CHAPTER TWELVE FINANCIAL STATEMENTS AND YEAR-END ACCOUNTING FOR A MERCHANDISING BUSINESS

YES! Our Income Statement shows we made a profit this year!! Purpose: Summarize the results of operations Shows: The sources of revenue Types of expenses Amount of net income or loss for the period Two forms: Single-step Multiple-step YES! Our Income Statement shows we made a profit this year!!

For Year Ended December 31, 20-- Let’s look at a Single-Step Student Run Bookstore Income Statement For Year Ended December 31, 20-- Let’s look at a Single-Step Income Statement.

SCC Student-Run Bookstore Income Statement For Year Ended December 31, 20-- Revenues: Net Sales $212,800 Interest Revenue 900 Rent Revenue 8,000 Subscriptions Revenue 10,000 Total Revenues $231,700 Yes! I am the king of revenues!! I will do the money dance. . Money money, money!!! All the Revenue sources are listed and totaled.

Cost of Goods Sold is listed with all the other expenses. SCC Student-Run Bookstore Income Statement For Year Ended December 31, 20-- Revenues: Net Sales $212,800 Interest Revenue 900 Rent Revenue 8,000 Subscriptions Revenue 10,000 Total Revenues $231,700 Expenses: Cost of Goods Sold $-111,500 Cost of Goods Sold is listed with all the other expenses.

For Year Ended December 31, 20-- SCC Student-Run Bookstore Income Statement For Year Ended December 31, 20-- Revenues: Ribbet---These expenses are cutting into the bosses profits, he’s not going to be too happy! Net Sales $212,800 Interest Revenue 900 Rent Revenue 8,000 Subscriptions Revenue 10,000 Total Revenues $231,700 Expenses: Cost of Goods Sold $111,500 Wages Expense 42,450 Advertising Expense 2,500 Bank Credit Card Expense 1,500 Rent Expense 20,000 Supplies Expense 1,400 Telephone Expense 3,500 Utilities Expense 12,000

Expenses are totaled and subtracted from Revenues to determine Bank Credit Card Expense 1,500 Rent Expense 20,000 Supplies Expense 1,400 Telephone Expense 3,500 La cukaracha, la cukaracha! We made some money this year! Utilities Expense 12,000 Insurance Expense 1,800 Depreciation Expense - Building 4,000 Depreciation Expense - Store Equipment 3,000 Miscellaneous Expense 2,250 Interest Expense 3,150 Total Expenses -209,050 Net Income $ 22,650 Expenses are totaled and subtracted from Revenues to determine Net Income or Loss.

It is called Single-Step because Expenses Bank Credit Card Expense 1,500 Rent Expense In a single step, I bet I could stuff an entire chocolate covered donut in my mouth. .yummm Napkin please?! 20,000 Supplies Expense 1,400 Telephone Expense 3,500 Utilities Expense 12,000 Insurance Expense 1,800 Depreciation Expense - Building 4,000 Depreciation Expense - Store Equipment 3,000 Miscellaneous Expense 2,250 Interest Expense 3,150 Total Expenses 209,050 Net Income $ 22,650 It is called Single-Step because Expenses (including Cost of Goods Sold) are subtracted from Revenues in ONE step to determine Net Income or Loss.

For Year Ended December 31, 20-- Multi-Step Income Statement SCC Student-Run Bookstore Income Statement For Year Ended December 31, 20-- Now let’s look at a Multi-Step Income Statement for the same company. Our mom called us a multiple birth because we have multiple personalities. . .get it.. . More than one! Ha! We are soooo funny!! Hee hee

Sales revenue (less any returns, allowances SCC Student-Run Bookstore Income Statement For Year Ended December 31, 20-- Revenue from sales: Sales $214,000 Less Sales Returns and Allow. -1,200 Net Sales $212,800 Sales revenue (less any returns, allowances or discounts) is shown first. The other revenues are listed at the end of the statement).

