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Owner’s equity in a corporation is called stockholders’ equity Owner’s equity in a corporation is called stockholders’ equity. A merchandiser’s income statement has a Cost of Merchandise Sold section, and a corporation’s income statement shows income tax expense. Additionally, a corporation prepares the statement of retained earnings, the balance sheet, and the statement of cash flows. Home Glencoe Accounting Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Explain how to record ownership of a corporation. Explain the relationship between the work sheet and the financial statements for a merchandising corporation. Explain how a corporation’s financial statements differ from a sole proprietorship. Analyze the financial data contained on the statements. Prepare an income statement, statement of retained earnings, and balance sheet. Describe the statement of cash flows for a merchandising corporation. Home Glencoe Accounting Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Key Terms Capital Stock stockholder’s equity retained earnings The Ownership of a Corporation Section 19.1 Key Terms Capital Stock stockholder’s equity retained earnings compatibility reliability relevance full disclosure materiality Home Glencoe Accounting

Accounting for a Corporation The Ownership of a Corporation Section 19.1 The ownership of a corporation is represented by shares of stock. A corporation may be owned by one person or thousands. Home Glencoe Accounting

Accounting for a Corporation The Ownership of a Corporation Section 19.1 Corporations have a Capital Stock account instead of the sole proprietorship’s owner’s capital account. This is a stockholders’ equity account that is the value of the stockholders’ claims to the corporation. Capital Stock The account that represents the total amount of investment in the corporation by its stockholders (owners). stockholders’ equity The value of the stockholders’ claims to the corporation. Home Glencoe Accounting

Accounting for a Corporation The Ownership of a Corporation Section 19.1 Equity contributed by the stockholders Stockholders’ equity must be reported in two parts: Equity earned through business profits Home Glencoe Accounting

Accounting for a Corporation The Ownership of a Corporation Section 19.1 Stockholders contribute to equity by purchasing shares of stock. This amount is recorded in the Capital Stock account. Home Glencoe Accounting

Accounting for a Corporation The Ownership of a Corporation Section 19.1 The net income earned and retained by a corporation is recorded in the retained earnings account. retained earnings A corporation’s accumulated net income that is not distributed to stockholders. Home Glencoe Accounting

Accounting for a Corporation The Ownership of a Corporation Section 19.1 Business Transaction On January 1 stockholders invested $25,000 in exchange for shares of stock of the corporation. See page 556 Home Glencoe Accounting

Accounting for a Corporation The Ownership of a Corporation Section 19.1 Compare the Balance Sheet for a Sole Proprietorship and a Corporation Home Glencoe Accounting

Characteristics of Financial Information The Ownership of a Corporation Section 19.1 Who Uses Financial Information? Managers Stockholders Creditors Government Agencies Employees Consumers General Public Home Glencoe Accounting

Characteristics of Financial Information The Ownership of a Corporation Section 19.1 information to be compared from one period to another Comparability Allows the comparison of information between businesses comparability Accounting characteristic that allows the financial information to be compared from one period to another period; also allows the comparison of financial information between businesses. Home Glencoe Accounting

Characteristics of Financial Information The Ownership of a Corporation Section 19.1 What Is Reliability? reliability A characteristic requiring that accounting information be reasonably free of bias and error. Home Glencoe Accounting

Characteristics of Financial Information The Ownership of a Corporation Section 19.1 What Is Relevance? relevance An accounting characteristic requiring that all information that would affect the decisions of financial statement users be disclosed in the financial reports. Home Glencoe Accounting

Characteristics of Financial Information The Ownership of a Corporation Section 19.1 What Is Full Disclosure? full disclosure Accounting principle requiring a financial report to include enough information so that it is complete. Home Glencoe Accounting

Characteristics of Financial Information The Ownership of a Corporation Section 19.1 What Is Materiality? materiality An accounting guideline stating that information considered important (relative to the other information) should be included in financial reports. Home Glencoe Accounting

A Corporation’s Financial Statements The Ownership of a Corporation Section 19.1 A merchandising corporation can prepare four financial statements: The Income Statement The Statement of Returned Earnings The Balance Sheet The Statement of Cash Flows Home Glencoe Accounting

Key Terms net sales net purchases gross profit on sales Section 19.2 The Income Statement Key Terms net sales net purchases gross profit on sales operating expenses selling expenses administrative expenses operating income vertical analysis Home Glencoe Accounting

Five Sections of the Income Statement Cost of Merchandise Sold Revenue Cost of Merchandise Sold Gross Profit on Sales Operating Expenses Net Income (or Loss) Home Glencoe Accounting

The Revenue Section Reports the Net Sales for the Period The Income Statement Section 19.2 The Income Statement The Revenue Section Reports the Net Sales for the Period See page 561 net sales The amount of sales for the period less any sales discounts, returns, and allowances. Home Glencoe Accounting

The Income Statement Calculating the Cost of Merchandise Sold. Section 19.2 The Income Statement Calculating the Cost of Merchandise Sold. Computing the cost of merchandise sold requires two steps: Determine the cost of all merchandise available for sale Calculate the cost of merchandise sold Home Glencoe Accounting

The Income Statement net purchases Section 19.2 The Income Statement Calculating the Cost of Merchandise Available for Sale Add Net Purchases to the Beginning Inventory Amount. net purchases The total cost of all merchandise purchased during a period, less any purchases, discounts, returns, and allowances. Home Glencoe Accounting

Calculating the Cost of Merchandise Sold The Income Statement Section 19.2 The Income Statement Calculating the Cost of Merchandise Sold See page 563 Home Glencoe Accounting

