Financial Statements for a Corporation Making Accounting Relevant Public corporations often offer Web sites where they provide financial data. Making Accounting Relevant Public corporations often offer Web sites where they provide financial data. Discuss what types of financial information might be of interest to potential stockholders.

Section 1The Ownership of a Corporation What You’ll Learn  Which equity accounts are used in corporation accounting.  How equity earned through business profits is reported.  Which end-of-period financial statements are prepared for a corporation. What You’ll Learn  Which equity accounts are used in corporation accounting.  How equity earned through business profits is reported.  Which end-of-period financial statements are prepared for a corporation.

Why It’s Important To 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 Important To 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 1The 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

Ownership of a Corporation  Capital Stock investments in corporation by stockholders classified as stockholders’ equity  Capital Stock investments in corporation by stockholders classified as stockholders’ equity Section 1The Ownership of a Corporation (con’t.)

Recording the Ownership of a Corporation (con’t.) Section 1The Ownership of a Corporation (con’t.) Business Transaction On January 1 stockholders invested $25,000 in exchange for shares of stock of the corporation. Cash In BankCapital Stock Debit + 25,000 Credit + 25,000 Credit – Debit –

Recording the Ownership of a Corporation (con’t.) Section 1The Ownership of a Corporation (con’t.) Business Transaction On January 1 stockholders invested $25,000 in exchange for shares of stock of the corporation. JOURNAL ENTRY 7.

Stockholders’ Equity CAPITAL STOCK Equity contributed by stock- holders RETAINED EARNINGS Equity earned through business profits CAPITAL STOCK Equity contributed by stock- holders RETAINED EARNINGS Equity earned through business profits Section 1The Ownership of a Corporation (con’t.)

Retained Earnings  represents increase in stockholders’ equity from portion of net income not distributed to stockholders Section 1The Ownership of a Corporation (con’t.)

Users of Financial Information  Managers evaluate past performance and to make informed decisions.  Stockholders  performance, potential future growth, and success of the business.  Managers evaluate past performance and to make informed decisions.  Stockholders  performance, potential future growth, and success of the business. Section 1The Ownership of a Corporation (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 1The Ownership of a Corporation (con’t.)

Comparability  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 1The Ownership of a Corporation (con’t.)

Reliability  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 1The Ownership of a Corporation (con’t.)

Relevance  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 1The Ownership of a Corporation (con’t.)

Full 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 1The Ownership of a Corporation (con’t.)

Materiality  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 1The Ownership of a Corporation (con’t.)

Check Your Understanding What is the purpose of preparing the same types of financial statements at the end of each period? Section 1The Ownership of a Corporation (con’t.)

Section 2The Income Statement What You’ll Learn  What is included in each of the five sections of the income statement.  How to prepare an income statement using four amount columns.  How to calculate the cost of merchandise sold.  How to calculate the gross profit on sales.  How to analyze the information on the income statement. What You’ll Learn  What is included in each of the five sections of the income statement.  How to prepare an income statement using four amount columns.  How to calculate the cost of merchandise sold.  How to calculate the gross profit on sales.  How to analyze the information on the income statement.

Why It’s Important The income statement reports the net income or loss for the period and indicates whether or not the business is operating efficiently. Why It’s Important The income statement reports the net income or loss for the period and indicates whether or not the business is operating efficiently. Section 2The 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 Section 2The 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 2The 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 2The 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 2The 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

Cost of Merchandise Sold Section 2The Income Statement (con’t.)

The 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 2The Income Statement (con’t.)

The Operating Expenses Section  Operating expenses are the costs of the goods and services used in the process of earning revenue for the business. Section 2The Income Statement (con’t.)

The 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 2The Income Statement (con’t.)

Analyzing Amounts on the Income Statement  The income statement is analyzed to evaluate the financial performance of the business.  With vertical analysis, each dollar amount reported on a financial statement is also reported as a percentage of another amount, called a base amount, appearing on that same statement.  The income statement is analyzed to evaluate the financial performance of the business.  With vertical analysis, each dollar amount reported on a financial statement is also reported as a percentage of another amount, called a base amount, appearing on that same statement. Section 2The Income Statement (con’t.)

Check Your Understanding An income statement for a merchandising business has five sections. Name and briefly describe each section. Section 2The Income Statement (con’t.)

Section 3The Statement of Retained Earnings and the Balance Sheet What You’ll Learn  How to prepare a statement of retained earnings for a merchandising corporation.  How to prepare a balance sheet for a merchandising corporation.  How to analyze the balance sheet. What You’ll Learn  How to prepare a statement of retained earnings for a merchandising corporation.  How to prepare a balance sheet for a merchandising corporation.  How to analyze the balance sheet.

Why It’s Important The statement of retained earnings reports how the Retained Earnings stockholders’ equity account changes from the beginning to the end of the period. The balance sheet reports the financial position of the business on the last day of the period. Why It’s Important The statement of retained earnings reports how the Retained Earnings stockholders’ equity account changes from the beginning to the end of the period. The balance sheet reports the financial position of the business on the last day of the period. Section 3The Statement of Retained Earnings and the Balance Sheet (con’t.) Key Terms  statement of retained earnings  horizontal analysis  base year  working capital Key Terms  statement of retained earnings  horizontal analysis  base year  working capital

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 3The Statement of Retained Earnings and the Balance Sheet (con’t.)

The Statement of Retained Earnings (con’t.) Section 3The Statement of Retained Earnings and the Balance Sheet (con’t.)

The Balance Sheet The balance sheet reports the balances of all asset, liability, and stockholders’ equity accounts for a specific date. Section 3The Statement of Retained Earnings and the Balance Sheet (con’t.)

Analyzing Amounts on the Balance Sheet Horizontal analysis is the comparison of the same items on financial statements for two or more accounting periods or dates and the determination of changes from one period or date to the next. Section 3The Statement of Retained Earnings and the Balance Sheet (con’t.)

Working Capital The amount by which current assets exceed current liabilities is known as working capital. Because current liabilities are usually paid for out of current assets, working capital represents the excess assets available to continue operations. Section 3The Statement of Retained Earnings and the Balance Sheet (con’t.) Current Assets – Current Liabilities = Working Capital $110,182.00–$17,592.09=$92, Current Assets – Current Liabilities = Working Capital $110,182.00–$17,592.09=$92,589.91

Check Your Understanding What is reported on a statement of retained earnings? Section 3The Statement of Retained Earnings and the Balance Sheet (con’t.)