LESSON 15-1 Preparing an Income Statement

New Vocabulary  Net sales: Total sales less sales discount and sales returns and allowances  Cost of merchandise sold: The original price of all merchandise sold during a fiscal period  Gross profit on sales: The revenue remaining after cost of merchandise sold has been deducted

INCOME STATEMENT INFORMATION ON A WORK SHEET page 448

REVENUE SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS page

COST OF MERCHANDISE SOLD SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS page

COMPLETING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS page

Audit Your Understanding What is the major difference between the income statement for merchandising business and a service business?  The cost of merchandise sold section How was the cost of merchandise sold calculated?  Beginning merchandise inventory, plus net purchases, equals total cost of merchandise available for sale, less ending merchandise inventory, equals cost of merchandise sold

Audit Your Understanding How can the amount of net income calculated on the income statement be verified?  Compare it with the amount on the worksheet

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15-2 Analyzing an Income Statement New Vocabulary  Financial ratio: A comparison between two items of financial information  Earnings per share: The amount of net income after federal income tax belonging to a single share of stock  Price-earnings ratio: The relationship between the market value per share and earnings per share of a stock

ANALYZING AN INCOME STATEMENT SHOWING A NET LOSS page 457

Price-Earnings Ratio = Earnings per Share ÷ Market Price per Share Earnings per Share = Number of Shares Outstanding ÷ Net Income after Federal Income Tax FINANCIAL RATIOS page 459 Earnings per Share Price-Earnings Ratio $32.13 = 2,500÷$80, = $32.13 ÷ $345.00

Audit Your Understanding For a merchandising business, every sales dollar includes what four components?  (1) cost of merchandise sold, (2) gross profit on sales, (3) total expenses, and (4) net income How does a company determine acceptable component percentages?  By making comparisons with prior fiscal periods as well as with industry standards

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15-3 Preparing a Statement of Stockholder’s Equity New Vocabulary  Statement of stockholders equity: A financial statement that shows changes in a corporation’s ownership for fiscal period  Par Value: A value assigned to a share of stock and printed on the stock certificate

CAPITAL STOCK SECTION OF THE STATEMENT OF STOCKHOLDERS’ EQUITY page Total stock issued at the end of the year 1.Stock at the beginning of the year 2.Stock issued during the year Multiply par value by number Shares $50 x 2,000

RETAINED EARNINGS SECTION OF THE STATEMENT OF STOCKHOLDERS’ EQUITY page 462 The two changes: Net Income and Dividends

Audit Your Understanding What financial information does a statement of stockholders equity report?  The changes in a corporation’s ownership for fiscal period What are the two major sections of a statement of stockholders’ equity?  Capital stock and retained earnings

Audit Your Understanding Where is the information found to prepare the capital stock section of the statement of stockholders’ equity  In the capital stock general ledger account Where is the beginning balance of retained earnings found?  In the Balance Sheet credit column of the worksheet

Audit Your Understanding How does a corporation distribute a portion of income to stockholders?  As a dividend Where is the amount of dividends found?  In the Balance Sheet debit column of a worksheet

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15-4 BALANCE SHEET INFORMATION ON A WORK SHEET page 464

CURRENT ASSETS SECTION OF A BALANCE SHEET page 465 Book value of accounts receivable 1.Heading 2. Assets section Book Value of Accts. Receivable

PLANT ASSETS SECTION OF A BALANCE SHEET page 466 Book Value

New Vocabulary  Current liabilities: Liabilities due within a short time, usually within a year  Example: Accounts Payable  Long-term liabilities: Liabilities for more than a year  Example: Mortgage or a Car Loan

LIABILITIES SECTION OF A BALANCE SHEET page 467  Account title and amount of each current liability  Total liabilities 2

STOCKHOLDERS’ EQUITY SECTION OF A BALANCE SHEET page 468

COMPLETED BALANCE SHEET page 469 (continued on next slide)

COMPLETED BALANCE SHEET page 469 (continued from previous slide)

New Vocabulary  Supporting schedule: A report prepared to give details about an item on a financial statement  Examples:  Schedule of Accounts Receivable & Schedule of Accounts Payable

Audit Your Understanding What are the two ways assets are classified?  Current and plant assets What three items are listed on the balance sheet for accounts having a related contra asset account?  (1) the balance of the asset account, (2) the balance of the asset’s contra account, and (3) book value

Audit Your Understanding What is an example of a long-term liability?  Mortgage payable What are the two supporting schedules that might accompany a balance sheet?  Schedule of accounts payable and schedule of accounts receivable

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The End