Financial Statements for a Corporation

Why It’s Important The income statement reports the net income or loss for the period and indicates whether or not the business is operating efficiently. Why It’s Important The income statement reports the net income or loss for the period and indicates whether or not the business is operating efficiently. Section 2The Income Statement (con’t.) Key Terms  net sales  net purchases  gross profit on sales  operating expenses Key Terms  net sales  net purchases  gross profit on sales  operating expenses  selling expenses  administrative expenses  operating income  vertical analysis  selling expenses  administrative expenses  operating income  vertical analysis

The Income Statement An income statement for a merchandising business has five sections: The Income Statement An income statement for a merchandising business has five sections:  Revenue Section 2The Income Statement (con’t.)  Cost of Merchandise Sold  Cost of Merchandise Sold  Gross Profit on Sales  Gross Profit on Sales  Operating Expenses  Operating Expenses  Net Income (or Loss)  Net Income (or Loss)

The Revenue Section This section reports the net sales for the period. The Revenue Section This section reports the net sales for the period. Section 2The Income Statement (con’t.)

Cost of Merchandise Sold Section 2The Income Statement (con’t.)

The Cost of Merchandise Sold Section The “cost of merchandise sold” is the actual cost to the business of the merchandise that was sold to customers during the period. The Cost of Merchandise Sold Section The “cost of merchandise sold” is the actual cost to the business of the merchandise that was sold to customers during the period. Section 2The Income Statement (con’t.) Beginning Merchandise Inventory +Net Purchases During the Period Cost of Merchandise Available for Sale –Ending Merchandise Inventory Cost of Merchandise Sold Beginning Merchandise Inventory +Net Purchases During the Period Cost of Merchandise Available for Sale –Ending Merchandise Inventory Cost of Merchandise Sold

Net Purchases Net purchases is all the costs related to merchandise purchased during the period. Net Purchases Net purchases is all the costs related to merchandise purchased during the period. Section 2The Income Statement (con’t.) Purchases +Transportation In Cost of Delivered Merchandise –Purchases Discounts –Purchases Returns and Allowances Net Purchases Purchases +Transportation In Cost of Delivered Merchandise –Purchases Discounts –Purchases Returns and Allowances Net Purchases

The Gross Profit on Sales Section  The gross profit on sales is the profit made during the period before operating expenses are deducted.  Gross profit on sales is found by subtracting the cost of merchandise sold from net sales.  The gross profit on sales is the profit made during the period before operating expenses are deducted.  Gross profit on sales is found by subtracting the cost of merchandise sold from net sales. Section 2The Income Statement (con’t.)

The Operating Expenses Section  Operating expenses are the costs of the goods and services used in the process of earning revenue for the business. Section 2The Income Statement (con’t.)

The Net Income Section  The final section of the income statement reports the net income (or net loss) for the period.  Operating income is the amount of income earned before federal corporate income taxes are deducted.  To calculate operating income, subtract the total operating expenses from the gross profit on sales.  The final section of the income statement reports the net income (or net loss) for the period.  Operating income is the amount of income earned before federal corporate income taxes are deducted.  To calculate operating income, subtract the total operating expenses from the gross profit on sales. Section 2The Income Statement (con’t.)

Net Sales = Sales - Sales Discounts - Sales Returns and Allowances Cost of Merchandise Sold =Beginning Inventory + Net purchases –Ending Inventory **(Net Purchases=Purchases + Transportation In - Purchases Discounts - Purchases Returns and Allowances) Gross Profit =Net Sales – Cost of Merchandise Sold Operating Income =Gross Profit – Operating Expense Net Income Before Taxes =Operating Income +/- Net Addition/Deductions Net Income =Net Income Before Taxes – Fed. Corp. Income Tax Expense The Income Statement Formulas

The Statement of Retained Earnings A statement of retained earnings reports the changes that take place in the Retained Earnings account during the period. These changes result from business operations and the distribution of earnings to stockholders through dividends. The Statement of Retained Earnings A statement of retained earnings reports the changes that take place in the Retained Earnings account during the period. These changes result from business operations and the distribution of earnings to stockholders through dividends. Section 3The Statement of Retained Earnings and the Balance Sheet (con’t.)

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.  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. Section 1The Ownership of a Corporation (con’t.)

The Statement of Retained Earnings (con’t.) Section 3The Statement of Retained Earnings and the Balance Sheet (con’t.)

The Balance Sheet The balance sheet reports the balances of all asset, liability, and stockholders’ equity accounts for a specific date. Section 3The Statement of Retained Earnings and the Balance Sheet (con’t.)

The Balance Sheet (con’t.) Section 3The Balance Sheet (con’t.) Find on Statement of Changes in O.E All balances found on the worksheet Capital Stock 20,000 Retained Earnings 6,050 Total Stockholders Equity 26,050 Total Liabilities and Stockholders’Equity 37,775

Characteristics of Financial Information Financial statements are used by many groups. 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.  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. Section 1The Ownership of a Corporation (con’t.)

Characteristics of Financial Information (con’t.)  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.  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. Section 1The Ownership of a Corporation (con’t.)

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.  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. Section 1The Ownership of a Corporation (con’t.)

Reliability  Users of accounting data assume that the amounts are reliable.  Reliability relates to the confidence users have that the financial information is reasonably free from bias and error.  Users of accounting data assume that the amounts are reliable.  Reliability relates to the confidence users have that the financial information is reasonably free from bias and error. Section 1The Ownership of a Corporation (con’t.)

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.  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. Section 1The Ownership of a Corporation (con’t.)

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.  To “disclose” means “to uncover or to make known.”  Full disclosure means that financial reports include enough information so that the report is complete. Section 1The Ownership of a Corporation (con’t.)

Materiality  If something is “material,” it is important.  Materiality means that information deemed relative should be included in financial reports.  If something is “material,” it is important.  Materiality means that information deemed relative should be included in financial reports. Section 1The Ownership of a Corporation (con’t.)

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. 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. Section 1The Ownership of a Corporation (con’t.) Key Terms  Capital Stock  stockholders’ equity  retained earnings  comparability Key Terms  Capital Stock  stockholders’ equity  retained earnings  comparability  reliability  relevance  full disclosure  materiality  reliability  relevance  full disclosure  materiality