1. CHAPTER TWELVE
FINANCIAL STATEMENTS AND YEAR-END ACCOUNTING FOR A MERCHANDISING BUSINESS

2. YES! Our Income Statement shows we made a profit this year!!
Purpose: Summarize the results of operations
Shows:
The sources of revenue
Types of expenses
Amount of net income or loss for the period
Two forms:
Single-step
Multiple-step
YES! Our Income Statement shows we made a profit this year!!

3. For Year Ended December 31, 20-- Let’s look at a Single-Step
Student Run Bookstore Income Statement
For Year Ended December 31, 20--
Let’s look at a Single-Step
Income Statement.

4. SCC Student-Run Bookstore Income Statement
For Year Ended December 31, 20--
Revenues:
Net Sales
$212,800
Interest Revenue
900
Rent Revenue
8,000
Subscriptions Revenue
10,000
Total Revenues
$231,700
Yes! I am the king of revenues!! I will do the money dance. . Money money, money!!!
All the Revenue sources
are listed and totaled.

5. Cost of Goods Sold is listed with all the other expenses.
SCC Student-Run Bookstore Income Statement
For Year Ended December 31, 20--
Revenues:
Net Sales
$212,800
Interest Revenue
900
Rent Revenue
8,000
Subscriptions Revenue
10,000
Total Revenues
$231,700
Expenses:
Cost of Goods Sold
$-111,500
Cost of Goods Sold is listed
with all the other expenses.

6. For Year Ended December 31, 20--
SCC Student-Run Bookstore Income Statement
For Year Ended December 31, 20--
Revenues:
Ribbet---These expenses are cutting into the bosses profits, he’s not going to be too happy!
Net Sales
$212,800
Interest Revenue
900
Rent Revenue
8,000
Subscriptions Revenue
10,000
Total Revenues
$231,700
Expenses:
Cost of Goods Sold
$111,500
Wages Expense
42,450
Advertising Expense
2,500
Bank Credit Card Expense
1,500
Rent Expense
20,000
Supplies Expense
1,400
Telephone Expense
3,500
Utilities Expense
12,000

7. Expenses are totaled and subtracted from Revenues to determine
Bank Credit Card Expense
1,500
Rent Expense
20,000
Supplies Expense
1,400
Telephone Expense
3,500
La cukaracha, la cukaracha! We made some money this year!
Utilities Expense
12,000
Insurance Expense
1,800
Depreciation Expense - Building
4,000
Depreciation Expense - Store Equipment
3,000
Miscellaneous Expense
2,250
Interest Expense
3,150
Total Expenses
-209,050
Net Income
$ 22,650
Expenses are totaled and subtracted
from Revenues to determine
Net Income or Loss.

8. It is called Single-Step because Expenses
Bank Credit Card Expense
1,500
Rent Expense
In a single step, I bet I could stuff an entire chocolate covered donut in my mouth. .yummm Napkin please?!
20,000
Supplies Expense
1,400
Telephone Expense
3,500
Utilities Expense
12,000
Insurance Expense
1,800
Depreciation Expense - Building
4,000
Depreciation Expense - Store Equipment
3,000
Miscellaneous Expense
2,250
Interest Expense
3,150
Total Expenses
209,050
Net Income
$ 22,650
It is called Single-Step because Expenses
(including Cost of Goods Sold) are
subtracted from Revenues in ONE step
to determine Net Income or Loss.

9. For Year Ended December 31, 20-- Multi-Step Income Statement
SCC Student-Run Bookstore Income Statement
For Year Ended December 31, 20--
Now let’s look at a
Multi-Step Income Statement
for the
same company.
Our mom called us a multiple birth because we have multiple personalities. . .get it.. . More than one! Ha! We are soooo funny!! Hee hee

10. Sales revenue (less any returns, allowances
SCC Student-Run Bookstore Income Statement
For Year Ended December 31, 20--
Revenue from sales:
Sales
$214,000
Less Sales Returns and Allow.
-1,200
Net Sales
$212,800
Sales revenue (less any returns, allowances
or discounts) is shown first. The other
revenues are listed at the end of
the statement).

