1. Preparing an Income Statement
Chapter 15
Preparing an Income Statement

2. Review of Accounting Principles
Record financial activities of a business in journals and ledgers during a fiscal period.
Prepare a work sheet at the end of the fiscal period to organize and summarize the financial information.
Use the completed work sheet to prepare financial statements.

3. Financial Statements
Provide the primary source of information needed by owners and managers to make decisions on the future activity of a business
Hobby shack prepares three financial statements
Income Statement
Statement of Stockholders’ equity
Balance sheet

4. Terms Net Sales Cost of Merchandise Sold Gross Profit on sales
Total sales less sales discount and sales returns and allowances
Cost of Merchandise Sold
The original price of all merchandise sole during a fiscal period
Also called cost of goods sold
Cost of sales
Gross Profit on sales
The revenue remaining after cost of merchandise sold has been deducted
Financial Ratio
A comparison between two items of financial information

5. Terms Cont. Earnings per Share Price-earnings ratio
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
Statement of stockholders’ equity
Shows changes in a corporation's ownership for a fiscal period contains two major sections capital stock and retained earnings.
Par Value
A value assigned to a share of stock and printed on the stock certificate
Supporting Schedule
A report prepared to give details about an item on a principal financial statement

6. Objectives
Define accounting terms and concepts related to financial statements for a merchandising business organized as a corporation.
Prepare an income statement for a merchandising business organized as a corporation

7. Preparing an Income Statements
5.1 Uses of Financial Statements

8. Uses of Financial Statements
Provide primary source of information needed by owners and managers to make decisions on the future activity of a business
Provide information about a business’s financial condition, changes in this financial condition and progress of operations.
Allows for more sound business decisions
Hobby Shack prepares three
Income statement, balance sheet and Statement of Stockholders’ equity.

9. Income Statement Information on a Work Sheet
Income statement is used to report a business’s financial progress during a fiscal period.
Information from a completed work sheet is used to prepare an income statement.
Income Statement of a merchandising business has three main sections
Revenue
Cost of Merchandise Sold
Expenses
Most information reported on the income statement is taken from the income statement columns of the work sheet.

11. Revenue Section on an Income Statement1 2 3 4 5 8 9 6 7
More accounts to report on the income statement. The accounts Sales and its contra accounts, Sales Discount and Sales Returns and Allowances, are reported in the Revenue Section.
Total sales less sales discount and sles returns and allowances is called net sales.
1. Heading
6. Contra account amounts
2. Revenue section
7. Contra account total
3. Title of revenue account
8. Net Sales
4. Sales amount
9. Net sales amount
5. Less contra accounts

12. Cost of Merchandises sold section of an Income statement
1. Cost of Merchandise Sold section
2. Beginning inventory 1
3. Purchases section 2
4. Total cost of merchandise available for sale 3
The original price of all merchandise sold during a fiscal period called the cost of merchandise sold also called Cost of goods sold or Cost of Sales. Concept: Historical Cost
The cost of merchandise sold is calculated from five amounts found on the work sheet. 3 are found in the income statement. Other amounts are found in the Trial Balance and Balance Sheet columns of the worksheet. 4
5. Ending inventory 5 6
6. Cost of merchandise sold

13. Income Statement Cont.
Gross Profit of Sales = the revenue remaining after cost of merchandise sold has been deducted.
Management uses gross profit on sales as a measure for how effectively the business is performing in its primary functions of buying and selling merchandise.
Calculating a ration between gross profit on sales and net sales enables management to compare its performance to prior fiscal periods.

14. Income Statement
The percentage relationship between one financial statement item is known as a component percentage.

15. Completing An Income Statement
1. Gross Profit on Sales
2. Expenses section 7 1
3. Net Income before Federal Income Tax
4. Less Federal Income Tax Expense 2
5. Net Income after Federal Income Tax
6. Double lines 3
7. Component percentage 4 6 5

16. Component Percentage  = Income Statement Component Amount Net Sales
Cost of Merchandise Sold
220,666.90
491,734.24
44.9%
Gross Profit on Sales
271,067
55.1%
Total Expenses
166,864
33.9%
Net Income before Federal Income Tax
104,203.19
21.2%

17. Audit Your Understanding
What is the major difference between the income statement for a merchandising business and a service business?
The cost of merchandise sold section
How is the cost of merchandise sole calculated?
Merchandise Inventory + Purchases = Total Cost of Merchandise Available for Sales - Ending Merchandise Inventory = Cost of Merchandise Sold.
How can the amount of net income calculated on the income statement be verified?
By comparing the amount calculated on the income statement with the amount on the work sheet.

