1. $ $ $ $ Financial Information Chapter 19
Chapter 19 Notes
Financial Information
Chapter 19 $
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.
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. $ $ $

2. $ $ $ $ Comparability Chapter 19
Characteristics of Financial Information $
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. $ $ $

3. $ $ $ $ Reliability Chapter 19
Characteristics of Financial Information $
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. $ $ $

4. $ $ $ $ Relevance Chapter 19
Characteristics of Financial Information $
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. $ $ $

5. $ $ $ $ Full Disclosure Chapter 19
Characteristics of Financial Information $
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. $ $

6. $ $ $ $ Materiality Chapter 19
Characteristics of Financial Information $
Materiality $
If something is “material,” it is important.
Materiality means that information deemed relative should be included in financial reports. $ $

7. $ $ $ $ Section 2 The Income Statement Chapter 19
The income statement reports the net income or loss for the period and indicates whether or not the business is operating efficiently. $
An income statement for a merchandising business has five sections: $
Revenue
Cost of Merchandise Sold $
Gross Profit on Sales
Operating Expenses
Net Income (or Loss)

8. $ $ $ $ The Revenue Section Chapter 19
The revenue section reports the net sales for the period $
Sales During the Period
– Sales Discounts
– Sales Returns & Allowances
Net Sales $ $

9. $ $ $ $ The Cost of Merchandise Sold Section Chapter 19
The “cost of merchandise sold” is the actual cost to the business of the merchandise that was sold to customers during the period. $ $
Beginning Merchandise Inventory
+ Net Purchases During the Period
Cost of Merchandise Available for Sale
– Ending Merchandise Inventory
Cost of Merchandise Sold $

10. $ $ $ $ Net Purchases Chapter 19
Net purchases is all the costs related to merchandise purchased during the period. $
Purchases
+ Transportation In
Cost of Delivered Merchandise
– Purchases Discounts
– Purchases Returns and Allowances
Net Purchases $ $

11. $ $ $ $ The Gross Profit on Sales Section Chapter 19
Chapter 19 Notes
Chapter 19 $
The Gross Profit on Sales Section
The gross profit on sales is the profit made during the period before operating expenses are deducted.
Gross profit on sales is found by subtracting the cost of merchandise sold from net sales. $ $ $
Net Sales
– Cost of Merchandise Sold
Gross Profit

12. $ $ $ $ The Operating Expenses Section Chapter 19 Gross Profit
Operating expenses are the costs of the goods and services used in the process of earning revenue for the business.
Operating income is the amount of income earned before federal corporate income taxes are deducted. $ $ $
Gross Profit
– Operating Expenses
= Operating Income

13. $ $ $ $ The Net Income Section Chapter 19 Operating Income
The final section of the income statement reports the net income (or net loss) for the period.
Operating Income
– Federal Corporate Income Tax Expense
= Net Income/Net Loss
This net income/net loss must match the net income/net loss on the worksheet. $ $ $

15. $ $ $ $ Stockholders’ Equity Chapter 19
Chapter 19 Notes
Chapter 19
Stockholders’ Equity $
Corporations have two kinds of equity: $
Equity contributed by stockholders
Capital Stock
Reported on the Balance Sheet
Equity earned through business profits
Retained Earnings
Reported on the Statement of changes in SE and the Balance Sheet $ $

16. $ $ $ $ Recording the Ownership of a Corporation Chapter 19
Capital Stock represents the investments in the corporation by its stockholders (owners).
Capital Stock is classified as a stockholders’ equity account.
Increase side – Credit
Balance side – Credit
Decrease side - Debit $ $ $

17. $ $ $ $ Recording the Retained Earnings of a Corporation Chapter 19
Retained earnings represents the increase in stockholders’ equity from the portion of net income not distributed to the stockholders.
Retained Earnings
Increase side – Credit (Net Income)
Balance side – Credit
Decrease side – Debit (Net Loss)
Retained Earnings is updated as part of closing entries. $ $ $

18. Chapter 19 $
The Statement of Retained Earnings
The statement of retained earnings reports how the Retained Earnings stockholders’ equity account changes from the beginning to the end of the period. $ $ $

19. $ $ $ $ The Balance Sheet Chapter 19 Proves the accounting equation:
The balance sheet reports the balances of all asset, liability, and stockholders’ equity accounts for a specific date.
The balance sheet reports the financial position of the business on the last day of the period.
Proves the accounting equation:
Assets = Liabilities + Stockholder’s Equity $ $ $

21. VERTICAL ANALYSIS $ $ $ $
Chapter 19 Notes
VERTICAL ANALYSIS
Chapter 19 $
Analyzing Amounts on the Income Statement & Balance Sheet $
Useful for determining relationships among items in a financial statement and changes in these relationships from one period to the next.
Involves the comparison of financial statement amounts within a single period or date. $ $

22. VERTICAL ANALYSIS $ $ $ $ Chapter 19
Chapter 19 Notes
VERTICAL ANALYSIS
Chapter 19 $
Each dollar amount reported on a financial statement is also reported as a percentage of another amount, called a base amount, appearing on that same statement. The dollar amount report is divided by the base amount to arrive a the percentage the amount reported represents of the base amount.
Base amount on Income Statement = Net Sales
Base amount on Balance Sheet
Assets or
Liabilities and Stockerholder’s Equity $ $ $

23. HORIZONTAL ANALYSIS $ $ $ $
Chapter 19 $
Analyzing Amounts on the Income Statement & Balance Sheet
The comparison of the same items on financial statements for two or more accounting periods or dates and the determination of changes from one period or date to the next.
Involves the comparison of financial statement amounts between periods or dates.
To find the percent of increase, subtract the base year amount from the current year, then divide by the base year. $ $ $

24. $ $ $ $ Working Capital Current – Current = Working
Chapter 19 $
Working Capital
The amount by which current assets exceed current liabilities is known as working capital.
Because current liabilities are usually paid for out of current assets, working capital represents the excess assets available to continue operations. $ $ $
Current – Current = Working
Assets Liabilities Capital