1. Financial statements for a corporation
Chapter 19

2. Accounting for a Corporation
Who owns a corporation?
Stockholders
Maria Sanchez, Capital vs. Capital Stock
Capital Stock – A stockholder’s equity account. Investments in a company are represented by this account.
Maria Sanchez invests…
Stockholders’ Equity – Value of the stockholders’ claims to the corporation

3. Earned Equity
Retained Earnings – The increase in stockholders’ equity from net income that is not distributed to stockholders.
Capital
Sole Proprietorship
Capital Stock
Retained Earnings
Corporation

4. Characteristics of Financial Information
Who uses financial statements?
Managers – Analyze past performance and make forecasts
Stockholders – performance, potential for growth, success
Creditors – Can this company pay its bills?
Government Agencies, employees, consumers, general public

5. Characteristics of Financials
Comparability – Allows information to be compared from one period to another
Reliability – Refers to the confidence users have that the financials are free of bias and errors
Relevance – Financials include all information that would affect decisions
Full disclosure – Can’t hide info
Materiality – Important; all important information should be included

6. Corporation’s Financial Statements
Income Statement
Statement of Retained Earnings
Balance Sheet Proves A=L+OE
Statement of Cash Flows

7. The Income Statement
Revenue Realization Principle – Revenue for a credit sale is recorded at the time of sale
Matching Principle – Revenues for a period are matched with their expenses
Income Statement for a merchandising company has 5 sections
Revenue
Cost of Merchandise Sold
Gross Profit
Operating Expenses
Net Income (or Loss)

8. Revenue Section
Net Sales – Amount of sales less any sales discounts, returns and allowances
See Page 558
Sales
-Sales R&A
-Sales Discounts
Net Sales

9. Cost of Merchandise Sold Section
Beginning Merchandise Inventory
+ Net Purchases
Cost of Merchandise Available for Sale
- Ending Inventory
2 Steps
Calculate the Cost of all Merchandise
Calculate Cost of Merchandise Sold

10. Cost of Merchandise Sold Section
Find Net Purchases First
Purchases
+ Transportation In
Cost of Delivered Merchandise
- Purchases Discounts
- Purchases Returns and Allowances
Net Purchases

11. Cost of Merchandise Sold Section
Beginning Inventory + Net Purchases Merchandise Available for Sale - Ending Inventory Cost of Merchandise Sold

12. Gross Profit Section
Gross Profit on Sales – The profit made before operating expenses are deducted
Net Sales
-Cost of Merchandise Sold
Gross Profit

13. Operating Expenses Section
Operating Expenses – costs of goods and services used in the process of earning revenue
Selling expenses – incurred to sell or market the merchandise sold
Administrative expenses – related to the management of the business

14. Net Income Section
Operating Income – Excess of gross profit over operating expenses; income earned before taxes

15. Analyzing Amounts on the Income Statement
Vertical Analysis – Comparing one item in a column as a percentage of another.
Horizontal Analysis – Compares statements from one accounting period to another

16. Statement of Retained Earnings
Statement of Retained Earnings – Reports the changes of retained earnings over a period
Beginning + Net Income = Ending

17. Analyzing Financials Base Period – period that is used for comparison
Horizontal Analysis
Vertical Analysis

18. Cash Flows Cash Inflows Cash Outflows
Operating Activities – All transactions that occur as part of normal business operations
Investing Activities – Loans, Investments, purchases and sale of plant assets
Financing Activities – Borrowing activities needed to finance the company operations and the repayment