Post on 12-Jan-2016
Accounting Concepts
Adequate Disclosure: When financial statements contain all information necessary
to understand a business’s financial situation. Can you make a good decision if you don’t know if you have a
net loss or net income?
Going Concern: When financial statements are prepared with the expectation
that a business will remain in operation indefinitely
Stakeholders: any person or group that will be affected by an action
Activity:
Turn to page 181 and Read Making Ethical Decisions Think about TechKnow Consulting (sells services)
Who are their stakeholders? Enter your answer on the bottom of page 143 of your Workbook
Owners Employees Suppliers (Accounts Payables) Customers Society/Communities
Ex: PG&E – hexavalent chromium to fight corrosion in cooling towers
Reporting Financial Information
Why do companies report financial information? Report the financial condition of the company Needed to make good business decisions Needed to make ethical decisions
What two types of financial statements are used? Income Statements Balance Sheets
When are they prepared? At the end of the fiscal period Either yearly or monthly (our example is using a 1 month)
When does the fiscal period end?
An Income Statement
Reports financial information for a specified period of time Entire Fiscal period (“For Month Ended…”, or “For Year ended..”) Shows how we did as a business for the entire year/month
Reports Financial progress Do we have a Net Income or Net Loss
What two types of accounts are on the Income Statement? Revenue (Sales) Expenses (costs to operate the business)
Completing an Income Statement Form
Information needed to complete the Income Statement: Account titles from the Title column of the Work Sheet Balances from the Income Statement columns of the Worksheet
Three Sections of an Income Statement: Form Heading (Who, What, When) Division Titles
Revenue Expenses Net Income or Net Loss
Percentage of Sales
IncomeStatement
1. Create the Heading Section• Who, What, When
2. List Revenue Accounts: • Enter division title• Indent Account Titles• Enter balance in
middle column
3. Prepare Expense Accounts: • Enter division title• Indent Account Titles• Balances in first column• Single Rule after last
expense account
4. Record Total Expenses • Enter “Total Expenses” on
next line below expenses• Sum Total Expenses and
enter value in middle amount column
% of Sales
5. Report Net Income/Net Loss
• Single rule below Total Expenses balance
• Enter “Net Income” division title on the Next blank line (not indented)
6. Report Net Income/Net Loss
• Subtract total expenses from total revenue.
• Double rule below both amount columns
Lawn Pro Company Income Statement
For Month Ended November 30, 2010
% of Sales
Revenue:
Sales 3 8 0 0 00
Expenses:
Advertising Expense 2 0 0 00
Insurance Expense 1 5 0 00
Miscellaneous Exp. 5 0 00
Rent Expense 6 0 0 00
Supplies Expense 5 0 0 00
Utilities Expense 3 9 0 00
Total Expenses 1 8 9 0 00
Component Percentages
Component percentage: the percentage relationship between one financial statement item and the total that includes that item Managers analyze relationships between expenses and revenue Assist with making decisions about future operations Two components: total expenses and net income/loss
Tells the percent of revenue that is expenses Tells the percent of revenue that is net income/loss
COMPONENTPERCENTAGE
3. Component % of Net Income • Divide Net Income by Total
Revenue• An acceptable % for Net
Income is not less than 45%• Convert to a Percentage• Round to one decimal place
2. Component % of Expense:• Divide total Expenses by
Total Revenue• An acceptable % for
expenses is not greater than 55%
• Convert to a Percentage• Round to one decimal place
1. Component % of Revenue:• Sales = 100% of
Revenue
• What is the % of Expenses?49.7%
• Is this acceptable?Yes
• What is the % of Net Income? 50.3%
• Is this acceptable?Yes
LawnPro Company Income Statement
For Month Ended November 30, 2010
% of Sales
Revenue:
Sales 3 8 0 0 00
Expenses:
Advertising Expense 2 0 0 00
Insurance Expense 1 5 0 00
Miscellaneous Exp. 5 0 00
Rent Expense 6 0 0 00
Supplies Expense 5 0 0 00
Utilities Expense 3 9 0 00
Total Expenses 1 8 9 0 00
Net Income: 1 9 1 0 00