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.)
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