1. Chapter 15
page 454
Objectives:
Define accounting terms & identify accounting concepts & practices related to financial statements for a merchandising business organized as a corporation
Prepare an income statement for a merchandising business organized as a corporation
Analyze an income statement using component percentages and financial ratios
Prepare a statement of stockholders’ equity for a merchandising business organized as a corporation
Prepare a balance sheet for a merchandising business organized as a corporation
LESSON 15-1

2. cost of merchandise sold gross profit on sales financial ratio
TERMS REVIEW
page 454
net sales
cost of merchandise sold
gross profit on sales
financial ratio
earnings per share
price-earning ratio
statement of stockholders’ equity
par value
current liabilities
long-term liabilities
supporting schedule
LESSON 15-1

3. LESSON 15-1: Preparing an Income Statement
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LESSON 15-1: Preparing an Income Statement
An income statement is used to report a business’s financial progress during a fiscal period.
Information from a completed work sheet is used to prepare an income statement.
The income statement of a merchandising business has 3 main sections:
1. Revenue section
2. Cost of Merchandise Sold section
3. Expenses section

4. INCOME STATEMENT INFORMATION ON A WORK SHEET
page 448
LESSON 15-1

5. Revenue Section of an Income Statement for a Merchandising Business
LESSON 15-1
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Revenue Section of an Income Statement for a Merchandising Business
The heading should include three parts:
1. Business name
2. Statement name—Income Statement
3. Period of report— “For year ended December 31, 20—”
The Revenue section is calculated from three amounts found on the work sheet. The sum of the two contra accounts, Sales Discount and Sales Returns & Allowances, is deducted from Sales to calculate Net Sales.
Net Sales—total sales less sales discount and sales return and allowances

6. REVENUE SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS
page 449 1 2 3 4 5 8 9 6 7
1. Heading
6. Contra account amounts
2. Revenue section
7. Contra account total
3. Title of revenue account
8. Net Sales
4. Sales amount
9. Net sales amount
5. Less contra accounts
LESSON 15-1

7. COST OF MERCHANDISE SOLD SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS
page 450
Cost of merchandise sold—the original price of all merchandise sold during a fiscal period
The Cost of Merchandise Sold section is unique to merchandising businesses.
The cost of merchandise sold is calculated from five amounts found on the work sheet. Three of these amounts are found in the Income Statement columns of the work sheet. Other amounts are found in the Trial Balance and Balance Sheet columns of the worksheet.
LESSON 15-1

8. COST OF MERCHANDISE SOLD SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS
page 450
1. Cost of Merchandise Sold section
2. Beginning inventory 1
3. Purchases section 2
4. Total cost of merchandise available for sale 3 4
5. Ending inventory 5 6
6. Cost of merchandise sold
LESSON 15-1

9. COMPLETING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS
page 452
Gross profit on sales—the revenue remaining after cost of merchandise sold has been deducted; sales less cost of merchandise sold
Gross profit on sales is important information used by management in making decisions about a business. Gross profit is the amount remaining that is available to cover expenses and to provide a profit.
Each expense, except for federal income tax expense, is listed and the total entered on the income statement.
Corporations calculate net income before and after federal income taxes.
The percentage relationship between one financial statement item and the total that includes that item is known as a component percentage.
Component percentages are calculated for each of the significant amounts.
Component percentages are calculated by dividing each significant amount by the sales amount.
LESSON 15-1

10. COMPLETING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS
page 452
1. Gross Profit on Sales
2. Expenses section 7 1
3. Net Income before Federal Income Tax
4. Less Federal Income Tax Expense 2
5. Net Income after Federal Income Tax
6. Double lines 3
7. Component percentage 4 6 5
LESSON 15-1

11. Let’s do Work Together 15-1 and On Your Own 15-2 on textbook page 454.
LESSON 15-2
4/25/2018
LESSON 15-1
Let’s do Work Together 15-1 and On Your Own 15-2 on textbook page 454.
GREEN

12. LESSON 15-2: Analyzing an Income Statement
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LESSON 15-2: Analyzing an Income Statement
A percentage relationship between one financial statement item and the total that includes that item is known as a component percentage.
Component percentages are useful only if the following are considered: industry standards, past performance of the company in more than one fiscal period, and company’s goals and objectives.
Acceptable Industry Standards
Sales
100%
Cost of merchandise sold
Not more than 46%
Gross profit on sales
Not less than 54%
Total expenses
Not more than 35%
Net income before federal income tax
Not less than 19%
GREEN

13. Analysis of Component Percentages
LESSON 15-2
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Analysis of Component Percentages
page 456
Cost of Merchandise Sold Component Percentage—The cost of merchandise sold is a major cost and must be kept as low as possible
Gross Profit on Sales Component Percentage—Gross profit must be large enough to cover total expenses and the desired amount of net income
Total Expenses Component Percentage—Total expenses must be less than gross profit on sales to provide a desirable net income
Net Income before Federal Income Tax Component Percentage—The component percentage for net income before federal income tax shows the progress being made by a business.
LESSON 15-2
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14. ANALYZING AN INCOME STATEMENT SHOWING A NET LOSS
LESSON 15-2
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ANALYZING AN INCOME STATEMENT SHOWING A NET LOSS
page 457
When a business’s total expenses are greater than the gross profit on sales, the difference is known as a net loss.
A business must analyze the income statement to determine the reason for the net loss. Calculating component percentages can help locate the reason for the net loss.
A tax refund (benefit) reduces the net loss.
Negative amounts on a financial statement are written within parentheses.
LESSON 15-2
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15. ANALYZING AN INCOME STATEMENT SHOWING A NET LOSS
LESSON 15-2
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ANALYZING AN INCOME STATEMENT SHOWING A NET LOSS
page 457
LESSON 15-2
GREEN

