Financial Statements for a Corporation Chapter 19 $ Financial Statements for a Corporation $ 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.

$ $ $ $ Section 1 The Ownership of a Corporation What You’ll Learn Chapter 19 $ 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. $ $ $

$ $ $ $ Why It’s Important Key Terms Chapter 19 Capital Stock Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Why It’s Important To 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. $ $ Key Terms Capital Stock stockholders’ equity retained earnings comparability $ reliability relevance full disclosure materiality

$ $ $ $ Recording the Ownership of a Corporation Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Recording the Ownership of a Corporation $ Capital Stock represents the investments in the corporation by its stockholders (owners). Capital Stock is classified as a stockholders’ equity account. $ $

$ $ $ $ Recording the Ownership of a Corporation (cont'd.) Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Recording the Ownership of a Corporation (cont'd.) $ Business Transaction On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. $ ANALYSIS Identify 1. The accounts affected are Cash in Bank and Capital Stock. Classify 2. Cash in Bank is an asset account. Capital Stock is a stockholders’ equity account. $ + / – 3. Cash in Bank is increased by $25,000. Capital Stock is increased by $25,000.

$ $ $ $ Recording the Ownership of a Corporation (cont'd.) Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Recording the Ownership of a Corporation (cont'd.) $ Business Transaction On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. $ DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Cash in Bank for $25,000. 5. Increases to stockholders’ equity accounts are recorded as credits. Credit Capital Stock for $25,000. $

$ $ $ $ Recording the Ownership of a Corporation (cont'd.) Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Recording the Ownership of a Corporation (cont'd.) $ Business Transaction On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. $ T ACCOUNTS 6. Insurance Prepaid Expense Insurance Debit + 25,000 Credit – Debit – Credit + 25,000 $

$ $ $ $ Recording the Ownership of a Corporation (cont'd.) Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Recording the Ownership of a Corporation (cont'd.) $ Business Transaction On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. $ JOURNAL ENTRY 7. $

$ $ $ $ Stockholders’ Equity Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Stockholders’ Equity Equity contributed by stock-holders Equity earned through business profits Retained earnings represents the increase in stockholders’ equity from the portion of net income not distributed to the stockholders. $ $ $

$ $ $ $ Characteristics of Financial Information Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Characteristics of Financial Information Financial statements are used by many groups. $ Managers analyze the financial statements to help evaluate past performance and to make informed decisions. Stockholders are interested in the performance, potential future growth, and success of the business. $ $

$ $ $ $ Characteristics of Financial Information (cont'd.) Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Characteristics of Financial Information (cont'd.) $ 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. $ $

$ $ $ $ Comparability Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Comparability 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. $ $ $

$ $ $ $ Reliability Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Reliability Users of accounting data assume that the data are reliable. Reliability relates to the confidence users have that the financial information is reasonably free from bias and error. $ $ $

$ $ $ $ Relevance Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Relevance 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. $ $ $

$ $ $ $ Full Disclosure Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Full 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. $ $

$ $ $ $ Materiality Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Materiality $ If something is “material,” it is important. Materiality means that information deemed relative should be included in financial reports. $ $

$ $ $ $ Check Your Understanding Chapter 19 Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Check Your Understanding $ What is the purpose of preparing the same types of financial statements at the end of each period? $ $