---
name: preparing-financial-statements
description: Builds the three financial statements — income statement, balance sheet, and cash flow statement — from a trial balance, with correct classification and cross-statement ties. Use when the user asks to prepare, draft, or review financial statements, a P&L or income statement, a balance sheet, a cash flow statement, year-end or month-end statements, or asks which framework applies (US GAAP, IFRS, or Canadian ASPE). Do not use for day-to-day bookkeeping (bookkeeping-for-small-businesses), tax filings (filing-us-business-taxes, filing-canadian-business-taxes), or public-company audited reporting.
---

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Author: Simon-Pierre Boucher
Contact: contact@spboucher.ai
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# Preparing Financial Statements

## When to use / when NOT to use
- **Use for:** producing an income statement, balance sheet, and cash flow statement from closed books/trial balance; classifying accounts; checking that statements tie; choosing/disclosing the framework (GAAP / IFRS / ASPE).
- **Do NOT use for:** recording transactions (→ `bookkeeping-for-small-businesses`), tax returns (→ the filing skills), or audited public-company reporting — that requires a licensed auditor.

## Important limits
- Educational help, not professional accounting advice — statements for lenders, investors, or audits go through a CPA.
- Framework guidance is tax-year/standard-stamped and MUST be verified against current GAAP/IFRS/ASPE pronouncements.
- Never assist with misstating results or falsifying records; refuse and explain.

## Core rules

1. **Start from a reconciled trial balance.** If debits ≠ credits, stop and fix the books first — statements built on an unbalanced trial balance are fiction.
2. **Income statement structure is fixed:** Revenue − COGS = Gross profit; − Operating expenses = Operating income; ± Interest/other = Pre-tax income; − Income tax = **Net income**.
   - ✅ COGS separated from operating expenses
   - ❌ One undifferentiated "Expenses" block
3. **Balance sheet MUST balance:** Assets = Liabilities + Equity, exactly. Classify current (≤12 months) vs non-current on both sides. Accumulated depreciation shown as a contra-asset.
4. **Cash flow statement: indirect method by default.** Operating = net income + non-cash addbacks (depreciation/amortization) ± working-capital changes (AR↑ subtracts, AP↑ adds); Investing = asset purchases/sales; Financing = loans and owner contributions/draws/dividends.
5. **The statements must tie.** Net income flows into retained earnings (ending RE = beginning RE + net income − dividends/draws); cash flow ending cash = balance sheet cash. If either tie fails, a statement is wrong.
6. **Name the framework on the statements.** US private companies: US GAAP. Canadian private companies: ASPE by default (IFRS if public or required by lenders). State the basis and whether statements are unaudited (e.g., "Notice to Reader / compilation").
7. **Show comparatives.** Present the prior period alongside the current one; explain material swings in the notes.
8. **Notes for anything material:** accounting basis, depreciation method/useful lives, loan terms, related-party transactions, commitments.

## Workflow

1. Obtain the closed, reconciled trial balance for the period (and prior period for comparatives).
2. Map each account to its statement line (use the classification table in the reference).
3. Build the income statement top-down; compute net income.
4. Build the balance sheet; roll retained earnings forward with net income and draws/dividends.
5. Build the cash flow statement (indirect); derive ending cash.
6. **Validate the three ties:** (a) balance sheet balances, (b) retained-earnings roll-forward uses the income statement's net income, (c) cash flow ending cash equals balance sheet cash. All three must pass before delivery.
7. Add framework/basis note, comparatives, and material-item notes.

## Edge cases & failure modes
- **Balance sheet off by exactly net income** → retained earnings not rolled forward.
- **Cash tie fails** → most often a missed financing item (owner draw/loan principal) or a working-capital sign error.
- **Negative equity** → present it plainly; do not net it away — flag going-concern language to a CPA.
- **Cash-basis books** → say so on the statements ("cash basis") rather than silently presenting them as GAAP/ASPE.

## References
Statement templates with a fully tied worked example and classification tables: see [references/reference.md](references/reference.md).