16. FINANCIAL RATIOS
page 459
Financial ratio—a comparison between two items of financial info
Earnings per share (EPS)—the amount of net income after federal income tax belonging to a single share of stock
Earnings per Share =
Number of Shares Outstanding ÷
Net Income after Federal Income Tax ÷ =
$32.13
2,500
$80,313.95
Earnings per share is the most widely recognized measure of financial performance. EPS is compared to prior year’s earnings per share or the market price of the stock.
LESSON 15-2

17. FINANCIAL RATIOS
page 459
Price earnings ratio (P-E ratio)—relationship between the market value per share and earnings per share of a stock
Price-Earnings Ratio =
Earnings per Share ÷
Market Price per Share =
10.7
$345.00 ÷
$32.13
The price earnings ratio provides investors with information concerning the price of the stock relative to the earnings. Low price earnings ratios are typically associated with slow growth companies. Companies expected to have dynamic growth in future earnings typically have a high price earnings ratio.
LESSON 15-2

18. Let’s do Work Together 15-2 and On Your Own 15-2 on textbook page 460.
LESSON 15-3
4/25/2018
LESSON 15-2
Let’s do Work Together 15-2 and On Your Own 15-2 on textbook page 460.
GREEN

19. LESSON 15-3: Preparing a Statement of Stockholders’ Equity
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LESSON 15-3: Preparing a Statement of Stockholders’ Equity
Statement of Stockholders’ Equity—financial statement that shows changes in a corporation’s ownership for a fiscal period
Contains two sections: capital stock and retained earnings
Par Value—a value assigned to a share of stock and printed on the stock certificate
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20. CAPITAL STOCK SECTION OF THE STATEMENT OF STOCKHOLDERS’ EQUITY
page 461 1 2 3 4 5
1. Heading
2. Capital Stock and Par Value
3. Stock at the beginning of the year
4. Stock issued during the year
5. Total stock issued at the end of the year
LESSON 15-3

21. RETAINED EARNINGS SECTION OF THE STATEMENT OF STOCKHOLDERS’ EQUITY
page 462 1 3 5 2 4 6 7
1. Retained Earnings
4. Dividends declared
2. Beginning balance
5. Increase in retained earnings
3. Net income after federal income tax
6. Ending balance
7. Total stockholders’ equity
LESSON 15-3

22. Let’s do Work Together 15-3 and On Your Own 15-3 on textbook page 463.
LESSON 15-4
4/25/2018
LESSON 15-3
Let’s do Work Together 15-3 and On Your Own 15-3 on textbook page 463.
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23. LESSON 15-4: Preparing a Balance Sheet
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LESSON 15-4: Preparing a Balance Sheet
A balance sheet reports a business’s financial condition on a specific date.
A balance sheet may be prepared in account form or report form.
Information used to prepare a balance sheet is obtained from two sources: 1) the Balance Sheet columns of a work sheet and 2) the statement of stockholders’ equity.
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24. CURRENT ASSETS SECTION OF A BALANCE SHEET
page 465 1 2 3 4 5
1. Heading
4. Remaining current asset accounts
2. Begin assets section
5. Current assets
3. Book value of accounts receivable
LESSON 15-4

25. PLANT ASSETS SECTION OF A BALANCE SHEET
LESSON 15-4
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PLANT ASSETS SECTION OF A BALANCE SHEET
page 466 1 2 4 3 5
1. Write the heading Plant Assets.
2. Calculate the book value of office equipment.
3. Use the same procedure to calculate the book value of store equipment.
4. Calculate total plant assets.
5. Calculate total assets.
LESSON 15-4
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26. LIABILITIES SECTION OF A BALANCE SHEET
page 467
1. Heading
2. Account title and amount of each current liability 1
3. Total liabilities 2
Current liabilities—liabilities due within a short time, usually within a year
Long term liabilities—liabilities owed for more than a year 3
LESSON 15-4

27. STOCKHOLDERS’ EQUITY SECTION OF A BALANCE SHEET
page 468
Capital Stock—the amount invested by stockholders
Retained Earnings—the amount retained by the corporation and not yet distributed to stockholders
Amounts in the Stockholders’ Equity section are obtained from the statement of stockholders’ equity
LESSON 15-4

28. STOCKHOLDERS’ EQUITY SECTION OF A BALANCE SHEET
page 468 6 1 3 2 4 5
1. Stockholders’ Equity
5. Total liabilities and stockholders’ equity
2. Capital stock
6. Double rule
3. Retained earnings
4. Total stockholders’ equity
LESSON 15-4

29. COMPLETED BALANCE SHEET
page 469
(continued on next slide)
LESSON 15-4

30. COMPLETED BALANCE SHEET
page 469
(continued from previous slide)
LESSON 15-4

31. Supporting Schedules for a Balance Sheet
Supporting schedule—a report prepared to give details about an item on a principal financial statement
Schedule of accounts payable—shows the balance for each vendor
Schedule of accounts receivable—shows the balance for each customer

32. Let’s do Work Together 15-4 and On Your Own 15-4 on textbook page 471.
Lesson 15-4
Let’s do Work Together 15-4 and On Your Own 15-4 on textbook page 471.
LESSON 15-1