1. Financial Accounting:
Copyright 2004 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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For
Financial Accounting:
A New Perspective by
Paul Solomon

2. Comparing Financial Statements by Entity & Industry
CHAPTER 10
Comparing Financial Statements by Entity & Industry

3. PERFORMANCE OBJECTIVES 1
PO30: Distinguish among sole proprietorship, partnership & corporate forms of entity
PO31: describe key differences in financial statements of merchandisers, manufacturers, construction companies, nonfinancial service companies

4. PERFORMANCE OBJECTIVES 2
PO32: Calculate net income; prepare income statements, balance sheets under percentage of completion & completed contract methods

5. USER FOCUS Not all assets are reported at cost
How construction in progress & progress billings reported on balance sheet

6. INSIGHTS Corporations take many forms
All income methods recognize same income over time

7. SOLE PROPRIETORSHIPS Characteristics of sole proprietorship
Owned, managed by 1 person
Easy to establish
Owner receives income/losses; liable for business obligations

8. PARTNERSHIPS Characteristics of partnership Owned by 2 or more people
Access to additional financing
Mutual agency, co-ownership of assets, division of income

9. COMMON CHARACTERISTICS
Characteristics common to sole proprietorships & partnerships
Unlimited liability for business debts
Easy to form
Commonly used for small business
Require distinction between business, personal transactions
Legally, business & owners same
Limited life
Owners taxed

10. WHY DID CMU CONVERT TO PARTNERSHIP?
To attract additional financing
Reduced work load
Conversion easy

11. INITIAL PARTNERSHIP TRANSACTION
Transaction analysis
Fundamental accounting equation
Account title
Assets =
Liabilities +
Equity
Inventory
Contributed Cap
10,000

12. INITIAL PARTNERSHIP TRANSACTION
Journal entry
Account titles Debit Credit
Inventory
10,000
Contributed Capital

13. DIVISION OF NET INCOME Net income/weeks 30,000/52 = $576.92 per week
Susan = ($ * 51) + (.75 * $576.92)
= $29,855.77
Martha = $30,000 - $29,855.77
= $144.23

14. CMU Partnership Capital For Year ended 12/31
Susan, 1/2
+ Investments
Share income
Withdrawals $0
30,000
29,856
<8,100>
$51,756
Martha 12/24
Investments
Total partners’ capital
10,000
144
10,144
$61,900

15. CMU Balance Sheet 12/31 Assets Current assets Investments
Property, plant,
Equipment
- Accumulated Depreciation
$56,300
2,000
19,000
<2,300>
Liabilities
Current
Noncurrent
Owner’s Equity
Partners’ Capital Accounts
$9,100
4,000
61,900
Total assets
$75,000
Total liabilities & Equity

16. CHARACTERISTICS OF CORPORATIONS
Owned by shares of stock
Legally separate from owners
Limited liability

17. WHY CHOOSE CORPORATE FORM OF BUSINESS ?
To raise large amounts of capital
Unlimited life
Changes in ownership easily implemented
Limited liability

18. WHAT IF? CMU Corporate Transactions 1
Journal entry
Sale of stock
Account Title
Debit
Credit
Cash
Inventory
Investment in stock
Capital Stock
30,000
9,200
5,600
44,800

19. WHAT IF? CMU Corporate Transactions 2
Journal entry
Corporation declares, pays dividends
Account Title
Debit
Credit
Dividends declared
Dividends payable
Cash
12,900

20. WHAT IF? CMU Corporate Transactions 3
Journal entry
Federal income tax incurred
Account Title
Debit
Credit
Income tax expense
Income tax payable
4,500

21. CMU Income Statement For year ending 12/31
Revenues
Expenses
Income tax expense
Net Income
$87,500
57,500
4,500
$25,500

22. CMU Statement of Retained Earnings For year ending 12/31
Balance 1/1
Net income
Deduct: dividends declared
Balance 12/31 $0
25,500
12,900
$12,600

23. CMU Balance Sheet 12/31 Assets Current assets Investments
Property, plant,
Equipment
- Accumulated Depreciation
$50,700
7,600
19,000
<2,300>
Liabilities
Current
Noncurrent
Owner’s Equity
Capital stock
Retained Earnings
$13,600
4,000
44,800
12,600
Total assets
$75,000
Total liabilities & Equity

