Preparing an Income Statement Chapter 15 Preparing an Income Statement

Review of Accounting Principles Record financial activities of a business in journals and ledgers during a fiscal period. Prepare a work sheet at the end of the fiscal period to organize and summarize the financial information. Use the completed work sheet to prepare financial statements.

Financial Statements Provide the primary source of information needed by owners and managers to make decisions on the future activity of a business Hobby shack prepares three financial statements Income Statement Statement of Stockholders’ equity Balance sheet

Terms Net Sales Cost of Merchandise Sold Gross Profit on sales Total sales less sales discount and sales returns and allowances Cost of Merchandise Sold The original price of all merchandise sole during a fiscal period Also called cost of goods sold Cost of sales Gross Profit on sales The revenue remaining after cost of merchandise sold has been deducted Financial Ratio A comparison between two items of financial information

Terms Cont. Earnings per Share Price-earnings ratio The amount of net income after federal income tax belonging to a single share of stock. Price-earnings ratio The relationship between the market value per share and earnings per share of a stock Statement of stockholders’ equity Shows changes in a corporation's ownership for a fiscal period contains two major sections capital stock and retained earnings. Par Value A value assigned to a share of stock and printed on the stock certificate Supporting Schedule A report prepared to give details about an item on a principal financial statement

Objectives Define accounting terms and concepts related to financial statements for a merchandising business organized as a corporation. Prepare an income statement for a merchandising business organized as a corporation

Preparing an Income Statements 5.1 Uses of Financial Statements

Uses of Financial Statements Provide primary source of information needed by owners and managers to make decisions on the future activity of a business Provide information about a business’s financial condition, changes in this financial condition and progress of operations. Allows for more sound business decisions Hobby Shack prepares three Income statement, balance sheet and Statement of Stockholders’ equity.

Income Statement Information on a Work Sheet Income statement is used to report a business’s financial progress during a fiscal period. Information from a completed work sheet is used to prepare an income statement. Income Statement of a merchandising business has three main sections Revenue Cost of Merchandise Sold Expenses Most information reported on the income statement is taken from the income statement columns of the work sheet.

Revenue Section on an Income Statement 1 2 3 4 5 8 9 6 7 More accounts to report on the income statement. The accounts Sales and its contra accounts, Sales Discount and Sales Returns and Allowances, are reported in the Revenue Section. Total sales less sales discount and sles returns and allowances is called net sales. 1. Heading 6. Contra account amounts 2. Revenue section 7. Contra account total 3. Title of revenue account 8. Net Sales 4. Sales amount 9. Net sales amount 5. Less contra accounts

Cost of Merchandises sold section of an Income statement 1. Cost of Merchandise Sold section 2. Beginning inventory 1 3. Purchases section 2 4. Total cost of merchandise available for sale 3 The original price of all merchandise sold during a fiscal period called the cost of merchandise sold also called Cost of goods sold or Cost of Sales. Concept: Historical Cost The cost of merchandise sold is calculated from five amounts found on the work sheet. 3 are found in the income statement. Other amounts are found in the Trial Balance and Balance Sheet columns of the worksheet. 4 5. Ending inventory 5 6 6. Cost of merchandise sold

Income Statement Cont. Gross Profit of Sales = the revenue remaining after cost of merchandise sold has been deducted. Management uses gross profit on sales as a measure for how effectively the business is performing in its primary functions of buying and selling merchandise. Calculating a ration between gross profit on sales and net sales enables management to compare its performance to prior fiscal periods.

Income Statement The percentage relationship between one financial statement item is known as a component percentage.

Completing An Income Statement 1. Gross Profit on Sales 2. Expenses section 7 1 3. Net Income before Federal Income Tax 4. Less Federal Income Tax Expense 2 5. Net Income after Federal Income Tax 6. Double lines 3 7. Component percentage 4 6 5

Component Percentage  = Income Statement Component Amount Net Sales Cost of Merchandise Sold 220,666.90 491,734.24 44.9% Gross Profit on Sales 271,067 55.1% Total Expenses 166,864 33.9% Net Income before Federal Income Tax 104,203.19 21.2%

Audit Your Understanding What is the major difference between the income statement for a merchandising business and a service business? The cost of merchandise sold section How is the cost of merchandise sole calculated? Merchandise Inventory + Purchases = Total Cost of Merchandise Available for Sales - Ending Merchandise Inventory = Cost of Merchandise Sold. How can the amount of net income calculated on the income statement be verified? By comparing the amount calculated on the income statement with the amount on the work sheet.