For Year Ended December 31, 20-- SCC Student-Run Bookstore Income Statement For Year Ended December 31, 20-- Revenue from sales: Sales $214,000 Less Sales R &A -1,200 Net Sales $212,800 Cost of Goods Sold: Merch. Inv. Jan. 1, 20-- $ 26,000 Purchases $105,000 Less: Purchases R&A $ 800 Purchases Disc. 1,000 -1,800 Net Purchases $103,200 Add Freight-In +300 Cost of Goods Pur. +103,500 Goods Avail. for Sale $129,500 Less Merchandise Inv. Dec 31- -18,000 Cost of Goods Sold 111,500

A simple way to look at Cost of Goods Sold: Beginning Inv= 5 candy bars @$1 each Purchased another 40 candy bars @$1 each How many do you have available to sell during the year? 45 total bars. . . If you have 10 candy bars left at the end of the year what happened to the missing bars? Right! You sold them! Cost of Goods Sold = 35 bars! (45 total available -10 EI= 35 Sold)

After Cost of Goods Sold is computed. . . Goods Avail. for Sale $129,500 Less Merchandise Inv. Dec 31- -18,000 Cost of Goods Sold -111,500 Gross Profit $101,300 After Cost of Goods Sold is computed. . . Then, subtract the Cost of Goods Sold from Net Sales to arrive at Gross Profit.

Operating Expenses are listed and totaled. Goods Avail. for Sale $129,500 Less M. I. Dec. 31, 20-- -18,000 Cost of Goods Sold -111,500 Operating Expenses are listed and totaled. Gross Profit $101,300 Operating Expenses: Wages Expense $ 42,450 Advertising Expense 2,500 Bank Credit Card Exp. 1,500 Rent Expense Then, subtract the total expenses from Gross Profit. Compute“ Income from Operations” 20,000 Supplies Expense 1,400 Telephone Expense 3,500 Utilities Expense 12,000 Insurance Expense 1,800 Depreciation Exp.-Bldg. 4,000 Deprec. Exp.-Store Eq. 3,000 Miscellaneous Expense 2,250 Total Oper. Expenses -94,400 Income from Operations $ 6,900

Depreciation Exp.-Bldg 4,000 Deprec. Exp-Store Eq. 3,000 Goods Avail. for Sale $129,500 Less M. I. Dec. 31, 20-- 18,000 Cost of Goods Sold 111,500 Gross Profit $101,300 Operating Expenses: Operating Expenses can be further divided into subcategories of Selling Expenses and General Expenses. Wages Expense $ 42,450 Advertising Expense 2,500 Bank Credit Card Exp. 1,500 Rent Expense 20,000 Supplies Expense 1,400 Telephone Expense How come its not divided up here? 3,500 The accountant said a raccoon got into her garden so she didn’t have time. Utilities Expense 12,000 Insurance Expense 1,800 Depreciation Exp.-Bldg 4,000 Deprec. Exp-Store Eq. 3,000 Miscellaneous Expense 2,250 Total Oper. Expenses 94,400 Income from Operations $ 6,900

SELLING EXPENSE Expenses directly associated with selling activities Examples: Sales Salaries Expense Sales Commissions Expense Advertising Expense Bank Credit Card Expense Delivery Expense Depreciation Expense - Store Equipment and Fixtures

GENERAL EXPENSES Expenses associated with administrative, office, or general operating activities Examples: Rent Expense Office Salaries Expense Office Supplies Expense Telephone Expense Utilities Expense Insurance Expense Depreciation Expense - Office Equipment

Add Other Revenues and subtract Other Expenses Income from Operations $ 6,900 Other Revenues: Interest Revenue $ 900 Rent Revenue 8,000 Subscriptions Revenue 10,000 Total Other Rev: $ +18,900 Other Expenses: Interest Expense -3,150 +15,750 Net Income $ 22,650 After you calculate, Income from Operations then the last step is to see if there are any other revenues or expenses which need to be included at the bottom of the Income Statement. . . Add Other Revenues and subtract Other Expenses to arrive at Net Income.

STATEMENT OF OWNER’S EQUITY Purpose: Summarize all changes in the owner’s equity during the period Sources needed to prepare statement: Work sheet General Ledger Capital account Includes: Beginning and ending Capital balances Investments and withdrawals by owner Net Income or Loss

Statement of Owner’s Equity for SCC Student-Run Bookstore. For Year Ended December 31, 20-- Let’s look at the Statement of Owner’s Equity for SCC Student-Run Bookstore.

Beginning capital and investments are found in the General Ledger SCC Student-Run Bookstore Statement of Owner’s Equity For Year Ended December 31, 20-- Rock Studley, capital, January 1, 20-- $104,400 Add additional investments 10,000 Total investment $114,400 Beginning capital and investments are found in the General Ledger Capital account. Rock Studley for the owner? Humm… Sounds kinda hunky. .

