 Hello and welcome to this bootcamp part three of five for the FAR CPA exam. In this session, we will cover specifically financial statements. In the prior two sessions, we covered adjusting entries. Also we covered how to analyze transaction using a t-account and accounting equation, how to journalize, post the ledger and prepare a trial balance. And as a result of session one and two, we came up with this adjusted trial balance that we're going to be working with in this session to prepare the financial statements. Now, here's what I need to tell you about this session. This session gives you an introduction to financial statement. This session show you how the financial statement fits together, how the income statement feeds into the statement of retained earnings, how the statements of retained earnings feeds into the balance sheet. So it's a simple illustration of these financial statements. For the CPA exam, you're going to have to learn about the income statement much, much more in depth about the balance sheet, much, much more in depth and about the statement of retained earnings, much, much more in depth. So this is basically the basics. In other words, as a CPA candidate or as an intermediate accounting students, you need to be familiar with those basic concepts before you start your actual in-depth studies about the financial statements. So whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website, farhatlectures.com. I don't replace your CPA review course. I'm a useful addition. I am a supplementary resource to your CPA preparation. I can help you understand the material differently than your CPA course, which in turn will help you prepare for your exam using your course, which in turn will help you pass the CPA exam. Your risk is one month of subscription, your potential gain is passing the exam. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. My CPA exam courses are aligned with your CPA review course, whether you have Becker, Gleam, Wiley, Roger, you can follow easily between my material and your CPA review course. I also have resources for other college courses. I strongly suggest you take a look. Please connect with me on LinkedIn. If you haven't done so, take a look at my LinkedIn recommendation, like this recording, share it, connect with me on Instagram, Facebook, Twitter, and Reddit. So in this session, we will focus on the financial statements starting with this adjusted trial balance. So those are adjusted balances for the trial balance. Now all these numbers, they didn't come out from thin air. We did work them starting from scratch. We did transaction by transaction to prepare the unadjusted trial balance. Then in lesson two, we prepare the adjustments and now we are in lesson three. So this is one, two, and three. From this adjusted trial balance, from this adjusted trial balance, we are going to start to complete or to prepare simple financial statements. But those simple financial statements are important because they passed your basic knowledge. What I'm trying to do here is just to make sure you know basic information. The first one is the income statement and they are prepared in this order and you will see why. The income statement will have three heading, the name of the statement, the name of the company and the period it's covering. For our purpose, we are covering October 31st, 2024, the month of October. How do we prepare the income statement? Well, the income statement shows you how much the company was profitable or not profitable, which is incurred the loss. How do we measure profitability? Well, we measure profitability through two things, revenues and expenses. So the first thing we're going to list are revenues and revenues are coming from the service revenue, the adjusted balance. So we have revenues of 15,000. So that's the first number. First we list revenues. Now, this company happened to have one source of revenue, consulting revenue. I called it here service consulting. It doesn't matter. It's only 15,000. Now a company could have more than one source of revenue. If you have more than one source, for example, you could have consulting revenue, interest revenue and some other revenue. Well, sales revenue. You add them all up and there will be total revenues. Once you total the revenues, we only have one. You list your expenses. Then you have your expenses and your expenses are listed on the bottom of the trial balance. So you will take your expenses, all their balances and you list them on the financial statement. You list them, rent, salaries, utilities, interest, depreciation and supplies. And remember, all these figures, we started from nothing and we created them in the prior two sessions. Therefore, you total them. Total expenses are 11,350. Now, once we have total revenues, total expenses, we are ready to compute our net profit or net income. In this situation, we have a net income because revenue exceeds expenses by 3,650. And this is the last number on this financial statement, 3,650. What does that mean? It means we were profitable. We incurred, we did not incur a loss. We made a profit for this period, which is the month of October. The next financial statement is called the statement of retained earnings. What is the statement of retained earnings? The statement of retained earnings tells us how much did the company kept? It, it lowers the word retained and earnings, think of it as net income, not think of it as net income. Okay, net income. So how much did the company retain? And the question is, why, why are we asking about this? Because indeed the company made 3,650 in profit, but they might have distributed all of this to the shareholders or they might have kept all of it. So we need to know over the years and the statement of retained earnings over the years. So it states with us from year to year that balance. But for our purposes, we're going to start with the beginning retained earnings of zero. Simply put, we don't have any prior history to this company. Therefore, the beginning retained earnings of zero. The other thing I want you to notice is the date for this financial statement is the same