1. 0 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Unit 4 The Accounting Cycle for a Merchandising Corporation Chapter 14Accounting for Sales and Cash Receipts Chapter 15Accounting for Purchases and Cash Payments Chapter 16Special Journals: Sales and Cash Receipts Chapter 17Special Journals: Purchases and Cash Payments Chapter 18Adjustments and the Ten-Column Work Sheet Chapter 19Financial Statements for a Corporation Chapter 20Completing the Accounting Cycle for a Merchandising Corporation Chapter 21Accounting for Publicly Held Corporations

2. 1 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 19 Financial Statements for a Corporation What You’ll Learn  Explain how to record ownership of a corporation.  Explain the relationship between the work sheet and the financial statements for a merchandising corporation.  Explain how a corporation’s financial statements differ from a sole proprietorship’s.  Prepare an income statement, statement of retained earnings, and balance sheet, and describe the statement of cash flows for a merchandising corporation.

3. 2 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 19 Financial Statements for a Corporation What You’ll Learn  Analyze the financial data contained on the statements.  Define the accounting terms introduced in this chapter.

4. 3 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 19, Section 1 The Ownership of a Corporation What Do You Think? Who owns a corporation?

5. 4 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Owner’s equity in a corporation is called stockholders’ equity. You Will Learn  the accounts used to record ownership of a corporation.  the qualities expected in financial statements.  the financial statements of a corporation. The Ownership of a Corporation SECTION 19.1

6. 5 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  Capital Stock  stockholders’ equity  retained earnings  comparability  reliability  relevance  full disclosure  materiality The Ownership of a Corporation SECTION 19.1

7. 6 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Accounting for a Corporation A corporation may be owned by one person or thousands. The ownership of a corporation is represented by shares of stock. The Ownership of a Corporation SECTION 19.1

8. 7 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording the Ownership of a Corporation Corporations have a Capital Stock account instead of the sole proprietorship’s owner’s capital account. This is a stockholders’ equity account that is the value of the stockholders’ claims to the corporation.Capital Stock stockholders’ equity The Ownership of a Corporation SECTION 19.1

9. 8 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Reporting Stockholders’ Equity in a Corporation The owner’s equity section is called stockholders’ equity and must be reported in two parts:  equity contributed by the stockholders  equity earned through business profits The Ownership of a Corporation SECTION 19.1

10. 9 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Equity Contributed by Stockholders Stockholders contribute to equity by purchasing shares of stock. This amount is recorded in the Capital Stock account. The Ownership of a Corporation SECTION 19.1

11. 10 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Equity Earned Through Business Profits The net income earned and retained by a corporation is called retained earnings. This amount is recorded in the Retained Earnings account.retained earnings The Ownership of a Corporation SECTION 19.1

12. 11 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Balance Sheet Presentation Compare the capital section of the balance sheet to a sole proprietorship and a corporation. The Ownership of a Corporation SECTION 19.1

13. 12 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Characteristics of Financial Information Financial statements are used by many groups:  managers  stockholders  creditors  government agencies, employees, consumers, and the general public The Ownership of a Corporation SECTION 19.1

14. 13 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Comparability For accounting information to be useful, it must be comparable. Comparability allowsComparability  information to be compared from one period to another, and  the comparison of information between businesses. The Ownership of a Corporation SECTION 19.1

15. 14 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Reliability Reliability refers to the confidence users have that financial information is reasonably free from bias and error. The Ownership of a Corporation SECTION 19.1

16. 15 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Relevance Relevance is the requirement that all information that would affect decisions of financial statement users be disclosed in the financial reports. The Ownership of a Corporation SECTION 19.1

17. 16 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Full Disclosure Full disclosure Full disclosure means that financial reports include enough information to be complete. The Ownership of a Corporation SECTION 19.1

18. 17 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Materiality Materiality means that relevant information should be included in financial reports. The Ownership of a Corporation SECTION 19.1

19. 18 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. A Corporation’s Financial Statements A merchandising corporation can prepare four financial statements:  the income statement  the statement of returned earnings  the balance sheet  the statement of cash flows Many of today’s businesses depend on computers to maintain the general ledger and subsidiary ledgers and to prepare the end-of-period financial statements. The Ownership of a Corporation SECTION 19.1

20. 19 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  Capital Stock The account that represents the total amount of investment in the corporation by its stockholders (owners).  stockholders’ equity The value of the stockholders’ claims to the corporation.  retained earnings A corporation’s accumulated net income that is not distributed to stockholders. The Ownership of a Corporation SECTION 19.1

21. 20 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  comparability Accounting characteristic that allows the financial information to be compared from one period to another period; also allows the comparison of financial information between businesses.  reliability A characteristic requiring that accounting information be reasonably free of bias and error.  relevance An accounting characteristic requiring that all information that would affect the decisions of financial statement users be disclosed in the financial reports. The Ownership of a Corporation SECTION 19.1

22. 21 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  full disclosure Accounting principle requiring a financial report to include enough information so that it is complete.  materiality An accounting guideline stating that information considered important (relative to the other information) should be included in financial reports. The Ownership of a Corporation SECTION 19.1

23. 22 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 19, Section 2 The Income Statement What Do You Think? Why is the income statement for merchandising businesses longer than for service businesses?