11. For Year Ended December 31, 20--
SCC Student-Run Bookstore Income Statement
For Year Ended December 31, 20--
Revenue from sales:
Sales
$214,000
Less Sales R &A
-1,200
Net Sales
$212,800
Cost of Goods Sold:
Merch. Inv. Jan. 1, 20--
$ 26,000
Purchases
$105,000
Less: Purchases R&A
$ 800
Purchases Disc.
1,000
-1,800
Net Purchases
$103,200
Add Freight-In
+300
Cost of Goods Pur.
+103,500
Goods Avail. for Sale
$129,500
Less Merchandise Inv. Dec 31-
-18,000
Cost of Goods Sold
111,500

12. A simple way to look at Cost of Goods Sold:
Beginning Inv= 5 candy each
Purchased another 40 candy each
How many do you have available to sell during the year?
45 total bars. . .
If you have 10 candy bars left at the end of the year what happened to the missing bars?
Right! You sold them!
Cost of Goods Sold
= 35 bars!
(45 total available -10 EI= 35 Sold)

13. After Cost of Goods Sold is computed. . .
Goods Avail. for Sale
$129,500
Less Merchandise Inv. Dec 31-
-18,000
Cost of Goods Sold
-111,500
Gross Profit
$101,300
After Cost of Goods Sold is computed. . .
Then, subtract the Cost of Goods Sold from Net Sales
to arrive at Gross Profit.

14. Operating Expenses are listed and totaled.
Goods Avail. for Sale
$129,500
Less M. I. Dec. 31, 20--
-18,000
Cost of Goods Sold
-111,500
Operating Expenses are
listed and totaled.
Gross Profit
$101,300
Operating Expenses:
Wages Expense
$ 42,450
Advertising Expense
2,500
Bank Credit Card Exp.
1,500
Rent Expense
Then, subtract the total expenses from Gross Profit.
Compute“ Income from Operations”
20,000
Supplies Expense
1,400
Telephone Expense
3,500
Utilities Expense
12,000
Insurance Expense
1,800
Depreciation Exp.-Bldg.
4,000
Deprec. Exp.-Store Eq.
3,000
Miscellaneous Expense
2,250
Total Oper. Expenses
-94,400
Income from Operations
$ 6,900

15. Depreciation Exp.-Bldg 4,000 Deprec. Exp-Store Eq. 3,000
Goods Avail. for Sale
$129,500
Less M. I. Dec. 31, 20--
18,000
Cost of Goods Sold
111,500
Gross Profit
$101,300
Operating Expenses:
Operating Expenses can
be further divided into
subcategories of
Selling Expenses and
General Expenses.
Wages Expense
$ 42,450
Advertising Expense
2,500
Bank Credit Card Exp.
1,500
Rent Expense
20,000
Supplies Expense
1,400
Telephone Expense
How come its not divided up here?
3,500
The accountant said a raccoon got into her garden so she didn’t have time.
Utilities Expense
12,000
Insurance Expense
1,800
Depreciation Exp.-Bldg
4,000
Deprec. Exp-Store Eq.
3,000
Miscellaneous Expense
2,250
Total Oper. Expenses
94,400
Income from Operations
$ 6,900

16. SELLING EXPENSE Expenses directly associated with selling activities
Examples:
Sales Salaries Expense
Sales Commissions Expense
Advertising Expense
Bank Credit Card Expense
Delivery Expense
Depreciation Expense - Store Equipment and Fixtures

17. GENERAL EXPENSES
Expenses associated with administrative, office, or general operating activities
Examples:
Rent Expense
Office Salaries Expense
Office Supplies Expense
Telephone Expense
Utilities Expense
Insurance Expense
Depreciation Expense - Office Equipment

18. Add Other Revenues and subtract Other Expenses
Income from Operations
$ 6,900
Other Revenues:
Interest Revenue $
Rent Revenue
8,000
Subscriptions Revenue
10,000
Total Other Rev:
$ +18,900
Other Expenses:
Interest Expense
-3,150
+15,750
Net Income
$ 22,650
After you calculate, Income from Operations then the last step is to see if there are any other revenues or expenses which need to be included at the bottom of the Income Statement. . .
Add Other Revenues and subtract Other Expenses
to arrive at Net Income.

19. STATEMENT OF OWNER’S EQUITY
Purpose: Summarize all changes in the owner’s equity during the period
Sources needed to prepare statement:
Work sheet
General Ledger Capital account
Includes:
Beginning and ending Capital balances
Investments and withdrawals by owner
Net Income or Loss

20. Statement of Owner’s Equity for SCC Student-Run Bookstore.
For Year Ended December 31, 20--
Let’s look at the
Statement of Owner’s Equity
for SCC Student-Run Bookstore.

21. Beginning capital and investments are found in the General Ledger
SCC Student-Run Bookstore
Statement of Owner’s Equity
For Year Ended December 31, 20--
Rock Studley, capital, January 1, 20--
$104,400
Add additional investments
10,000
Total investment
$114,400
Beginning capital and investments
are found in the General Ledger
Capital account.
Rock Studley for the owner? Humm… Sounds kinda hunky. .

