Financial statement preparation
/How to Prepare Financial Statements
The preparation of financial statements involves the process of aggregating accounting information into a standardized set of financials. The completed financial statements are then distributed to management, lenders, creditors, and investors, who use them to evaluate the performance, liquidity, and cash flows of a business. The preparation of financial statements includes the following steps (the exact order may vary by company).
Step 1: Verify Receipt of Supplier Invoices
Compare the receiving log to accounts payable to ensure that all supplier invoices have been received. Accrue the expense for any invoices that have not been received. This step may be fully automated in an advanced accounting software package; more commonly, you will need to manually compare the receiving log for the last week of the reporting period to received supplier invoices, to see if any are missing (which can be quite a task for a higher-volume business). A further issue is that it may not be worth your time to accrue an expense for the smaller-value supplier invoices. Usually, only higher-value invoice amounts are accrued.
Step 2: Verify Issuance of Customer Invoices
Compare the shipping log to accounts receivable to ensure that all customer invoices have been issued. Issue any invoices that have not yet been prepared. There should be a rock-solid billing procedure already in place, to ensure that all billings are issued to customers as soon as possible. Even when this is the case, the month-end closing process is a good time to go back and verify that all invoices have actually been issued. This task can be shifted to the internal audit team, which can periodically examine the billing process to ensure that all invoices are being issued in a timely manner.
Step 3: Accrue Unpaid Wages
Accrue an expense for any wages earned but not yet paid as of the end of the reporting period.
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Step 4: Calculate Depreciation
Calculate depreciation expense and amortization expense for all fixed assets in the accounting records. Ensure that you are not still taking depreciation expense on assets that have already been fully depreciated (which is especially common when you are tracking depreciation on an electronic spreadsheet).
Step 5: Value Inventory
Conduct an ending physical inventory count, or use an alternative method to estimate the ending inventory balance. Use this information to derive the cost of goods sold, and record the amount in the accounting records.
Step 6: Reconcile Bank Accounts
Conduct a bank reconciliation, and create journal entries to record all adjustments required to match the accounting records to the bank statement. This is an essential activity, since there are always reconciling items on the bank statement.
Step 7: Post Account Balances
Post all subsidiary ledger balances to the general ledger.
Step 8: Review Accounts
Review the balance sheet accounts, and use journal entries to adjust account balances to match the supporting detail. This requires a careful reconciliation of at least the major balance sheet accounts, to ensure that they only contain valid balances. In many cases, some or all of these balances need to be charged to expense.
Step 9: Review Financials
Print a preliminary version of the financial statements and review them for errors. There will likely be several errors, so create journal entries to correct them, and print the financial statements again. Repeat until all errors have been corrected.
Step 10: Accrue Income Taxes
Accrue an income tax expense, based on the corrected income statement. Ideally, the income tax rate should be based on your estimate of the average tax rate that will apply for the entire fiscal year.
Step 11: Close Accounts
Close all subsidiary ledgers for the period, and open them for the following reporting period. Otherwise, you will end up with transactions in the subsidiary ledgers that are incorrectly posted to a later reporting period.
Step I2: Issue Financial Statements
Print a final version of the financial statements. Based on this information, write footnotes to accompany the statements. Finally, prepare a cover letter that explains key points in the financial statements. Then assemble this information into packets and distribute them to the standard list of recipients.