24. 23 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea A merchandiser’s income statement has a Cost of Merchandise Sold section, and a corporation’s income statement shows income tax expense. You Will Learn  how to prepare an income statement for a merchandising business organized as a corporation.  how to apply vertical analysis to a financial statement. The Income Statement SECTION 19.2

25. 24 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  net sales  net purchases  gross profit on sales  operating expenses  selling expenses  administrative expenses  operating income  vertical analysis The Income Statement SECTION 19.2

26. 25 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Income Statement When preparing the income statement, the revenue realization and the matching principles are applied. Merchandising businesses have the cost of merchandise purchased and resold to customers, so the income statement has five sections instead of the service business’s three sections:  Revenue  Cost of Merchandise Sold  Gross Profit on Sales  Operating Expenses  Net Income (or Loss) The Income Statement SECTION 19.2

27. 26 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Revenue Section This section reports the net sales for the period. To complete the revenue section:net sales  Enter Revenue: at the left edge on the first line.  On the second line, enter Sales (indented).  Enter deductions from Sales on the next lines.  Add the balances of the contra revenue accounts and enter the total below Sales in the third amount column.  Enter the words Net Sales (indented) on the next line. Subtract the total of the contra revenue accounts from the Sales account and enter the amount in the fourth amount column. The Income Statement SECTION 19.2

28. 27 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Revenue Section The Income Statement SECTION 19.2

29. 28 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Cost of Merchandise Sold Section The cost of merchandise sold is calculated as follows: Computing the cost of merchandise sold requires two steps:  Determine the cost of all merchandise available for sale.  Calculate the cost of merchandise sold. The Income Statement SECTION 19.2

30. 29 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Calculating Cost of Merchandise Available for Sale Add net purchases to the beginning inventory amount. Use the following to calculate net purchases:net purchases The Income Statement SECTION 19.2

31. 30 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Calculating Cost of Merchandise Sold Subtract the ending merchandise inventory amount from the cost of merchandise available for sale to calculate the cost of merchandise sold. The following is an example of the Income Statement completed through Gross Profit on Sales. The Income Statement SECTION 19.2

32. 31 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Calculating Cost of Merchandise Sold The Income Statement SECTION 19.2

33. 32 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Gross Profit on Sales Section The gross profit on sales is the profit made before operating expenses are deducted. Subtracting the cost of merchandise sold from net sales will give the gross profit on sales.gross profit on sales The Income Statement SECTION 19.2

34. 33 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Operating Expenses Section The operating expenses are the costs of goods and services used in the process of earning revenue. Operating expenses can be further classified into selling expenses (incurred to sell or market the merchandise sold) and administrative expenses (related to the management of the business).operating expenses selling expenses administrative expenses The Income Statement SECTION 19.2

35. 34 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Net Income Section The federal corporate income tax amount is presented separately on the income statement so the income statement shows the amount of operating income. Operating income is the amount of income earned before deducting federal corporate income taxes.operating income An example follows of the completed Income Statement. The Income Statement SECTION 19.2

36. 35 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Income Statement SECTION 19.2

37. 36 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing Amounts on the Income Statement The information reported on financial statements is expressed in dollars. Vertical analysis reports each dollar amount as a percentage of a base amount, which enables users to more easily view the relationships among the items on the financial statements.Vertical analysis The Income Statement SECTION 19.2

38. 37 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Income Statement SECTION 19.2

39. 38 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  net sales The amount of sales for the period less any sales discounts, returns, and allowances.  net purchases The total cost of all merchandise purchased during a period, less any purchases, discounts, returns, and allowances.  gross profit on sales The amount of profit made during the fiscal period before expenses are deducted; it is found by subtracting the cost of merchandise sold from net sales. The Income Statement SECTION 19.2

40. 39 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  operating expenses The cash spent or assets consumed to earn a revenue for a business; operating expenses do not include federal income tax expense.  selling expenses Expenses a business incurs to sell or market its merchandise or services.  administrative expenses Costs related to the management of a business (for example, office expenses). The Income Statement SECTION 19.2

41. 40 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  operating income The excess of gross profit over operating expenses; taxable income.  vertical analysis A method of analysis that expresses financial statement items as percentages of a base amount. The Income Statement SECTION 19.2

42. 41 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 19, Section 3 The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows What Do You Think? Why do investors want to see so many various financial statements?