22. Net Income is found on the work sheet
SCC Student-Run Bookstore
Statement of Owner’s Equity
For Year Ended December 31, 20--
Rock Studley, capital, January 1, 20--
$104,400
Add additional investments
10,000
Total investment
$114,400
Net Income for the year
$ 22,650
Net Income is found on the work sheet
and on the Income Statement (which we prepared right before this).

23. Withdrawals, from the worksheet, are subtracted from Net Income to
SCC Student-Run Bookstore
Statement of Owner’s Equity
For Year Ended December 31, 20--
Rock Studley, capital, January 1, 20--
$104,400
Add additional investments
+10,000
Total investment
$114,400
Net Income for the year
$ 22,650
Less withdrawals for the year
-20,000
Increase in Capital
2,650
Withdrawals, from the worksheet,
are subtracted from Net Income to
determine the increase in capital
this period.

24. The ending capital on December 31, is computed.
SCC Student-Run Bookstore
Statement of Owner’s Equity
For Year Ended December 31, 20--
Rock Studley, Capital, January 1, 20--
$104,400
From first day of period to last day of period
Add additional investments
10,000
Total investment
$114,400
Net Income for the year
$ 22,650
Less withdrawals for the year
20,000
Increase in Capital
2,650
Rock Studley, Capital, December 31, 20--
$117,050
The ending capital on
December 31, is computed.
Remember, that this statement shows the changes in the Owner’s Capital from the first day to the last day of the period.

25. The SCC Student-Run Bookstore’s Classified Balance Sheet.
SCC Student-Run Bookstore Balance Sheet
Let’s look at
The SCC Student-Run Bookstore’s
Classified Balance Sheet.
December 31, 20--
Not another Balance Sheet! You’re killing me!
It’s the last one! I promise, cross my heart and hope to die—stick a needle in my eye if I am lying!

26. SCC Student-Run Bookstore Balance Sheet
December 31, 20--
Assets
Current assets:

27. CURRENT ASSETS Cash and other assets which are: Examples:
Expected to be converted into cash, or
Consumed within one year or the normal operating cycle, whichever is longer
Examples:
Cash, Receivables,
merchandise inventory
and prepaid expenses
Listed in order of liquidity:
Most liquid shown first

28. OPERATING CYCLE Length of time generally required for a business to:
Buy inventory
Sell it
Collect the cash
Generally, it is less than one year.

29. Merchandise Inventory is a current asset
SCC Student-Run Bookstore Balance Sheet
December 31, 20--
Assets
Current assets:
Cash
$20,000
Accounts Receivable
15,000
Merchandise Inventory
18,000
Supplies
400
Prepaid Insurance
600
Total current assets
$54,000
Merchandise Inventory is a current asset
that is unique to merchandising businesses.

30. PROPERTY, PLANT & EQUIPMENT
Assets that are expected to be used:
For more than one year
In the operation of a business
Examples:
Land, Buildings,
Office Equipment, Store Equipment, and Delivery Equipment

31. SCC Student-Run Bookstore Balance Sheet
December 31, 20--
Assets
Current assets:
Cash
$20,000
Accounts Receivable
15,000
Merchandise Inventory
18,000
Supplies
400
Prepaid Insurance
600
Total current assets
$ 54,000
Property, plant, and equipment:
Land
$10,000
Building
$ 90,000
Less accumulated deprec.
20,000
70,000
Store Equipment
$ 50,000
Less accumulated deprec.
18,000
32,000
Total prop., pt., and equip.
$112,000

32. Property, plant, and equipment: Land $10,000 Building $90,000
Total current assets
$ 54,000
Property, plant, and equipment:
Land
$10,000
Building
$90,000
Less accumulated deprec.
20,000
70,000
Store Equipment
$50,000
Less accumulated deprec.
18,000
32,000
Total property, plant and equip.
112,000
Total assets
$166,000
That is so sexist!
Don’t you just love it when accountants say you have great assets??
Yeah! Especially if they’re hot!

33. Total assets
$166,000
Liabilities
Current liabilities:

34. CURRENT LIABILITIES
Obligations that are due within one year or the normal operating cycle, whichever is longer
Require the use of current assets
Examples:
Notes Payable, Accounts Payable, Wages Payable, Utilities Payable, Unearned Subscriptions Revenue, and the current portion of Mortgage Payable

35. Unearned subscriptions revenue 2,000 Mortgage Pay. (current portion)
Total assets
$166,000
Liabilities
Current liabilities:
Notes Payable
$ 5,000
Accounts Payable
10,000
Wages Payable
450
Utilities Payable
1,500
Unearned subscriptions revenue
2,000
Mortgage Pay. (current portion)
500
Total current liabilities
$19,450
I better hurry up and earn some more money so I can pay off all of these debts this year!