18. 15.2 Analyzing Income Statement

19. Objectives
Analyze an Income statement using component percentages and financial ratios.

20. Terms Financial Ratio Earnings per Share Price-Earnings Ratio
A comparison between two items of financial information
Earnings per Share
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 report.

21. LESSON 15-2 Analyzing an Income Statement
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LESSON 15-2
Analyzing an Income Statement
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22. ANALYZING AN INCOME STATEMENT SHOWING A NET LOSS
LESSON 15-2
ANALYZING AN INCOME STATEMENT SHOWING A NET LOSS
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page 457
LESSON 15-2
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23. FINANCIAL RATIOS $80,313.95 ÷ 2,500 = $32.13 $345.00 ÷ $32.13 = 10.7
page 459
Earnings per Share
Earnings per Share =
Number of Shares Outstanding ÷
Net Income after Federal Income Tax
$80,313.95 ÷
2,500 =
$32.13
Price-Earnings Ratio
Price-Earnings Ratio =
Earnings per Share ÷
Market Price per Share
$345.00 ÷
$32.13 =
10.7
LESSON 15-2

24. TERMS REVIEW financial ratio earnings per share price-earning ratio
page 460
financial ratio
earnings per share
price-earning ratio
LESSON 15-2

25. LESSON 15-3 Preparing a Statement of Stockholders’ Equity
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LESSON 15-3
Preparing a Statement of Stockholders’ Equity

26. CAPITAL STOCK SECTION OF THE STATEMENT OF STOCKHOLDERS’ EQUITY
page 461 1 2 3 4 5
1. Heading
2. Capital Stock and Par Value
3. Stock at the beginning of the year
4. Stock issued during the year
5. Total stock issued at the end of the year
LESSON 15-3

27. RETAINED EARNINGS SECTION OF THE STATEMENT OF STOCKHOLDERS’ EQUITY
page 462 1 3 5 2 4 6 7
1. Retained Earnings
4. Dividends declared
2. Beginning balance
5. Increase in retained earnings
3. Net income after federal income tax
6. Ending balance
7. Total stockholders’ equity
LESSON 15-3

28. TERMS REVIEW statement of stockholders’ equity par value page 463
LESSON 15-3

29. LESSON 15-4 Preparing a Balance Sheet
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LESSON 15-4
Preparing a Balance Sheet
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30. BALANCE SHEET INFORMATION ON A WORK SHEET
page 464
LESSON 15-4

31. CURRENT ASSETS SECTION OF A BALANCE SHEET
page 465 1 2 3 4 5
1. Heading
4. Remaining current asset accounts
2. Begin assets section
5. Current assets
3. Book value of accounts receivable
LESSON 15-4

32. PLANT ASSETS SECTION OF A BALANCE SHEET
LESSON 15-4
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PLANT ASSETS SECTION OF A BALANCE SHEET
page 466 1 2 4 3 5
1. 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.
LESSON 15-4
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33. LIABILITIES SECTION OF A BALANCE SHEET
page 467
1. Heading
2. Account title and amount of each current liability 1
3. Total liabilities 2 3
LESSON 15-4

34. STOCKHOLDERS’ EQUITY SECTION OF A BALANCE SHEET
page 468 6 1 3 2 4 5
1. Stockholders’ Equity
5. Total liabilities and stockholders’ equity
2. Capital stock
6. Double rules
3. Retained earnings
4. Total stockholders’ equity
LESSON 15-4

35. COMPLETED BALANCE SHEET
page 469
(continued on next slide)
LESSON 15-4

36. COMPLETED BALANCE SHEET
page 469
(continued from previous slide)
LESSON 15-4

37. TERMS REVIEW current liabilities long-term liabilities
page 471
current liabilities
long-term liabilities
supporting schedule
LESSON 15-4

38. 15.2 Analyzing an Income Statement

39. Objectives Define accounting terms related to financial statements
Identify accounting concepts and practices related to financial statements for a merchandising business organized as a corporation.
Analyzing an Income Statement