Net Income is found on the work sheet SCC Student-Run Bookstore Statement of Owner’s Equity For Year Ended December 31, 20-- Rock Studley, capital, January 1, 20-- $104,400 Add additional investments 10,000 Total investment $114,400 Net Income for the year $ 22,650 Net Income is found on the work sheet and on the Income Statement (which we prepared right before this).

Withdrawals, from the worksheet, are subtracted from Net Income to SCC Student-Run Bookstore Statement of Owner’s Equity For Year Ended December 31, 20-- Rock Studley, capital, January 1, 20-- $104,400 Add additional investments +10,000 Total investment $114,400 Net Income for the year $ 22,650 Less withdrawals for the year -20,000 Increase in Capital 2,650 Withdrawals, from the worksheet, are subtracted from Net Income to determine the increase in capital this period.

The ending capital on December 31, is computed. SCC Student-Run Bookstore Statement of Owner’s Equity For Year Ended December 31, 20-- Rock Studley, Capital, January 1, 20-- $104,400 From first day of period to last day of period Add additional investments 10,000 Total investment $114,400 Net Income for the year $ 22,650 Less withdrawals for the year 20,000 Increase in Capital 2,650 Rock Studley, Capital, December 31, 20-- $117,050 The ending capital on December 31, is computed. Remember, that this statement shows the changes in the Owner’s Capital from the first day to the last day of the period.

The SCC Student-Run Bookstore’s Classified Balance Sheet. SCC Student-Run Bookstore Balance Sheet Let’s look at The SCC Student-Run Bookstore’s Classified Balance Sheet. December 31, 20-- Argh!@#% Not another Balance Sheet! You’re killing me! It’s the last one! I promise, cross my heart and hope to die—stick a needle in my eye if I am lying!

SCC Student-Run Bookstore Balance Sheet December 31, 20-- Assets Current assets:

CURRENT ASSETS Cash and other assets which are: Examples: Expected to be converted into cash, or Consumed within one year or the normal operating cycle, whichever is longer Examples: Cash, Receivables, merchandise inventory and prepaid expenses Listed in order of liquidity: Most liquid shown first

OPERATING CYCLE Length of time generally required for a business to: Buy inventory Sell it Collect the cash Generally, it is less than one year.

Merchandise Inventory is a current asset SCC Student-Run Bookstore Balance Sheet December 31, 20-- Assets Current assets: Cash $20,000 Accounts Receivable 15,000 Merchandise Inventory 18,000 Supplies 400 Prepaid Insurance 600 Total current assets $54,000 Merchandise Inventory is a current asset that is unique to merchandising businesses.

PROPERTY, PLANT & EQUIPMENT Assets that are expected to be used: For more than one year In the operation of a business Examples: Land, Buildings, Office Equipment, Store Equipment, and Delivery Equipment

SCC Student-Run Bookstore Balance Sheet December 31, 20-- Assets Current assets: Cash $20,000 Accounts Receivable 15,000 Merchandise Inventory 18,000 Supplies 400 Prepaid Insurance 600 Total current assets $ 54,000 Property, plant, and equipment: Land $10,000 Building $ 90,000 Less accumulated deprec. 20,000 70,000 Store Equipment $ 50,000 Less accumulated deprec. 18,000 32,000 Total prop., pt., and equip. $112,000

Property, plant, and equipment: Land $10,000 Building $90,000 Total current assets $ 54,000 Property, plant, and equipment: Land $10,000 Building $90,000 Less accumulated deprec. 20,000 70,000 Store Equipment $50,000 Less accumulated deprec. 18,000 32,000 Total property, plant and equip. 112,000 Total assets $166,000 That is so sexist! Don’t you just love it when accountants say you have great assets?? Yeah! Especially if they’re hot!

Total assets $166,000 Liabilities Current liabilities:

CURRENT LIABILITIES Obligations that are due within one year or the normal operating cycle, whichever is longer Require the use of current assets Examples: Notes Payable, Accounts Payable, Wages Payable, Utilities Payable, Unearned Subscriptions Revenue, and the current portion of Mortgage Payable

Unearned subscriptions revenue 2,000 Mortgage Pay. (current portion) Total assets $166,000 Liabilities Current liabilities: Notes Payable $ 5,000 Accounts Payable 10,000 Wages Payable 450 Utilities Payable 1,500 Unearned subscriptions revenue 2,000 Mortgage Pay. (current portion) 500 Total current liabilities $19,450 I better hurry up and earn some more money so I can pay off all of these debts this year!