36. LONG-TERM LIABILITIES
Obligations that will extend beyond one year or the normal operation cycle, whichever is longer
Mortgage Payable is a common long-term liability.
Used to reflect an obligation that is secured by a mortgage on certain property

37. Total assets
$166,000
Liabilities
Current liabilities:
Notes Payable
$ 5,000
Accounts Payable
10,000
Wages Payable
450
Utilities Payable
1,500
Unearned subscriptions revenue
2,000
Mortgage Pay. (current portion)
500
Total current liabilities
$19,450
Long-term liabilities:
Mortgage Payable
$30,000
Less current portion
500
29,500
Total liabilities
$ 48,950

38. OWNER’S EQUITY Accounts are determined by type of organization:
Sole Proprietorships:
One capital account

39. Total assets
$166,000
Liabilities
Current liabilities:
Notes Payable
$ 5,000
Accounts Payable
10,000
Wages Payable
450
Utilities Payable
1,500
Unearned subscriptions revenue
2,000
Mortgage Pay. (current portion)
500
Total current liabilities
$ 19,450
Long-term liabilities:
Mortgage Payable
$30,000
Less current portion
500
29,500
Total liabilities
$ 48,950
Owner’s Equity
Rock Studley, Capital
117,050
Total liabilities and owner’s equity
$166,000

40. CLOSING ENTRIES Similar to closing entries of a service business:
But additional merchandising accounts that also must be closed
Easiest to use work sheet to prepare closing entries

41. DEBIT - all credit balance Income Statement accounts
ACCOUNT TITLE
INCOME STMT
BALANCE SHEET
DR.
CR.
DR.
CR. 17
Rock Studley, Capital
114,400 18
Rock Studley, Drawing
20,000 19
Income Summary
26,000
18,000 20
Sales
214,000 21
Sales Returns & Allow.
1,200 22
Interest Revenue
900 23
Rent Revenue
8000 24
Subscriptions Revenue
10,000 25
Purchases
105,000 26
Purchases Ret. & Allow.
800 27
Purchases Discounts
1,000 28
Freight-In
300 29
Wages Expense
42,450
Entry#1
DEBIT - all credit balance
Income Statement accounts
CREDIT - Income Summary 30
Advertising Expense
2,500 31
Bank Credit Card Expense
1,500 32
Rent Expense
20,000 33
Supplies Expense
1,400 34
Telephone Expense
3,500 35
Utilities Expense
12,000 36
Insurance Expense
1,800

42. GENERAL JOURNAL Closing Entries Sales 214,000 Subscriptions Revenue
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Closing Entries
20-- 2
Sales
214,000
Dec. 31 3
Subscriptions Revenue
10,000 4
Interest Revenue
900 5
Rent Revenue
8,000 6
Purch. Returns & Allow.
800 7
Purchases Discounts
1,000 8
Income Summary
234,700 9 10 11

43. Entry #2: DEBIT- Income Summary CREDIT- Income Statement debit
ACCOUNT TITLE
INCOME STMT
BALANCE SHEET
DR.
CR.
DR.
CR. 21
Sales Returns & Allow.
1,200 25
Purchases
105,000 26
Purch. Returns & Allow.
800 27
Purchases Discounts
1,000 28
Freight-In
300
Entry #2:
DEBIT- Income
Summary
CREDIT- Income
Statement debit
balance accts. 29
Wages Expense
42,450 30
Advertising Expense
2,500 31
Bank Credit Card Exp.
1,500 32
Rent Expense
20,000 33
Supplies Expense
1,400 30
Telephone Expense
3,500 31
Utilities Expense
12,000 32
Insurance Expense
1,800 33
Depr. Expense -Building
4,000 34
Depr. Expense -Store Eq.
3,000 35
Miscellaneous Expense
2,250 36
Interest Expense
3,150

44. 10 31
Income Summary
204,050 11
Sales Returns & Allow.
1,200 12
Purchases
105,000 13
Freight-In
300 14
Wages Expense
42,450 15
Advertising Expense
2,500 16
Bank Credit Card Exp.
1,500 17
Rent Expense
20,000 18
Supplies Expense
1,400 19
Telephone Expense
3,500 20
Utilities Expense
12,000 21
Insurance Expense
1,800 22
Depreciation Exp. - Bldg.
4,000 23
Deprec. Exp. - Store Eq.
3,000 24
Miscellaneous Expense
2,250 25
Interest Expense
3,150 26 27

