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Financial Statements for a CorporationFinancial Statements for a Corporation
Why It’s ImportantThe income statement reports the net
income or loss for the period and indicates whether or not the business is operating efficiently.
Why It’s ImportantThe income statement reports the net
income or loss for the period and indicates whether or not the business is operating efficiently.
Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)
Key Terms net sales
net purchases
gross profit on sales
operating expenses
Key Terms net sales
net purchases
gross profit on sales
operating expenses
selling expenses administrative
expenses operating income vertical analysis
selling expenses administrative
expenses operating income vertical analysis
The Income Statement
An income statement for a merchandising business has five sections:
The Income Statement
An income statement for a merchandising business has five sections:
Revenue Revenue
Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)
Cost of Merchandise Sold Cost of Merchandise Sold
Gross Profit on Sales Gross Profit on Sales
Operating Expenses Operating Expenses
Net Income (or Loss) Net Income (or Loss)
The Revenue Section
This section reports the net sales for the period.
The Revenue Section
This section reports the net sales for the period.
Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)
Cost of Merchandise SoldCost of Merchandise Sold
Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)
The Cost of Merchandise Sold Section
The “cost of merchandise sold” is the actual cost to the business of the merchandise that was sold to customers during the period.
The Cost of Merchandise Sold Section
The “cost of merchandise sold” is the actual cost to the business of the merchandise that was sold to customers during the period.
Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)
Beginning Merchandise Inventory
+ Net Purchases During the Period
Cost of Merchandise Available for Sale
– Ending Merchandise Inventory
Cost of Merchandise Sold
Beginning Merchandise Inventory
+ Net Purchases During the Period
Cost of Merchandise Available for Sale
– Ending Merchandise Inventory
Cost of Merchandise Sold
Net Purchases
Net purchases is all the costs related
to merchandise purchased during the
period.
Net Purchases
Net purchases is all the costs related
to merchandise purchased during the
period.
Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)
Purchases
+ Transportation In
Cost of Delivered Merchandise
– Purchases Discounts
– Purchases Returns and Allowances
Net Purchases
Purchases
+ Transportation In
Cost of Delivered Merchandise
– Purchases Discounts
– Purchases Returns and Allowances
Net Purchases
The Gross Profit on Sales SectionThe Gross Profit on Sales Section
The gross profit on sales is the
profit made during the period
before operating expenses are
deducted.
Gross profit on sales is found by
subtracting the cost of
merchandise sold from net sales.
The gross profit on sales is the
profit made during the period
before operating expenses are
deducted.
Gross profit on sales is found by
subtracting the cost of
merchandise sold from net sales.
Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)
The Operating Expenses SectionThe Operating Expenses Section
Operating expenses are the
costs of the goods and
services used in the process
of earning revenue for the
business.
Operating expenses are the
costs of the goods and
services used in the process
of earning revenue for the
business.
Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)
The Net Income SectionThe Net Income Section
The final section of the income statement reports the net income (or net loss) for the period.
Operating income is the amount of income earned before federal corporate income taxes are deducted.
To calculate operating income, subtract the total operating expenses from the gross profit on sales.
The final section of the income statement reports the net income (or net loss) for the period.
Operating income is the amount of income earned before federal corporate income taxes are deducted.
To calculate operating income, subtract the total operating expenses from the gross profit on sales.
Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)
Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)
• Net Sales = Sales - Sales Discounts - Sales Returns and Allowances
• Cost of Merchandise Sold=Beginning Inventory + Net purchases –Ending Inventory **(Net Purchases=Purchases + Transportation In - Purchases
Discounts - Purchases Returns and Allowances)
• Gross Profit=Net Sales – Cost of Merchandise Sold
• Operating Income =Gross Profit – Operating Expense
• Net Income Before Taxes=Operating Income +/- Net Addition/Deductions
• Net Income=Net Income Before Taxes – Fed. Corp. Income Tax Expense
The Income Statement FormulasThe Income Statement Formulas
The Statement of Retained Earnings
A statement of retained earnings
reports the changes that take place
in the Retained Earnings account
during the period. These changes
result from business operations and
the distribution of earnings to
stockholders through dividends.
The Statement of Retained Earnings
A statement of retained earnings
reports the changes that take place
in the Retained Earnings account
during the period. These changes
result from business operations and
the distribution of earnings to
stockholders through dividends.
Section 3 The Statement of Retained Earnings and the Balance Sheet (con’t.)