as the date on the income statement. It's for a period of time for the whole month of October. So we started with beginning retained earnings. And what we do after we start with beginning retained earnings, we'll add to it what earnings we earned this period. We happened to have start with zero plus net income, which is 3,650. Now, if it was a loss, we will deduct the loss. Now, what else affect retained earnings? Well, what affects retained earnings is what affect the shareholders because the shareholders, whether they keep it, they keep the money in the company or they take it for themselves. So in this situation, we noticed that the company had 3,000 of dividend. So we deduct 3,000 of dividend minus 3,000 and dividend. What's going to happen? The company will retain an earning 650. Simply put, if we're going to look at this picture, the company operated for a month of October. As a result, they made a profit of 3,650. And on the income statement, basically we used up all the expenses, all those expenses, we used them up, and we used all the revenues on the income statement. Notice there, they all went on the income statement. Then we prepared the statement of retained earnings. The statement of retained earnings is how much we kept from the earnings. Well, we made 3,650. 3,000 went to earnings. Therefore, what's left is 650. And this is basically the statement of retained earnings, 650. Now, what's left to prepare is the balance sheet. Well, you need to know the balance sheet's accounts are assets, liabilities, and equity. Let's start to prepare the balance sheet. The balance sheet would also have a three heading, the name of the statement, the name of the company, and the date. Notice the date is a point not period. What does that mean? It means this is the balance sheet exactly as of October 31st, not for the month of October 31st. So, October 30th, this balance sheet would look something different. On November 1st, it would look something different as well. So, it's that date. It's a picture of time. What do we list? We list all the assets. We have cash, receivable, supplies, prepaid, equipment, and accumulated depreciation. When we net them all out, they net out to 96,750. Now, please remember, this is a simple balance sheet. We're going to be looking at a classified balance sheet later on, much, much, much more in depth and much more in details. So, this is the balance sheet. The balance sheet shows us our resources, our assets as our resources. Excellent. What do we have to work with? This is what we have, all our assets. Also, the balance sheet shows us our liabilities. Well, liabilities, again, they're listed right after assets, and these are our liabilities. There we go. In this box, accounts payable, notes payable, salaries payable, interest payable, and unearned revenue, we add them up. We have total liabilities of 46,100. Liabilities are that, are claims. Basically, liabilities are, in a way, sources of assets or sources of the resources, and I told you the resources are assets. So, the liabilities, by incurring liabilities, you obtain assets. So, one source of assets is liabilities. They're sources, they're also a claim against the asset. So, we have 46,100. The balance sheet has the balance. The third component of the balance sheet is the state, is the stockholders' equity. Stockholders' equity, as far as we're concerned, now it's going to contain two main component, and later on, we'll expand on it. It's going to include common stock, which is this account here. Common stock, let me highlight it in yellow, the whole thing. Common stock, which is 50,000. Common stock, and common stock represent what the owner invested in the business. And it's going to include another important figure. It's going to include statement of retained earnings. So, notice the statement of retained earnings feeds into the balance sheet. That's very important to see. And what is retained earning? We just computed retained earnings. Retained earnings are what the company earned and kept, 650, because if they did not keep it, they gave it to shareholders. Also, the equity section is a source of assets, source of assets, just like the liabilities, source of assets. So, where did our assets came from? The investors put in 50,000. The company earned and kept 650. Both of those are sources of assets. Therefore, what's going to end up happening when we add up all our liabilities and all our equity, they should add up to total assets. So, that's why it's called the balance sheet. Assets equal liabilities plus owner's equity. So, this is the third component, not the third component. Yeah, the third component of the balance sheet and the balance sheet is the third financial statement that we're going to learn about today. Now, once again, this is basically an overview. So, simply put, if you're comfortable with this much, that's very helpful. It doesn't mean you are ready for the exam. This is a good starting point. The balance sheet will be covered much, much more in details. We're going to add more lines to the statement of retained earnings and we are going to look at the income statement much, much more in depth. But this is all what we need to know now because this is basics. Basics of financial accounting, it's the boot camp. In the next session, what I'm going to be doing is looking at the fourth, I believe the fourth, the fourth component of this boot camp and that's the closing entries. And I'm going to be using the same exact trial balance to show you to illustrate the closing process. It'll be very simple, just like the financial statement, but it will get to the point. Then we'll move on to the last session of this boot camp, which is converting from cash to approval. Once again, whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website farhatlectures.com. I don't replace your beloved CPA review course. I want you to have one. In addition to your CPA review course, I can help you. I can help you understand the material better. Together, we can help you pass the CPA exam. Don't shortchange yourself. Work hard. The exam is worth it. Good luck. Study hard and share with others.