45. CREDIT - Capital account
ACCOUNT TITLE
INCOME STMT
BALANCE SHEET
DR.
CR.
DR.
CR. 25
Purchases
105,000 26
Purchases Ret. & Allow.
800 27
Purchases Discounts
1,000 28
Freight-In
300 29
Wages Expense
42,450
Entry #3
DEBIT - Income Summary
CREDIT - Capital account
for Net Income amount 30
Advertising Expense
2,500 31
Bank Credit Card Exp
1,500 32
Rent Expense
20,000 33
Supplies Expense
1,400 34
Telephone Expense
3,500 35
Utilities Expense
12,000 36
Insurance Expense
1,800 37
Depr. Expense Building
4,000 38
Depr. Expense -Store Eq.
3,000 39
Miscellaneous Expense
2,250 40
Interest Expense
3,150 41
230,050
252,700
224,000
201,350 42
Net Income
22,650
22,650 43
252,600
252,700
224,000
224,000 44

46. 20
Utilities Expense
12,000 21
Insurance Expense
1,800 22
Deprec. Exp. - Building
4,000 23
Deprec. Exp. - Store Equip.
3,000 24
Miscellaneous Expense
2,250 25
Interest Expense
3,150 26 27 31
Income Summary
22,650 28
Rock Studley, Capital
22,650 29 30 31 32 33 34 35 36 37

47. CREDIT to close the Drawing Account
ACCOUNT TITLE
INCOME STMT
BALANCE SHEET
DR.
CR.
DR.
CR. 17
Rock Studley, Capital
114,400 18
Rock Studley, Drawing
20,000 19
Income Summary
26,000
18,000 20
Sales
214,000 21
Sales Returns & Allow.
1,200 22
Interest Revenue
900 23
Rent Revenue
8000 24
Subscriptions Revenue
Entry # 4
DEBIT - Capital
CREDIT to close the Drawing Account
10,000 25
Purchases
105,000 26
Purchases Ret. & Allow
800 27
Purchases Discounts
1,000 28
Freight-In
300 29
Wages Expense
42,450 30
Advertising Expense
2,500 31
Bank Credit Card Expense
1,500 32
Rent Expense
20,000 33
Supplies Expense
1,400 34
Telephone Expense
3,500 35
Utilities Expense
12,000 36
Insurance Expense
1,800

48. 20
Utilities Expense
12,000 21
Insurance Expense
1,800 22
Deprec. Exp. - Building
4,000 23
Deprec. Exp. - Store Equip.
3,000 24
Miscellaneous Expense
2,250 25
Interest Expense
3,150 26 27 31
Income Summary
22,650 28
Rock Studley, Capital
22,650 29 30 31
Rock Studley, Capital
20,000 31
Rock Studley, Drawing
20,000 32 33 34 35 36 37

49. After posting the four closing journal entries:
We are almost finished!!
We need to verify that our General Ledger still balances.. .
We will prepare another Trial Balance.
This last Trial Balance is called the
Post-Closing Trial Balance

50. POST-CLOSING TRIAL BALANCE
Trial Balance prepared after the closing journal entries have been posted.
Purpose: to prove that the general ledger is in balance at the beginning of a new accounting period.

51. SCC Student-Run Bookstore
Post-Closing Trial Balance
December, 31, 20--
Account Title
Acct #
Debit Bal
Credit Bal
Cash
101
20,000
Accounts Receivable
122
15,000
Merchandise Inventory
131
18,000
Supplies
141
400
Prepaid Insurance
145
600
Land
161
10,000
Building
171
90,000
Accumulated Depreciation - Building
171.1
20,000
Store Equipment
181
50,000
Accumulated Depreciation - Store Eq.
181.1
18,000
Notes Payable
201
5,000
Accounts Payable
202
10,000
Wages Payable
219
450
Sales Tax Payable
231
1,500
Unearned Subscriptions Revenue
241
2,000
Mortgage Payable
251
30,000
Rock Studley, Capital
311
117,050
204,000
204,000

52. Did I mention that reversing entries are optional!?
Prepared at the beginning of an accounting period
Reverses adjusting entries made last period.
To simplify the recording of transactions in the new accounting period.
Except for the first year of operations, only adjustments that INCREASED an ASSET OR LIABILITY account from a zero balance should be reversed.
Did I mention that reversing entries are optional!?