43. 42 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea In addition to the income statement, a corporation prepares the statement of retained earnings, the balance sheet, and the statement of cash flows. You Will Learn  how and why a statement of retained earnings is prepared.  how to prepare a balance sheet for a merchandising business organized as a corporation. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

44. 43 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. You Will Learn  how to apply horizontal analysis to a financial statement.  about the statement of cash flows. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

45. 44 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  statement of retained earnings  horizontal analysis  base period  cash inflows  cash outflows  operating activities  investing activities  financing activities The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

46. 45 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Statement of Retained Earnings A statement of retained earnings reports the changes in the Retained Earnings account during the period. The changes result from business operations and dividends.statement of retained earnings The statement is prepared from information on the work sheet and is used when preparing the balance sheet. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

47. 46 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Balance Sheet The balance sheet reports the balances of all asset, liability, and stockholders’ equity accounts for a specific date. The assets are listed first, followed by the Liabilities section and the Stockholders’ Equity section. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

48. 47 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. SECTION 19.3 The Balance Sheet

49. 48 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing Amounts on the Balance Sheet Horizontal analysis Horizontal analysis uses dollar amounts expressed as percentages to compare the same items on financial statements for two or more accounting periods or dates. A base period, usually a year, is used for comparison.base period The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

50. 49 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. SECTION 19.3 Analyzing Amounts on the Balance Sheet

51. 50 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Statement of Cash Flows The information on the statement of cash flows is vital for decision making. The statement shows a company’s cash flow, which indicates the ability of the company to pay its debts and pay dividends. Cash inflows come into and cash outflows go out of a business.Cash inflows cash outflows The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

52. 51 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. SECTION 19.3 The Statement of Cash Flows

53. 52 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Cash Flows from Operating Activities Operating activities Operating activities include all transactions that occurred during the accounting period as part of normal business operations. To determine operating cash inflows and outflows, the income statement and balance sheet amounts are converted to the cash basis of accounting. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

54. 53 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Cash Flows from Investing Activities Investing activities Investing activities include  loans the business makes,  payments received for those loans,  purchase and sale of plant assets, and  Investments. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

55. 54 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Cash Flows from Financing Activities Financing activities Financing activities are the borrowing activities needed to finance the company operations and the repayment of these debts. The following table shows typical cash inflows and outflows for operating, investing, and financing activities. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

56. 55 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Cash Flows from Financing Activities The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

57. 56 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  statement of retained earnings A financial statement that reports the changes in the Retained Earnings account during the period.  horizontal analysis The comparison of the same item(s) on financial statements for two or more accounting periods or dates; used to determine changes from one period to another.  base period A period that is used for comparison in financial statements analysis. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

58. 57 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  cash inflows Receipts of cash.  cash outflows Payments of cash.  operating activities Business activities involving normal business operations. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

59. 58 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  investing activities Business activities involving investments and plant assets.  financing activities Business activities involving debt and equity transactions. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows SECTION 19.3

60. 59 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 1 Match the characteristic of financial information to its definition. A.The information in the financial reports is complete. B.The information is relatively free of errors and bias. C.All information that would affect decision making is included. D.Information from one period can be used to evaluate the information for a different but similar period. E.All important and relevant information should be included. 1. comparability________ 2. reliability________ 3. relevance________ 4. full disclosure________ 5. materiality________ Chapter 19 Review CHAPTER 19

61. 60 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 1 1. Comparability: D 2. Reliability: B 3. Relevance: C 4. Full disclosure: A 5. Materiality: E Chapter 19 Review CHAPTER 19

62. 61 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 2 List the steps necessary to determine the amount to report in the Cost of Merchandise Sold section of the income statement. Chapter 19 Review CHAPTER 19

63. 62 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 2 Step 1: List the amount of beginning merchandise inventory. Step 2: Calculate the Cost of Delivered Merchandise by adding amounts in the Purchases and Transportation In accounts. Step 3: Calculate the amount of Net Purchases by subtracting the Purchases Discounts and Purchases Returns and Allowances from the Cost of Delivered Merchandise. Step 4: Add Net Purchases to beginning merchandise inventory to determine the Cost of Merchandise Available for sale during the period. Step 5: Subtract the amount of ending merchandise inventory from the Cost of Merchandise Available for sale. The result is the Cost of Merchandise Sold. Chapter 19 Review CHAPTER 19

64. 63 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 3 “The wide use of computer accounting software makes the understanding of accounting less important.” Do you agree or disagree with that statement, and why? Chapter 19 Review CHAPTER 19

65. 64 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 3 Answers will vary. While computerized accounting programs make the posting and entry of accounting transactions faster and eliminate errors in transferring data from the journal to the ledger, this does not mean that an understanding of accounting is less important. It can be argued that it is more important in this case to have a sound understanding of accounting principles to be able to follow what is happening in the business transaction so a person can determine whether it has been entered correctly. Chapter 19 Review CHAPTER 19

66. 65 Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Resources Glencoe Accounting Online Learning Center English Glossary Spanish Glossary