Financial Statements for a Corporation Making Accounting Relevant Public corporations often offer Web sites where they provide financial data. Making Accounting Relevant Public corporations often offer Web sites where they provide financial data. Discuss what types of financial information might be of interest to potential stockholders.

Section 1The Ownership of a Corporation What You’ll Learn  Which equity accounts are used in corporation accounting.  How equity earned through business profits is reported.  Which end-of-period financial statements are prepared for a corporation. What You’ll Learn  Which equity accounts are used in corporation accounting.  How equity earned through business profits is reported.  Which end-of-period financial statements are prepared for a corporation.

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 (cont'd.) 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

Recording the Ownership of a Corporation  Capital Stock represents the investments in the corporation by its stockholders (owners).  Capital Stock is classified as a stockholders’ equity account.  Capital Stock represents the investments in the corporation by its stockholders (owners).  Capital Stock is classified as a stockholders’ equity account. Section 1The Ownership of a Corporation (cont'd.)

Recording the Ownership of a Corporation (cont'd.) Section 1The Ownership of a Corporation (cont'd.) Business Transaction On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. ANALYSIS Identify1.The accounts affected are Cash in Bank and Capital Stock. Classify2.Cash in Bank is an asset account. Capital Stock is a stockholders’ equity account. + / –3.Cash in Bank is increased by $25,000. Capital Stock is increased by $25,000.

Recording the Ownership of a Corporation (cont'd.) Section 1The Ownership of a Corporation (cont'd.) Business Transaction On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. DEBIT-CREDIT RULE 4.Increases to asset accounts are recorded as debits. Debit Cash in Bank for $25, Increases to stockholders’ equity accounts are recorded as credits. Credit Capital Stock for $25,000.

Recording the Ownership of a Corporation (cont'd.) Section 1The Ownership of a Corporation (cont'd.) Business Transaction On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. T ACCOUNTS 6. InsurancePrepaid ExpenseInsurance Debit + 25,000 Credit + 25,000 Credit – Debit –

Recording the Ownership of a Corporation (cont'd.) Section 1The Ownership of a Corporation (cont'd.) Business Transaction On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. JOURNAL ENTRY 7.

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 (cont'd.)

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 (cont'd.)

Characteristics of Financial Information (cont'd.)  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 (cont'd.)

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 (cont'd.)

Reliability  Users of accounting data assume that the data 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 data 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 (cont'd.)

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 (cont'd.)

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 (cont'd.)

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 (cont'd.)

Check Your Understanding What is the purpose of preparing the same types of financial statements at the end of each period? Section 1The Ownership of a Corporation (cont'd.)