Financial statements for a corporation Chapter 19

Accounting for a Corporation Who owns a corporation? Stockholders Maria Sanchez, Capital vs. Capital Stock Capital Stock – A stockholder’s equity account. Investments in a company are represented by this account. Maria Sanchez invests… Stockholders’ Equity – Value of the stockholders’ claims to the corporation

Earned Equity Retained Earnings – The increase in stockholders’ equity from net income that is not distributed to stockholders. Capital Sole Proprietorship Capital Stock Retained Earnings Corporation

Characteristics of Financial Information Who uses financial statements? Managers – Analyze past performance and make forecasts Stockholders – performance, potential for growth, success Creditors – Can this company pay its bills? Government Agencies, employees, consumers, general public

Characteristics of Financials Comparability – Allows information to be compared from one period to another Reliability – Refers to the confidence users have that the financials are free of bias and errors Relevance – Financials include all information that would affect decisions Full disclosure – Can’t hide info Materiality – Important; all important information should be included

Corporation’s Financial Statements Income Statement Statement of Retained Earnings Balance Sheet Proves A=L+OE Statement of Cash Flows

The Income Statement Revenue Realization Principle – Revenue for a credit sale is recorded at the time of sale Matching Principle – Revenues for a period are matched with their expenses Income Statement for a merchandising company has 5 sections Revenue Cost of Merchandise Sold Gross Profit Operating Expenses Net Income (or Loss)

Revenue Section Net Sales – Amount of sales less any sales discounts, returns and allowances See Page 558 Sales -Sales R&A -Sales Discounts Net Sales

Cost of Merchandise Sold Section Beginning Merchandise Inventory + Net Purchases Cost of Merchandise Available for Sale - Ending Inventory 2 Steps Calculate the Cost of all Merchandise Calculate Cost of Merchandise Sold

Cost of Merchandise Sold Section Find Net Purchases First Purchases + Transportation In Cost of Delivered Merchandise - Purchases Discounts - Purchases Returns and Allowances Net Purchases

Cost of Merchandise Sold Section Beginning Inventory + Net Purchases Merchandise Available for Sale - Ending Inventory Cost of Merchandise Sold

Gross Profit Section Gross Profit on Sales – The profit made before operating expenses are deducted Net Sales -Cost of Merchandise Sold Gross Profit

Operating Expenses Section Operating Expenses – costs of goods and services used in the process of earning revenue Selling expenses – incurred to sell or market the merchandise sold Administrative expenses – related to the management of the business

Net Income Section Operating Income – Excess of gross profit over operating expenses; income earned before taxes

Analyzing Amounts on the Income Statement Vertical Analysis – Comparing one item in a column as a percentage of another. Horizontal Analysis – Compares statements from one accounting period to another

Statement of Retained Earnings Statement of Retained Earnings – Reports the changes of retained earnings over a period Beginning + Net Income = Ending

Analyzing Financials Base Period – period that is used for comparison Horizontal Analysis Vertical Analysis

Cash Flows Cash Inflows Cash Outflows Operating Activities – All transactions that occur as part of normal business operations Investing Activities – Loans, Investments, purchases and sale of plant assets Financing Activities – Borrowing activities needed to finance the company operations and the repayment