Preparing an Income Statement

 Financial statements provide the primary source of information needed by owners and managers to make decisions on the future activity of a business.   The financial statements should provide information about the business’s financial condition, changes in this financial condition, and the progress of operations. Comparing financial condition and progress for more than one fiscal period also helps owners and managers make sound business decisions. Therefore, financial information must be reported the same way from one fiscal period to the next.   A corporation prepares: Income Statement Balance Sheet Statement of Stockholders’ Equity

LESSON page 448

 Merchandising Businesses report revenue, cost of merchandise sold, gross profit on sales, expenses, and net income or loss.  Current and previous income statements can be compared to determine the reasons for increases or decreases in net income.

 Three main section of an income statement: Revenue section Cost of merchandise sold Expenses section   Total sales – sales discount and sales returns and allowances = Net Sales   The original price of all merchandise sold during a fiscal period is called the cost of merchandise sold.   The revenue remaining after cost of merchandise sold has been deducted is called gross profit on sales. 

LESSON Contra account amounts page Heading 7.Contra account total 3.Title of revenue account 8.Net Sales 4.Sales amount9.Net sales amount 5.Less contra accounts 2.Revenue section

LESSON page Cost of Merchandise Sold section 2.Beginning inventory 3.Purchases section 4.Total cost of merchandise available for sale 5.Ending inventory 6.Cost of merchandise sold

LESSON Component percentage 6.Double lines 5.Net Income after Federal Income Tax 4.Less Federal Income Tax Expense 3.Net Income before Federal Income Tax 2.Expenses section 1.Gross Profit on Sales

 net sales  cost of merchandise sold  gross profit on sales LESSON page 454

Analyzing an Income Statement

 A percentage relationship between one financial statement item and the total that includes that item is known as a component percentage.  For Hobby Shack, a merchandising business, every sales dollar reported on the income statement includes four components (1) cost of merchandise sold (2) gross profit on sales (3) total expenses (4) net income before income tax.  LOOK ON p. 455 in book for example

LESSON

 A comparison between two items of financial information is called a financial ratio.  The amount of net income after federal income tax belonging to a single share of stock is called earnings per share.  The relationship between the market value per share and earnings per share of stock is called the price-earnings ratio.

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

 financial ratio  earnings per share  price-earning ratio LESSON page 460

Preparing a Statement of Stockholders ’ Equity

 A financial statement that shows changes in a corporation’s ownership for a fiscal period is called a statement of stockholders’ equity.  The amount of capital stock issued as of the beginning of the year is the beginning balance of the capital stock account. Any additional stock transactions recorded in the general ledger during the fiscal year would be added to calculate the amount of stock issued during the fiscal year.   Thus, the amounts in the capital stock section of the statement of stockholders’ equity are obtained from the general ledger account, Capital Stock.

 Each share of stock issued by a corporation has a monetary value. A value assigned to a share of stock and printed on the stock certificate is called par value.

LESSON page Heading 2. Capital Stock and Par Value 5.Total stock issued at the end of the year 3.Stock at the beginning of the year 4.Stock issued during the year

LESSON page Dividends declared Beginning balance 7.Total stockholders’ equity 6.Ending balance3.Net income after federal income tax 5.Increase in retained earnings 1.Retained Earnings

 statement of stockholders ’ equity  par value LESSON page 463

Preparing a Balance Sheet

LESSON page 464

LESSON page Book value of accounts receivable 4. Remaining current asset accounts1. Heading 2. Begin assets section 5. Current assets

LESSON page Write the heading Plant Assets. 2.Calculate the book value of office equipment. 3.Use the same procedure to calculate the book value of store equipment. 4.Calculate total plant assets. 5.Calculate total assets.

 Liabilities due within a short time, usually within a year, are called current liabilities.  Liabilities owed for more than a year are called long-term liabilities.

LESSON page Heading 2.Account title and amount of each current liability 3.Total liabilities 2

LESSON Total liabilities and stockholders’ equity Capital stock 1.Stockholders’ Equity 3.Retained earnings 4.Total stockholders’ equity 6.Double rules 6

LESSON page 469 (continued on next slide)

LESSON page 469

 A report prepared to give details about an item on a principal financial statement is called a supporting schedule.

 current liabilities  long-term liabilities  supporting schedule LESSON page 471