24. INSIGHT 10-1: Corporations Take Many Forms
C-Corporation
Taxed under subchapter C of Internal Revenue Code
S-Corporation
Closely held: < 30 stockholders
Taxed as partnership
Nonprofit Corporation
Limited liability company

25. EXPLORING DIFFERENT TYPES OF INDUSTRY
Merchandising
Manufacturing
Construction
Service companies

26. MERCHANDISING Operating activities
Buys, resells products
Accounts receivable & Sales
Inventory, Cost of Goods Sold
Account titles
Debit
Credit
Bad debt expense
Allowance for bad debts
500

27. MERCHANDISING: Investing Activities
Recognizing Depreciation
Account title
Primary
Contra
Land, Building, Equipment
Accumulated depreciation
Net book value
$xxx,xxx
<x,xxx>

28. MANUFACTURING: Operating Activities
Raw materials
Direct labor
Manufacturing overhead
Total manufacturing costs
Raw materials + Direct labor + Overhead
Cost of goods manufactured
Work in process 1/1
+ Total manufacturing costs
– work in process 12/31

29. CONSTRUCTION: Operating Activities
Long term construction
Aircraft, bridges, dams, skyscrapers, etc.
2 revenue recognition methods
Completed contract
Revenues not recognized until work completed
Percentage of completion
Revenues & expenses recognized in proportion to project completion

30. COMPLETED CONTRACT Statement Retained Earnings
Year 1
Year 2
Retained earnings, beginning
+ Net income
Subtotal
Dividends
Retained earnings, ending $0
1,000,000

31. PERCENTAGE OF COMPLETION: Statement of Retained Earnings
Year 1
Year 2
Retained earnings, beginning
+ Net income
Subtotal
Dividends
Retained earnings, ending $0
800,000
$800,000
200,000
1,000,000
$1,000,000

32. INSIGHT 10-2 Same Income
Why is total retained earnings the same at the end of the project for both methods of revenue recognition?
Same income earned
Allocated to time periods differently

33. USER FOCUS 10-1: Reporting Assets
Accounts receivable
Do not reported historical cost
Do represent uncollected sales revenue

34. USER FOCUS 10-2: Construction Accounts
Construction in progress
Current account
Measured by value of work done
Progress billings
Contra asset
Measured by amount billed

35. SERVICE COMPANIES Sales of services Financial services companies Banks
Insurance companies
Stock, real estate brokerages

36. Reading Consolidated Financial Statements
APPENDIX 10-1
Reading Consolidated Financial Statements

37. PERFORMANCE OBJECTIVES
PO33: Prepare consolidated balance sheet

38. BASIC CONCEPT Case 1 P Company buys 100% of S Company Journal entry
Account Titles
Debit
Credit
Investment in Subsidiary S
Cash
200

39. BASIC CONCEPT Case 1 Explanation
To avoid double counting, P Company
Eliminates investment in S subsidiary
Eliminates capital stock, retained earnings S subsidiary
P company adds remaining assets, liabilities, equity accounts of P & S

40. CONCEPT OF GOODWILL: Case 2
P Company buys 100% of S Company for $10 above book value
Journal entry
Account Titles
Debit
Credit
Investment in S Company
Cash
210

41. CONCEPT OF GOODWILL: Case 2 Explanation
Intangible asset
Excess of purchase price over book value of individual assets
To avoid double counting, P Company
Eliminates investment in S subsidiary, Goodwill
Eliminates capital stock, retained earnings S subsidiary
P company adds remaining assets, liabilities, equity accounts of P & S

42. CONCEPT OF MINORITY INTEREST: Case 3
P Company buys 90% of S Company, paying $10 over book value
Journal entry
Account Titles
Debit
Credit
Goodwill
Capital Stock
Retained earnings
Investment in S 10 90
190

43. CONCEPT OF MINORITY INTEREST: Case 3 Explanation
Nonparent ownership of voting stock in less than wholly owned subsidiary company
To avoid double counting, P Company
Eliminates investment in S subsidiary, Goodwill
Eliminates 90% capital stock, retained earnings S subsidiary
Establishes minority interest equal to 10%
P company adds remaining assets, liabilities, equity accounts of P & S