but from a cash flow, we were not good. So this is the first section, which is the operating section. The second section is the investing section. And under the investing section, the only thing is we acquire the store furniture of 53,000. Therefore, we used money for investing of 53,000. The last section is the financing section. Here, we issued stocks. So we received money from issuing stocks, but we paid some dividend. We really had no debt, no loans. Therefore, net cash is provided. So what happened is we are getting cash from investors to finance the operating as well as the investing section. Then we take the net of these three. The net of these three is operating, investing and financing. And we know that our cash netting those three is plus a 305, plus zero, the beginning cash. We didn't, the company did not exist. Therefore, the ending cash is 305. And let's look at the balance sheet. Cash is 305. Notice cash is 305. Therefore, it works. Therefore, our balance sheet worked. So this was an exercise. This was an exercise that went through journal entries, financial statements, and cash flow statement. I might have went a little bit fast because this is not for explanation purposes. This is just a review. Assuming you went through the tutorial for journal entries, you went to the tutorial through how to prepare an income statement, balance sheet statement of cash flow. Anyhow, if you need more resources for your courses, check out my website, farhatlectures.com. If you're studying for your CPA exam, look, you need to learn the basic. You need to invest in your career. Check out my website. CPA is a lifetime investment. Study hard, stay safe.