© 2014 Cengage Learning. All Rights Reserved. Vocabulary Test Review © 2014 Cengage Learning. All Rights Reserved.

Reporting Financial Information ●The area of accounting that focuses on reporting information to external users is called financial accounting. ●The area of accounting that focuses on reporting information to internal users is called managerial accounting. ●Preparing financial statement at the end of each monthly fiscal period is an application of the accounting concept Accounting Period Cycle. SLIDE 2 Lesson 7-1 LO1

© 2014 Cengage Learning. All Rights Reserved. Preparing an Income Statement from Information on a Work Sheet ●Information needed to prepare the income statement is obtained from the work sheet. SLIDE 3 LO1 Lesson 7-1 Account titles are obtained from the work sheet’s Account Title column. Account balances are obtained from the work sheet’s Income Statement columns.

© 2014 Cengage Learning. All Rights Reserved. Heading of an Income Statement SLIDE 4 LO1 Lesson 7-1 Very Important: When any financial statement reports Net Income, the date has to be for a period of time. An income statement shows financial progress over a period of time.

© 2014 Cengage Learning. All Rights Reserved. Revenue, Expenses, and Net Income Sections of an Income Statement LO1 Lesson 7-1 Reporting in the same fiscal period the revenue earned and the expenses incurred to earn that revenue is an application of the accounting concept Matching Expenses with Revenue. Matching Expenses with Revenue

© 2014 Cengage Learning. All Rights Reserved. Revenue, Expenses, and Net Income Sections of an Income Statement LO1 Lesson 7-1 The information needed to prepare an income statement’s revenue section comes from the work sheet’s Account Title column and the Income Statement Credit Column.

© 2014 Cengage Learning. All Rights Reserved. Revenue, Expenses, and Net Income Sections of an Income Statement LO1 Lesson 7-1 The information needed to prepare an income statement’s expense section comes from the work sheet’s Account Title column and the Income Statement Debit Column. ( Think of the account’s normal balance side.)

© 2014 Cengage Learning. All Rights Reserved. Analyzing an Income Statement ●A comparison between two components of financial information is called a financial ratio. ●The calculation and interpretation of a financial ratio is called ratio analysis. ●Reporting an amount on a financial statement as a percentage of another item on the same financial statement is called vertical analysis. SLIDE 8 LO2 Lesson 7-1

© 2014 Cengage Learning. All Rights Reserved. Analyzing an Income Statement SLIDE 9 LO2 Lesson 7-1 The revenue reported includes components for total expenses and net income. This income statement shows that 45.7% of the revenue is total expenses (one component), and 54.3% of the revenue is net income (the other component).

© 2014 Cengage Learning. All Rights Reserved. Analyzing an Income Statement SLIDE 10 LO2 Lesson 7-1 Net Income Ratio Net Income ÷ Total Sales = Net Income Ratio $3, ÷ $5, = 54.3% Net Income Ratio Net Income ÷ Total Sales = Net Income Ratio $3, ÷ $5, = 54.3% Total Expenses Ratio Total Expenses ÷ Total Sales = Total Expenses Ratio $2, ÷ $5, = 45.7% Total Expenses Ratio Total Expenses ÷ Total Sales = Total Expenses Ratio $2, ÷ $5, = 45.7% The double underline indicates that the Net Income is accurate and matches the Net Income shown on the Work Sheet. Total Expenses Ratio Total Revenue has two components: Total Expense Ratio and Net Income Ratio Total Expenses Ratio Total Revenue has two components: Total Expense Ratio and Net Income Ratio

© 2014 Cengage Learning. All Rights Reserved. Adequate Disclosure Concept Applied SLIDE 11 LO2 Lesson 7-1 Adequate Disclosure Concept Assuring that financial statements contain all information necessary to understand a business’s financial condition. Adequate Disclosure Concept Assuring that financial statements contain all information necessary to understand a business’s financial condition. Shows Net Income over a period of time. Shows what the company is worth.

© 2014 Cengage Learning. All Rights Reserved. Income Statement with Two Sources of Revenue and a Net Loss SLIDE 12 LO2 Lesson 7-1 Income Statement Date An income statement reports the financial progress of a business in earning a net income or net loss over a period of time. Income Statement Date An income statement reports the financial progress of a business in earning a net income or net loss over a period of time. Verify the accuracy by checking this number against the net income (or loss) on the work sheet.

© 2014 Cengage Learning. All Rights Reserved. Preparing a Balance Sheet from Information on a Work Sheet ●Information needed to prepare the balance sheet is obtained from the work sheet. SLIDE 13 LO3 Lesson 7-2 Account titles are obtained from the work sheet’s Account Title column. Account balances are obtained from the work sheet’s Balance Sheet columns.

© 2014 Cengage Learning. All Rights Reserved. Heading of a Balance Sheet SLIDE 14 LO3 Lesson 7-2 Reports information as of a specific date. Cash changes nearly every day. You couldn’t have a balance sheet “for the month ended.”

© 2014 Cengage Learning. All Rights Reserved. Balance Sheets SLIDE 15 LO3 Lesson 7-2 Information to create the asset section comes from the work sheet’s account title column and the balance sheet debit column. (Relate it to the normal balance side.)

© 2014 Cengage Learning. All Rights Reserved. Balance Sheet SLIDE 16 LO3 Lesson 7-2 Information to create the liabilities section of the balance sheet comes from the work sheet’s account title column and the balance sheet credit column. (Relate it to the normal balance side.) Capital is obtained from the work sheet’s Balance Sheet Credit column.

© 2014 Cengage Learning. All Rights Reserved. Owner’s Equity Section of a Balance Sheet SLIDE 17 Lesson 7-2 The Capital reported on a balance sheet is calculated as: the work sheet’s capital account balance plus net income minus the drawing account balance. (Income will increase the capital and drawing will reduce it.)

© 2014 Cengage Learning. All Rights Reserved. Owner’s Equity Reported in Detail on a Balance Sheet (Some companies want all the details.) SLIDE 18 LO3 Lesson 7-2

© 2014 Cengage Learning. All Rights Reserved. Chapter Vocabulary Terms © 2014 Cengage Learning. All Rights Reserved. There won’t be any vocabulary on the test for this chapter. Ch. 7 Vocab Test Review