Section 3 The Statement of Retained Earnings and the Balance Sheet (con’t.)
Stockholders’ EquityStockholders’ Equity
Equity contributed by stock-
holders
Equity earned through business
profits
Retained earnings represents the
increase in stockholders’ equity
from the portion of net income
not distributed to the
stockholders.
Equity contributed by stock-
holders
Equity earned through business
profits
Retained earnings represents the
increase in stockholders’ equity
from the portion of net income
not distributed to the
stockholders.
Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)
The Statement of Retained Earnings (con’t.)
The Statement of Retained Earnings (con’t.)
Section 3 The Statement of Retained Earnings and the Balance Sheet (con’t.)
Section 3 The Statement of Retained Earnings and the Balance Sheet (con’t.)
The Balance SheetThe Balance Sheet
The balance sheet reports
the balances of all asset,
liability, and stockholders’
equity accounts for a specific
date.
The balance sheet reports
the balances of all asset,
liability, and stockholders’
equity accounts for a specific
date.
Section 3 The Statement of Retained Earnings and the Balance Sheet (con’t.)
Section 3 The Statement of Retained Earnings and the Balance Sheet (con’t.)
The Balance Sheet (con’t.)The Balance Sheet (con’t.)
Section 3 The Balance Sheet (con’t.)Section 3 The Balance Sheet (con’t.)
Find on Statement of Changes in O.E
All balances found on the worksheet
Capital Stock 20,000Retained Earnings 6,050 Total Stockholders Equity 26,050Total Liabilities and Stockholders’Equity 37,775
Characteristics of Financial Information
Financial statements are used by many groups.
Characteristics of Financial Information
Financial statements are used by many groups.
Managers analyze the financial
statements to help evaluate past
performance and to make informed
decisions.
Stockholders are interested in the
performance, potential future growth,
and success of the business.
Managers analyze the financial
statements to help evaluate past
performance and to make informed
decisions.
Stockholders are interested in the
performance, potential future growth,
and success of the business.
Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)
Characteristics of Financial Information (con’t.)
Characteristics of Financial Information (con’t.)
Creditors want to know the ability of
the business to pay its debts.
Government agencies, employees,
consumers, and the general public
are also interested in the financial
position of the business.
Creditors want to know the ability of
the business to pay its debts.
Government agencies, employees,
consumers, and the general public
are also interested in the financial
position of the business.
Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)
ComparabilityComparability
For accounting information to be
useful, it must be
understandable and comparable.
Comparability allows accounting
information to be compared
from one fiscal period to
another.
For accounting information to be
useful, it must be
understandable and comparable.
Comparability allows accounting
information to be compared
from one fiscal period to
another.
Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)
ReliabilityReliability
Users of accounting data assume
that the amounts are reliable.
Reliability relates to the
confidence users have that the
financial information is
reasonably free from bias and
error.
Users of accounting data assume
that the amounts are reliable.
Reliability relates to the
confidence users have that the
financial information is
reasonably free from bias and
error.
Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)
RelevanceRelevance
Not all information about a
business is relevant to financial
decision making.
Relevance means that the
information “makes a difference”
to a user in reaching a business
decision.
Not all information about a
business is relevant to financial
decision making.
Relevance means that the
information “makes a difference”
to a user in reaching a business
decision.
Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)
Full DisclosureFull Disclosure
To “disclose” means “to uncover
or to make known.”
Full disclosure means that
financial reports include enough
information so that the report is
complete.
To “disclose” means “to uncover
or to make known.”
Full disclosure means that
financial reports include enough
information so that the report is
complete.
Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)
MaterialityMateriality
If something is “material,” it is
important.
Materiality means that
information deemed relative
should be included in financial
reports.
If something is “material,” it is
important.
Materiality means that
information deemed relative
should be included in financial
reports.
Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)
Why It’s ImportantTo properly prepare end-of-period
financial reports for a corporation, you need to understand how equity for a corporation is handled and the differences in equity between corporations and sole proprietorships.
Why It’s ImportantTo properly prepare end-of-period
financial reports for a corporation, you need to understand how equity for a corporation is handled and the differences in equity between corporations and sole proprietorships.
Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)
Key Terms Capital Stock stockholders’ equity retained earnings comparability
Key Terms Capital Stock stockholders’ equity retained earnings comparability
reliability relevance full disclosure materiality
reliability relevance full disclosure materiality