Preparing the Financial Statements

Once the adjusting entries have been made or entered into a worksheet, the financial statements can be prepared using information from the ledger accounts. Because some of the financial statements use data from the other statements, the following is a logical order for their preparation:

• Income statement
• Statement of retained earnings
• Balance sheet
• Cash flow statement

Income Statement

The income statement reports revenues, expenses, and the resulting net income. It is prepared by transferring the following ledger account balances, taking into account any adjusting entries that have been or will be made:

• Revenue
• Expenses
• Capital gains or losses

Statement of Retained Earnings

The retained earnings statement shows the retained earnings at the beginning and end of the accounting period. It is prepared using the following information:

• Beginning retained earnings, obtained from the previous statement of retained earnings.
• Net income, obtained from the income statement
• Dividends paid during the accounting period

Balance Sheet

The balance sheet reports the assets, liabilities, and shareholder equity of the company. It is constructed using the following information:

• Balances of all asset accounts such cash, accounts receivable, etc.
• Balances of all liability accounts such as accounts payable, notes, etc.
• Capital stock balance
• Retained earnings, obtained from the statement of retained earnings

Cash Flow Statement

The cash flow statement explains the reasons for changes in the cash balance, showing sources and uses of cash in the operating, financing, and investing activities of the firm. Because the cash flow statement is a cash-basis report, it cannot be derived directly from the ledger account balances of an accrual accounting system. Rather, it is derived by converting the accrual information to a cash-basis using one of the following two methods:

• Direct method: cash flow information is derived by directly subtracting cash disbursements from cash receipts.
• Indirect method: cash flow information is derived by adding or subtracting non-cash items from net income.

What is a stock split? Why do stocks split?

All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision by the company's board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders. For example, in a 2-for-1 stock split, every shareholder with one stock is given an additional share. So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2-for-1 split.

A stock's price is also affected by a stock split. After a split, the stock price will be reduced since the number of shares outstanding has increased. In the example of a 2-for-1 split, the share price will be halved. Thus, although the number of outstanding shares and the stock price change, the market capitalization remains constant.

A stock split is usually done by companies that have seen their share price increase to levels that are either too high or are beyond the price levels of similar companies in their sector. The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed.

A stock split can also result in a stock price increase following the decrease immediately after the split. Since many small investors think the stock is now more affordable and buy the stock, they end up boosting demand and drive up prices. Another reason for the price increase is that a stock split provides a signal to the market that the company's share price has been increasing and people assume this growth will continue in the future, and again, lift demand and prices.

Another version of a stock split is the reverse split. This procedure is typically used by companies with low share prices that would like to increase these prices to either gain more respectability in the market or to prevent the company from being delisted (many stock exchanges will delist stocks if they fall below a certain price per share). For example, in a reverse 5-for-1 split, 10 million outstanding shares at 50 cents each would now become two million shares outstanding at $2.50 per share. In both cases, the company is worth $5 million.

The bottom line is a stock split is used primarily by companies that have seen their share prices increase substantially and although the number of outstanding shares increases and price per share decreases, the market capitalization (and the value of the company) does not change. As a result, stock splits help make shares more affordable to small investors and provides greater marketability and liquidity in the market. 

Refer: www.investopedia.com/ask/answers/113.asp

Top 10 Corporate Accounting Scandals

Refer http://www.accounting-degree.org/scandals<a href="http://www.accounting-degree.org/scandals/"><img src="http://www.accounting-degree.org/scandals/accounting-scandals.jpg" alt="The 10 Worst Corporate Accounting Scandals of All Time" width="500" border="0" /></a><br />Source: <a href="http://www.accounting-degree.org">Accounting-Degree.org</a>