The Income Statement Section 19.2 The Income Statement The gross profit on sales is the profit made before operating expenses are deducted. gross profit on sales The amount of profit made during the fiscal period before expenses are deducted; it is found by subtracting the cost of merchandise sold from net sales. Home Glencoe Accounting

Administrative Expenses The Income Statement Section 19.2 The Income Statement Selling Expenses Operating Expenses Administrative Expenses operating expenses The cash spent or assets consumed to earn a revenue for a business; operating expenses do not include federal income tax expense. Home Glencoe Accounting

Administrative Expenses The Income Statement Section 19.2 The Income Statement Selling Expenses Operating Expenses Administrative Expenses selling expenses Expenses a business incurs to sell or market its merchandise or services. Home Glencoe Accounting

Administrative Expenses The Income Statement Section 19.2 The Income Statement Selling Expenses Operating Expenses Administrative Expenses administrative expenses Costs related to the management of a business (for example, office expenses). Home Glencoe Accounting

The excess of gross profit over operating expenses; taxable income. The Income Statement Section 19.2 The Income Statement The federal corporate income tax amount is presented separately on the income statement so the income statement shows the amount of operating income. operating income The excess of gross profit over operating expenses; taxable income. Home Glencoe Accounting

Analyzing Amounts on the Income Statement Section 19.2 The Income Statement Vertical analysis enables users to more easily view relationships. vertical analysis A method of analysis that expresses financial statement items as percentages of a base amount. Home Glencoe Accounting

Key Terms statement of retained earnings horizontal analysis The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows Section 19.3 Key Terms statement of retained earnings horizontal analysis base period cash inflows cash outflows operating activities investing activities financing activities Home Glencoe Accounting

The Statement of Retained Earnings The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows Section 19.3 Statement of Retained Earnings Home Glencoe Accounting

The Statement of Retained Earnings The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows Section 19.3 Statement of Retained Earnings See page 569 statement of retained earnings A financial statement that reports the changes in the Retained Earnings account during the period. Home Glencoe Accounting

The Balance Sheet The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows Section 19.3 The balance sheet reports the balances of all asset, liability, and stockholders’ equity accounts for a specific date. The assets are listed first, followed by the Liabilities section and the Stockholders’ Equity section. Home Glencoe Accounting

The Starting Line’s Balance Sheet The Balance Sheet The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows Section 19.3 The Starting Line’s Balance Sheet See page 570 Home Glencoe Accounting

Analyzing Amounts on the Balance Sheet The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows Section 19.3 Horizontal analysis uses dollar amounts expressed as percentages to compare the same items on financial statements for two or more accounting periods or dates. A base period is usually used for comparison. horizontal analysis The comparison of the same item(s) on financial statements for two or more accounting periods or dates; used to determine changes from one period to another. Home Glencoe Accounting

Analyzing Amounts on the Balance Sheet The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows Section 19.3 Horizontal analysis uses dollar amounts expressed as percentages to compare the same items on financial statements for two or more accounting periods or dates. A base period is usually used for comparison. base period A period, usually a year, that is used for comparison. Home Glencoe Accounting

The Statement of Cash Flows The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows Section 19.3 The Statement of Cash Flows Shows Cash Inflows and Cash Outflows cash inflow Receipts of cash. cash outflow Payments of cash. See page 573 Home Glencoe Accounting

The Statement of Cash Flows The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows Section 19.3 Cash Flows from Operating Activities To determine operating cash inflows and outflows, the income statement and balance sheet amounts are converted to the cash basis of accounting. operating activities Business activities involving normal business operations. Home Glencoe Accounting

The Statement of Cash Flows The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows Section 19.3 Loans the business makes Payments received for loans Investing Activities Purchase and sale of plant assets Investments investing activities Business activities involving investments and plant assets. Home Glencoe Accounting

The Statement of Cash Flows The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows Section 19.3 What Are Financing Activities? financing activities Business activities involving debt and equity transactions. Home Glencoe Accounting

The Statement of Cash Flows The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows Section 19.3 Typical Cash Inflows and Outflows for the Three Activities of a Business Home Glencoe Accounting

Question 1 Match the characteristic of financial information to its definition. The information in the financial reports is complete. The information is relatively free of errors and bias. All information that would affect decision making is included. Information from one period can be used to evaluate the information for a different but similar period. All important and relevant information should be included. 1. comparability ________ 2. reliability ________ 3. relevance ________ 4. full disclosure ________ 5. materiality ________ D B C A E Home Glencoe Accounting

Question 2 List the steps necessary to determine the amount to report in the Cost of Merchandise Sold section of the income statement. Step 1: List the amount of beginning merchandise inventory. Step 2: Calculate the Cost of Delivered Merchandise by adding amounts in the Purchases and Transportation In accounts. Step 3: Calculate the amount of Net Purchases by subtracting the Purchases Discounts and Purchases Returns and Allowances from the Cost of Delivered Merchandise. Step 4: Add Net Purchases to beginning merchandise inventory to determine the Cost of Merchandise Available for sale during the period. Step 5: Subtract the amount of ending merchandise inventory from the Cost of Merchandise Available for sale. The result is the Cost of Merchandise Sold. Home Glencoe Accounting

Question 3 “The wide use of computer accounting software makes the understanding of accounting less important.” Do you agree or disagree with that statement, and why? Answers will vary. While computerized accounting programs make the posting and entry of accounting transactions faster and eliminate errors in transferring data from the journal to the ledger, this does not mean that an understanding of accounting is less important. It can be argued that it is more important in this case to have a sound understanding of accounting principles to be able to follow what is happening in the business transaction so a person can determine whether it has been entered correctly. Home Glencoe Accounting

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