1. Create an income statement similar to the practice problems with your employers name at the top. Make sure you include either a gain or a loss on a long-term asset (vehicle, equipment, building, machinery, etc.) and that you end with a net income and not a net loss.
2. Decide how much you are going to report as dividends that were paid out during the year.
3. Net income increases retained earnings and dividends decrease retained earnings. Now you need to select beginning and ending retained earnings balances that fit, given the numbers you chose for net income and dividends. In other words, your beginning retained earnings plus net income minus dividends should equal your ending retained earnings.
4. Create a balance sheet similar to the practice problems with your employers name at the top. Start by putting the retained earnings amounts in that you decided on above.
5. Next, you need to figure out beginning and ending accumulated depreciation amounts. That account is a contra asset, which means it increases on the credit side. When its presented on the balance sheet, it is shown as a negative number because it works against the long-term asset it relates to (contra-asset). Depreciation expense (from your income statement) makes that account even more negative. When you sell a long-term asset, accumulated depreciation is debited which means that account is less negative. Decide how much of your long-term asset you are going to sell and what that 4-line sale entry would look like (like the practice problems). Once you know how much accumulated depreciation would be debited for, you are ready to set your beginning and ending accumulated depreciation amounts. Just like the net income and dividends above, your accumulated depreciation account will be affected by the depreciation expense and the sale of that asset.
6. Now that you know how much of your long-term assets you are going to sell, you need to decide how much you are going to spend on new long-term assets. The increase from the purchase and the decrease from the sale have to explain the change in your beginning and ending long-term asset account.
7. Make sure your common stock and PIC accounts increased from the previous year.
8. Continue filling out (making up amounts) for the rest of your balance sheet for both years keeping in mind that your total assets MUST equal your liabilities plus equity. Do NOT move on until they balance!
9. Create your additional information section for the problem. This is where you provide more information about things like the sale and purchase of your long-term assets, dividends that were paid, and shares of stock that were issued. The increase in the common stock and the PIC account together represent how much cash you received from the issuance of stock. In the cash flow video when you see the phrase there was no gain or loss on the sale of the long-term investments, nor on the bonds retired, that does not mean that there was no change in those accounts. You can see, based on the numbers you selected in step 8 above, that those account balances did change (or at least they should have). No gain or loss just means just thatthere was no gain or loss related to those accounts that you had to worry about showing up on the income statement that you created earlier.