How to Prepare Financial Statements: A Guide for FP&A Teams

How to Prepare Financial Statements

Financial statements are essential tools for evaluating a company’s financial health, performance, and stability, As a financial planning and analysis (FP&A) team, understanding how to prepare financial statements is crucial for making informed decisions. The three main financial statements are:

  • Income Statement: Assessing revenue, expenses, and overall performance.
  • Balance Sheet: Summarizing assets, liabilities, and shareholder equity.
  • Cash Flow Statement: Tracking cash inflows and outflows.

Together, these statements offer a comprehensive picture of a company’s financial standing. Whether you’re using software or manually compiling data, the process for preparing these statements remains largely the same. Below, we’ll guide you through the preparation of each financial statement step by step.


How to Prepare an Income Statements

The income statement (also known as a profit and loss statement) provides insight into a company’s profitability over a period of time. It helps management and investors assess overall performance and financial health. Here’s how to prepare it:

1. Choose Your Reporting Period

Select a reporting period based on your goals. A monthly report is ideal for short-term assessments, while an annual report provides a broader, long-term view of financial performance.

2. Determine Your Trial Balance

A trial balance lists all account balances at a given point in time and ensures that debits and credits are balanced. This serves as the foundation for preparing an income statement.

3. Calculate Revenue

Include both operating income (from core business activities, like sales) and non-operating income (from external sources, such as interest or rental income).

4. Calculate the Cost of Goods Sold (COGS)

COGS represents the direct costs of producing products or services sold by the company. This includes materials, payroll costs for production employees, and equipment overhead.

5. Calculate Gross Profit

Subtract COGS from net sales to determine the gross profit. This metric shows how efficiently a company produces its goods or services.

6. Account for Operating Expenses

Operating expenses include costs like rent, utilities, marketing, and salaries for non-production employees. These do not include costs tied directly to product creation (those are part of COGS).

7. Calculate Total Income

Subtract your operating expenses from the gross profit to calculate total income, also known as earnings before interest and taxes (EBIT).

8. Account for Taxes and Interest

Deduct any applicable taxes and interest payments from total income to get a more realistic measure of profitability.

9. Find Net Income

Finally, subtract taxes and interest from your total income to calculate net income — the bottom-line profit or loss for the reporting period.


How to Prepare a Balance Sheet

The balance sheet provides a snapshot of a company’s financial position, highlighting assets, liabilities, and equity. It’s an essential tool for evaluating financial health and stability. Here’s how to prepare a balance sheet:

1. List Your Assets

Categorize assets into current (e.g., cash, accounts receivable), fixed (e.g., property, machinery), and other assets (e.g., investments, intellectual property). Total these to determine your company’s assets.

2. List Your Liabilities

Liabilities are amounts the company owes. These can be current (e.g., accounts payable, short-term loans) or long-term (e.g., long-term loans, bonds). Add them up to determine your liabilities.

3. Calculate Shareholders’ Equity

Use the following formula to determine equity: Shareholders’ Equity = Total Assets – Total Liabilities This represents the ownership value in the company, including retained earnings, which are profits not distributed as dividends but reinvested for growth.

4. Balance Your Sheet

Ensure your balance sheet is balanced with the fundamental accounting equation: Assets = Liabilities + Shareholders’ Equity

This equation must always hold true.


How to Prepare a Cash Flow Statement

The cash flow statement tracks how cash moves in and out of the business during a specific period. It helps you understand the company’s cash generation, usage, and overall liquidity.

1. Find Your Starting Cash Balance

The starting balance is taken from the ending balance in your previous cash flow statement, and it’s the foundation for calculating cash flows.

2. Calculate Cash Flow from Operating Activities

Cash flow from operating activities shows the cash generated or used in core business operations. You can calculate this using two methods:

  • Indirect Method: Begin with net income and adjust for non-cash expenses (like depreciation) and changes in working capital (accounts receivable, payable, etc.).
  • Direct Method: Track actual cash inflows and outflows from operations, which is a more detailed and time-consuming process.

3. Calculate Cash Flow from Investing Activities

Add cash received from sales of long-term assets or investments and subtract cash spent on acquiring them.

4. Calculate Cash Flow from Financing Activities

Include cash from issuing equity, borrowing, and capital contributions. Then, subtract outflows like loan repayments, dividends, or repurchasing shares.

5. Find Your Ending Cash Balance

Add the net cash flow from operating, investing, and financing activities to your starting cash balance to determine the ending balance for the period. Track this balance over time to understand cash flow trends.


Conclusion: Work Smarter with PivotXL

Financial statements are essential for providing insights into your company’s financial performance, allowing you to make informed, data-driven decisions. While preparing these statements can be complex, PivotXL simplifies the process with powerful tools designed for FP&A teams. With PivotXL, you can efficiently generate financial statements and gain deeper insights into your business’s financial health.

If you’re looking for ways to streamline your financial reporting and make better decisions, PivotXL is here to help. Try our platform today and see how it can help you work smarter, not harder.

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