15.2 Analyzing Income Statement

Objectives Analyze an Income statement using component percentages and financial ratios.

Terms Financial Ratio Earnings per Share Price-Earnings Ratio A comparison between two items of financial information Earnings per Share Amount of net income after federal income tax belonging to a single share of stock Price-Earnings Ratio The relationship between the market value per share and earnings per share of a stock report.

LESSON 15-2 Analyzing an Income Statement 4/15/2018 LESSON 15-2 Analyzing an Income Statement Blue

ANALYZING AN INCOME STATEMENT SHOWING A NET LOSS LESSON 15-2 ANALYZING AN INCOME STATEMENT SHOWING A NET LOSS 4/15/2018 page 457 LESSON 15-2 Blue

FINANCIAL RATIOS $80,313.95 ÷ 2,500 = $32.13 $345.00 ÷ $32.13 = 10.7 page 459 Earnings per Share Earnings per Share = Number of Shares Outstanding ÷ Net Income after Federal Income Tax $80,313.95 ÷ 2,500 = $32.13 Price-Earnings Ratio Price-Earnings Ratio = Earnings per Share ÷ Market Price per Share $345.00 ÷ $32.13 = 10.7 LESSON 15-2

TERMS REVIEW financial ratio earnings per share price-earning ratio page 460 financial ratio earnings per share price-earning ratio LESSON 15-2

LESSON 15-3 Preparing a Statement of Stockholders’ Equity 4/15/2018 LESSON 15-3 Preparing a Statement of Stockholders’ Equity

CAPITAL STOCK SECTION OF THE STATEMENT OF STOCKHOLDERS’ EQUITY page 461 1 2 3 4 5 1. Heading 2. Capital Stock and Par Value 3. Stock at the beginning of the year 4. Stock issued during the year 5. Total stock issued at the end of the year LESSON 15-3

RETAINED EARNINGS SECTION OF THE STATEMENT OF STOCKHOLDERS’ EQUITY page 462 1 3 5 2 4 6 7 1. Retained Earnings 4. Dividends declared 2. Beginning balance 5. Increase in retained earnings 3. Net income after federal income tax 6. Ending balance 7. Total stockholders’ equity LESSON 15-3

TERMS REVIEW statement of stockholders’ equity par value page 463 LESSON 15-3

LESSON 15-4 Preparing a Balance Sheet 4/15/2018 LESSON 15-4 Preparing a Balance Sheet Blue

BALANCE SHEET INFORMATION ON A WORK SHEET page 464 LESSON 15-4

CURRENT ASSETS SECTION OF A BALANCE SHEET page 465 1 2 3 4 5 1. Heading 4. Remaining current asset accounts 2. Begin assets section 5. Current assets 3. Book value of accounts receivable LESSON 15-4

PLANT ASSETS SECTION OF A BALANCE SHEET LESSON 15-4 4/15/2018 PLANT ASSETS SECTION OF A BALANCE SHEET page 466 1 2 4 3 5 1. Write the heading Plant Assets. 2. Calculate the book value of office equipment. 3. Use the same procedure to calculate the book value of store equipment. 4. Calculate total plant assets. 5. Calculate total assets. LESSON 15-4 Blue

LIABILITIES SECTION OF A BALANCE SHEET page 467 1. Heading 2. Account title and amount of each current liability 1 3. Total liabilities 2 3 LESSON 15-4

STOCKHOLDERS’ EQUITY SECTION OF A BALANCE SHEET page 468 6 1 3 2 4 5 1. Stockholders’ Equity 5. Total liabilities and stockholders’ equity 2. Capital stock 6. Double rules 3. Retained earnings 4. Total stockholders’ equity LESSON 15-4

COMPLETED BALANCE SHEET page 469 (continued on next slide) LESSON 15-4

COMPLETED BALANCE SHEET page 469 (continued from previous slide) LESSON 15-4

TERMS REVIEW current liabilities long-term liabilities page 471 current liabilities long-term liabilities supporting schedule LESSON 15-4

15.2 Analyzing an Income Statement

Objectives Define accounting terms related to financial statements Identify accounting concepts and practices related to financial statements for a merchandising business organized as a corporation. Analyzing an Income Statement