Financial Statements for a Corporation

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Chapter 19

Financial Statements for a Corporation

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.
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Chapter 19

Section 1 The Ownership of a Corporation

• What Youll 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.

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

Why Its 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.

• Key Terms
• Capital Stock
• stockholders equity
• retained earnings
• comparability

• reliability
• relevance
• full disclosure
• materiality

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

Ownership of a Corporation

• Capital Stock
• investments in corporation by stockholders
• classified as stockholders equity

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

Recording the Ownership of a Corporation (cont.)

Business Transaction
On January 1 stockholders invested 25,000 in
exchange for shares of stock of the corporation.


Cash In Bank Capital Stock
Debit 25,000
Credit 25,000
Credit
Debit

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

Recording the Ownership of a Corporation (cont.)

Business Transaction
On January 1 stockholders invested 25,000 in
exchange for shares of stock of the corporation.

JOURNAL ENTRY 7.

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

Stockholders Equity

• CAPITAL STOCK
• Equity contributed by stock-holders
• RETAINED EARNINGS
• Equity earned through business profits

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

Retained Earnings

• represents increase in stockholders equity from
  portion of net income not distributed to
  stockholders

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

Users of Financial Information

• Managers
• evaluate past performance and to make informed
  decisions.
• Stockholders
• performance, potential future growth, and success
  of the business.

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

Characteristics of Financial Information (cont.)

• 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.

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

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.

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

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.

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

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.

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

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.

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

Materiality

• If something is material, it is important.
• Materiality means that information deemed
  relative should be included in financial reports.

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Section 1 The Ownership of a Corporation (cont.)
Chapter 19

Check Your Understanding

What is the purpose of preparing the same types
of financial statements at the end of each period?


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Chapter 19

Section 2 The Income Statement

• What Youll 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.

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Section 2 The Income Statement (cont.)
Chapter 19

Why Its Important The income statement reports
the net income or loss for the period and
indicates whether or not the business is
operating efficiently.

• Key Terms
• net sales
• net purchases
• gross profit on sales
• operating expenses

• selling expenses
• administrative expenses
• operating income
• vertical analysis

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Section 2 The Income Statement (cont.)
Chapter 19

The Income Statement An income statement for a
merchandising business has five sections

• Revenue

• Cost of Merchandise Sold

• Gross Profit on Sales

• Operating Expenses

• Net Income (or Loss)

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Section 2 The Income Statement (cont.)
Chapter 19

The Revenue Section This section reports the net
sales for the period.



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Section 2 The Income Statement (cont.)
Chapter 19

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.


Beginning Merchandise Inventory Net
Purchases During the Period Cost of Merchandise
Available for Sale Ending Merchandise
Inventory Cost of Merchandise Sold

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Section 2 The Income Statement (cont.)
Chapter 19

Net Purchases Net purchases is all the costs
related to merchandise purchased during the
period.

Purchases Transportation In Cost of
Delivered Merchandise Purchases Discounts
Purchases Returns and Allowances Net
Purchases


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Section 2 The Income Statement (cont.)
Chapter 19

Cost of Merchandise Sold



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Section 2 The Income Statement (cont.)
Chapter 19

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.

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Section 2 The Income Statement (cont.)
Chapter 19

The Operating Expenses Section

• Operating expenses are the costs of the goods and
  services used in the process of earning revenue
  for the business.

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Section 2 The Income Statement (cont.)
Chapter 19

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.

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Section 2 The Income Statement (cont.)
Chapter 19

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.

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Section 2 The Income Statement (cont.)
Chapter 19

Check Your Understanding

An income statement for a merchandising business
has five sections. Name and briefly describe
each section.


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Chapter 19

Section 3 The Statement of Retained Earnings and
the Balance Sheet

• What Youll 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.

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Section 3 The Statement of Retained Earnings and
the Balance Sheet (cont.)
Chapter 19

Why Its 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.

• Key Terms
• statement of retained earnings
• horizontal analysis
• base year
• working capital

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Section 3 The Statement of Retained Earnings and
the Balance Sheet (cont.)
Chapter 19

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.



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Section 3 The Statement of Retained Earnings and
the Balance Sheet (cont.)
Chapter 19

The Statement of Retained Earnings (cont.)



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Section 3 The Statement of Retained Earnings and
the Balance Sheet (cont.)
Chapter 19

The Balance Sheet

The balance sheet reports the balances of all
asset, liability, and stockholders equity
accounts for a specific date.


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Section 3 The Statement of Retained Earnings and
the Balance Sheet (cont.)
Chapter 19

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.


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Section 3 The Statement of Retained Earnings and
the Balance Sheet (cont.)
Chapter 19

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.



Current Assets Current Liabilities Working
Capital 110,182.00 17,592.09 92,589.91
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Section 3 The Statement of Retained Earnings and
the Balance Sheet (cont.)
Chapter 19

Check Your Understanding

What is reported on a statement of retained
earnings?