GLENCOE / McGraw-Hill

Financial Statements and Closing Procedures

Preparing the Financial Statements Section Objectives Prepare a classified income statement from the worksheet. Prepare a statement of owner’s equity from the worksheet. Prepare a classified balance sheet from the worksheet.

Classified Financial Statements At the end of the period, Modern Casuals prepares three financial statements: Income statement Statement of owner's equity Balance sheet Page 472

This makes the financial statements more useful to the readers. The income statement and the balance sheet are arranged in a classified format. This makes the financial statements more useful to the readers. Page 472

What is a classified financial statement? QUESTION: What is a classified financial statement? A classified financial statement is a format in which items are divided into groups of similar accounts and a subtotal is given for each group. ANSWER: Page 472

The Classified Income Statement Page 472

Prepare a classified income statement from the worksheet. Objective 1 Prepare a classified income statement from the worksheet. Page 472

The Classified Income Statement A classified income statement is sometimes called a multiple-step income statement. Page 472

What is a multiple-step income statement? QUESTION: What is a multiple-step income statement? A multiple-step income statement is a type of income statement on which several subtotals are computed before the net income is calculated. ANSWER: Page 472

What is a single-step income statement? QUESTION: What is a single-step income statement? A single-step income statement is a format in which only one computation is needed to determine the net income. ANSWER: (Total Revenue – Total Expenses = Net Income) Page 472

Single-step Income Statement The format lists all revenues in one section and all expenses in another section. Carter Consulting Services Income Statement Month Ended December 31, 2004 Revenue Fees Income 28,000.00 Expenses Salaries Expense 5,000.00 Utilities Expense 600.00 Supplies Expense 500.00 Rent Expense 3,000.00 Depreciation Expense - Equipment 583.00 Total Expenses 9,683.00 Net Income for the Month 18,317.00 Page 472

Operating Revenue Page 472

Operating Revenue The first section of the classified income statement contains the revenue from operations. This is the revenue earned from normal business activities. Other income is presented separately near the bottom of the statement. Page 472

Operating Revenue The operating revenue for Modern Casuals is net sales of merchandise. Sales (Sales Returns and Allowances) Net Sales The parentheses indicate that the amount is subtracted. Page 473

Operating Revenue Net sales for Modern Casuals Page 473

Cost of Goods Sold Page 473

Cost of Goods Sold The Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period. Three elements are needed to compute the cost of goods sold: Beginning inventory Net delivered cost of purchases Ending inventory Page 473

Net Delivered Cost of Purchases + Freight In (Purchases Returns and Allowances) (Purchases Discounts) Net Delivered Cost of Purchases Page 473

Total Merchandise Available for Sale Beginning Merchandise Inventory + Net Delivered Cost of Purchases Total Merchandise Available for Sale Page 473

Cost of Goods Sold Beginning Merchandise Inventory + Net Delivered Cost of Purchases Total Merchandise Available for Sale (Ending Merchandise Inventory) Cost of Goods Sold Page 473

Merchandise Inventory is the one account that appears on both the income statement and the balance sheet. Beginning and ending merchandise inventory balances appear on the income statement. Ending merchandise inventory also appears on the balance sheet in the Assets section. Page 473

Cost of Goods Sold Net delivered cost of purchases Merchandise available for sale Page 473 Cost of goods sold

Gross Profit on Sales Page 473

QUESTION: What is gross profit? Gross profit is the difference between net sales and the cost of goods sold. ANSWER: Page 473

Gross Profit on Sales For Modern Casuals net sales is the revenue earned from selling clothes. Cost of goods sold is what Modern Casuals paid for the clothes that were sold during the fiscal period. Gross profit is what is left to cover operating expenses and provide a profit. Page 473

Gross Profit on Sales The format to compute gross profit on sales is: Net Sales (Cost of Goods Sold) Gross Profit on Sales Page 473

Gross profit on sales for Modern Casuals Page 473

Operating Expenses Page 473

Operating Expenses Operating expenses are expenses that arise from normal business activities. Modern Casuals separates operating expenses into two categories: Selling Expenses General and Administrative Expenses Page 473

Operating Expenses Salaries for salespersons and advertising are examples of selling expenses. Page 473

Operating Expenses Rent, utilities, and salaries for office employees are examples of general and administrative expenses. Page 473

Net Income or Net Loss from Operations Page 475

Net Income or Net Loss from Operations The format for determining net income (or net loss) from operations is: Gross Profit on Sales (Total Operating Expenses) Net Income (or Net Loss) from Operations Page 475