LONG-TERM LIABILITIES Obligations that will extend beyond one year or the normal operation cycle, whichever is longer Mortgage Payable is a common long-term liability. Used to reflect an obligation that is secured by a mortgage on certain property

Total assets $166,000 Liabilities Current liabilities: Notes Payable $ 5,000 Accounts Payable 10,000 Wages Payable 450 Utilities Payable 1,500 Unearned subscriptions revenue 2,000 Mortgage Pay. (current portion) 500 Total current liabilities $19,450 Long-term liabilities: Mortgage Payable $30,000 Less current portion 500 29,500 Total liabilities $ 48,950

OWNER’S EQUITY Accounts are determined by type of organization: Sole Proprietorships: One capital account

Total assets $166,000 Liabilities Current liabilities: Notes Payable $ 5,000 Accounts Payable 10,000 Wages Payable 450 Utilities Payable 1,500 Unearned subscriptions revenue 2,000 Mortgage Pay. (current portion) 500 Total current liabilities $ 19,450 Long-term liabilities: Mortgage Payable $30,000 Less current portion 500 29,500 Total liabilities $ 48,950 Owner’s Equity Rock Studley, Capital 117,050 Total liabilities and owner’s equity $166,000

CLOSING ENTRIES Similar to closing entries of a service business: But additional merchandising accounts that also must be closed Easiest to use work sheet to prepare closing entries

DEBIT - all credit balance Income Statement accounts ACCOUNT TITLE INCOME STMT BALANCE SHEET DR. CR. DR. CR. 17 Rock Studley, Capital 114,400 18 Rock Studley, Drawing 20,000 19 Income Summary 26,000 18,000 20 Sales 214,000 21 Sales Returns & Allow. 1,200 22 Interest Revenue 900 23 Rent Revenue 8000 24 Subscriptions Revenue 10,000 25 Purchases 105,000 26 Purchases Ret. & Allow. 800 27 Purchases Discounts 1,000 28 Freight-In 300 29 Wages Expense 42,450 Entry#1 DEBIT - all credit balance Income Statement accounts CREDIT - Income Summary 30 Advertising Expense 2,500 31 Bank Credit Card Expense 1,500 32 Rent Expense 20,000 33 Supplies Expense 1,400 34 Telephone Expense 3,500 35 Utilities Expense 12,000 36 Insurance Expense 1,800

GENERAL JOURNAL Closing Entries Sales 214,000 Subscriptions Revenue DATE DESCRIPTION DEBIT PR CREDIT 1 Closing Entries 20-- 2 Sales 214,000 Dec. 31 3 Subscriptions Revenue 10,000 4 Interest Revenue 900 5 Rent Revenue 8,000 6 Purch. Returns & Allow. 800 7 Purchases Discounts 1,000 8 Income Summary 234,700 9 10 11

Entry #2: DEBIT- Income Summary CREDIT- Income Statement debit ACCOUNT TITLE INCOME STMT BALANCE SHEET DR. CR. DR. CR. 21 Sales Returns & Allow. 1,200 25 Purchases 105,000 26 Purch. Returns & Allow. 800 27 Purchases Discounts 1,000 28 Freight-In 300 Entry #2: DEBIT- Income Summary CREDIT- Income Statement debit balance accts. 29 Wages Expense 42,450 30 Advertising Expense 2,500 31 Bank Credit Card Exp. 1,500 32 Rent Expense 20,000 33 Supplies Expense 1,400 30 Telephone Expense 3,500 31 Utilities Expense 12,000 32 Insurance Expense 1,800 33 Depr. Expense -Building 4,000 34 Depr. Expense -Store Eq. 3,000 35 Miscellaneous Expense 2,250 36 Interest Expense 3,150

10 31 Income Summary 204,050 11 Sales Returns & Allow. 1,200 12 Purchases 105,000 13 Freight-In 300 14 Wages Expense 42,450 15 Advertising Expense 2,500 16 Bank Credit Card Exp. 1,500 17 Rent Expense 20,000 18 Supplies Expense 1,400 19 Telephone Expense 3,500 20 Utilities Expense 12,000 21 Insurance Expense 1,800 22 Depreciation Exp. - Bldg. 4,000 23 Deprec. Exp. - Store Eq. 3,000 24 Miscellaneous Expense 2,250 25 Interest Expense 3,150 26 27

