Financial Statements for a CorporationFinancial 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.

Discuss what types of financial

information might be of interest to

potential stockholders.

Section 1 The Ownership of a Corporation

Section 1 The 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 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

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

Recording the Ownership of a Corporation (con’t.)

Recording the Ownership of a Corporation (con’t.)

Section 1 The Ownership of a Corporation (con’t.)Section 1 The 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 Bank Capital Stock

Debit

+

25,000

Credit

+

25,000

Credit

–

Debit

–

Recording the Ownership of a Corporation (con’t.)

Recording the Ownership of a Corporation (con’t.)

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

Retained EarningsRetained Earnings

represents increase in

stockholders’ equity from portion

of net income not distributed to

stockholders

represents increase in

stockholders’ equity from portion

of net income not distributed to

stockholders

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

Users of Financial InformationUsers 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 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.)

Check Your UnderstandingCheck Your Understanding

What is the purpose of

preparing the same types of

financial statements at the end

of each period?

What is the purpose of

preparing the same types of

financial statements at the end

of each period?

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

Section 2 The Income Statement

Section 2 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.

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 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.)

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

Cost of Merchandise SoldCost of Merchandise Sold

Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)

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.)

Analyzing Amounts on the Income StatementAnalyzing 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 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)

Check Your UnderstandingCheck Your Understanding

An income statement for a

merchandising business has five

sections. Name and briefly

describe each section.

An income statement for a

merchandising business has five

sections. Name and briefly

describe each section.

Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)

Section 3The Statement of Retained Earnings and the Balance Sheet

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 ImportantThe 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 ImportantThe 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 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.)

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 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 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.)

Analyzing Amounts on the Balance SheetAnalyzing 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.

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 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.)

Working CapitalWorking 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.

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 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.)

Current Assets – Current Liabilities = Working Capital

$110,182.00 – $17,592.09 = $92,589.91

Current Assets – Current Liabilities = Working Capital

$110,182.00 – $17,592.09 = $92,589.91

Check Your UnderstandingCheck Your Understanding

What is reported on a

statement of retained

earnings?

What is reported on a

statement of retained

earnings?

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.)