Net income from operations Page 475

Other Income and Other Expenses Page 475

Other Income and Other Expenses Income that is earned from sources other than normal business activities appears in the Other Income section. For Modern Casuals other income includes interest on notes receivable and one miscellaneous income item. Expenses that are not directly connected with business operations appear in the Other Expenses section. Page 475

Other Income and Other Expenses Page 475

Net Income or Net Loss Page 475

Net Income or Net Loss Net income is all the revenue minus all the expenses. If there is a net loss, it appears in parentheses. Net income or net loss is used to prepare the statement of owner's equity. Page 475

Net income for Modern Casuals Page 475

The Statement of Owner’s Equity Page 475

Prepare a statement of owner’s equity from the worksheet. Objective 2 Prepare a statement of owner’s equity from the worksheet. Page 475

The Statement of Owner's Equity The statement of owner's equity reports the changes that occurred in the owner's financial interest during the period. The ending capital balance for Sonia Sanchez, $81,923.25, is used to prepare the balance sheet. Page 475

The Classified Balance Sheet Page 475

Prepare a classified balance sheet from the worksheet. Objective 3 Prepare a classified balance sheet from the worksheet. Page 475

Current Assets Page 475

What are current assets? QUESTION: What are current assets? Current assets are assets consisting of cash, items that normally will be converted into cash within one year, or items that will be used up within one year. ANSWER: Page 475

Current Assets Current assets are usually listed in order of liquidity. Page 476

Liquidity is the ease with which an item can be converted into cash. QUESTION: What is liquidity? Liquidity is the ease with which an item can be converted into cash. ANSWER: Page 476

Current Assets Current assets for Modern Casuals Page 476

Plant and Equipment Page 477

What is plant and equipment? QUESTION: What is plant and equipment? Plant and equipment is property that will be used in the business for longer than one year. ANSWER: Page 477

Plant and Equipment Noncurrent assets are called long-term assets. An important category of long-term assets is plant and equipment. For many businesses plant and equipment represents a sizable investment. Page 477

Plant and Equipment The balance sheet shows three amounts for each category of plant and equipment : Asset (Accumulated depreciation) Book value Page 477

Plant and Equipment Total plant and equipment Page 477

Current Liabilities Page 477

What are current liabilities? QUESTION: What are current liabilities? Current liabilities are debts that must be paid within one year. ANSWER: Page 477

Current Liabilities Current liabilities are usually listed in order of priority of payment. Management must ensure that funds are available to pay current liabilities when they become due in order to maintain the firm's good credit reputation. Page 477

Total current liabilities Assets Prepaid Interest 75.00 5,000.00 Total Current Assets 104,610.00 Total Plant and Equipment 23,550.00 Total Assets 128,160.00 Liabilities and Owner’s Equity Current Liabilities Notes Payable-Trade 2,000.00 Notes Payable-Bank 9,000.00 Accounts Payable 24,129.00 Interest Payable 20.00 Social Security Tax Payable 1,177.00 Medicare Tax Payable 271.75 Employee Income Tax Payable 990.00 Fed. Unemployment Tax Pay. 12.00 State Unemployment Tax Pay. 81.00 Salaries Payable 1,500.00 Sales Tax Payable 7,056.00 Total Current Liabilities 46,236.75 Modern Casuals Balance Sheet Year Ended December 31, 2004 Total current liabilities Page 477

Long-Term Liabilities Page 477

What are long-term liabilities? QUESTION: What are long-term liabilities? Long-term liabilities are debts of a business that are due more than one year in the future. ANSWER: Page 477

Long-Term Liabilities Although repayment of long-term liabilities might not be due for several years, management must make sure that periodic interest is paid promptly. Long-term liabilities include mortgages, notes payable, and loans payable. Page 477

Owner's Equity Page 477

Owner's Equity Modern Casuals prepares a separate statement of owner's equity that reports all information about changes that occurred in the owner's financial interest during the period. Page 477

Owner's Equity The ending balance from the statement of owner’s equity is transferred to the Owner's Equity section of the balance sheet. Page 477

Complete the following sentences: multiple-step income statement R E V I W Complete the following sentences: A classified income statement is also called a(n) ___________________________. multiple-step income statement Gross profit ___________ is the difference between net sales and the cost of goods sold. _____________ are assets consisting of cash, items that normally will be converted into cash within one year, or items that will be used up within one year. Current assets

Complete the following sentences: Long-term liabilities V I W Complete the following sentences: Current liabilities _______________ are debts that must be paid within one year. Liquidity ________ is the ease with which an item can be converted into cash. Long-term liabilities _________________ are debts of a business that are due more than one year in the future.

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