CREDIT - Capital account ACCOUNT TITLE INCOME STMT BALANCE SHEET DR. CR. DR. CR. 25 Purchases 105,000 26 Purchases Ret. & Allow. 800 27 Purchases Discounts 1,000 28 Freight-In 300 29 Wages Expense 42,450 Entry #3 DEBIT - Income Summary CREDIT - Capital account for Net Income amount 30 Advertising Expense 2,500 31 Bank Credit Card Exp 1,500 32 Rent Expense 20,000 33 Supplies Expense 1,400 34 Telephone Expense 3,500 35 Utilities Expense 12,000 36 Insurance Expense 1,800 37 Depr. Expense Building 4,000 38 Depr. Expense -Store Eq. 3,000 39 Miscellaneous Expense 2,250 40 Interest Expense 3,150 41 230,050 252,700 224,000 201,350 42 Net Income 22,650 22,650 43 252,600 252,700 224,000 224,000 44

20 Utilities Expense 12,000 21 Insurance Expense 1,800 22 Deprec. Exp. - Building 4,000 23 Deprec. Exp. - Store Equip. 3,000 24 Miscellaneous Expense 2,250 25 Interest Expense 3,150 26 27 31 Income Summary 22,650 28 Rock Studley, Capital 22,650 29 30 31 32 33 34 35 36 37

CREDIT to close the Drawing Account ACCOUNT TITLE INCOME STMT BALANCE SHEET DR. CR. DR. CR. 17 Rock Studley, Capital 114,400 18 Rock Studley, Drawing 20,000 19 Income Summary 26,000 18,000 20 Sales 214,000 21 Sales Returns & Allow. 1,200 22 Interest Revenue 900 23 Rent Revenue 8000 24 Subscriptions Revenue Entry # 4 DEBIT - Capital CREDIT to close the Drawing Account 10,000 25 Purchases 105,000 26 Purchases Ret. & Allow 800 27 Purchases Discounts 1,000 28 Freight-In 300 29 Wages Expense 42,450 30 Advertising Expense 2,500 31 Bank Credit Card Expense 1,500 32 Rent Expense 20,000 33 Supplies Expense 1,400 34 Telephone Expense 3,500 35 Utilities Expense 12,000 36 Insurance Expense 1,800

20 Utilities Expense 12,000 21 Insurance Expense 1,800 22 Deprec. Exp. - Building 4,000 23 Deprec. Exp. - Store Equip. 3,000 24 Miscellaneous Expense 2,250 25 Interest Expense 3,150 26 27 31 Income Summary 22,650 28 Rock Studley, Capital 22,650 29 30 31 Rock Studley, Capital 20,000 31 Rock Studley, Drawing 20,000 32 33 34 35 36 37

After posting the four closing journal entries: We are almost finished!! We need to verify that our General Ledger still balances.. . We will prepare another Trial Balance. This last Trial Balance is called the Post-Closing Trial Balance

POST-CLOSING TRIAL BALANCE Trial Balance prepared after the closing journal entries have been posted. Purpose: to prove that the general ledger is in balance at the beginning of a new accounting period.

SCC Student-Run Bookstore Post-Closing Trial Balance December, 31, 20-- Account Title Acct # Debit Bal Credit Bal Cash 101 20,000 Accounts Receivable 122 15,000 Merchandise Inventory 131 18,000 Supplies 141 400 Prepaid Insurance 145 600 Land 161 10,000 Building 171 90,000 Accumulated Depreciation - Building 171.1 20,000 Store Equipment 181 50,000 Accumulated Depreciation - Store Eq. 181.1 18,000 Notes Payable 201 5,000 Accounts Payable 202 10,000 Wages Payable 219 450 Sales Tax Payable 231 1,500 Unearned Subscriptions Revenue 241 2,000 Mortgage Payable 251 30,000 Rock Studley, Capital 311 117,050 204,000 204,000

Did I mention that reversing entries are optional!? Prepared at the beginning of an accounting period Reverses adjusting entries made last period. To simplify the recording of transactions in the new accounting period. Except for the first year of operations, only adjustments that INCREASED an ASSET OR LIABILITY account from a zero balance should be reversed. Did I mention that reversing entries are optional!?