1. © 2014 Cengage Learning. All Rights Reserved.
Learning Objective
LO1 Prepare an income statement for a merchandising business organized as a corporation.
© 2014 Cengage Learning. All Rights Reserved.

2. Uses of Financial Statements
Lesson 16-1
Uses of Financial Statements
LO1
A corporation prepares an income statement and a balance sheet similar to those used by a proprietorship.
A corporation also prepares a statement of stockholders’ equity.

3. Preparing an Income Statement from a Trial Balance
Lesson 16-1
Preparing an Income Statement from a Trial Balance
LO1

4. Lesson 16-1
Operating Revenue Section of an Income Statement for a Merchandising Business
LO1
The amount of sales, less sales discounts and sales returns and allowances, is called net sales.

5. Lesson 16-1
Operating Revenue Section of an Income Statement for a Merchandising Business
LO1
Operating Revenue Section 2
Heading 1
Less Contra Accounts 5
Sales Amount 4
Title of Revenue Account 3
Contra Account Amounts 6
Contra Account
Total 7
Net Sales 8
Net Sales
Amount 9

6. Gross profit is often referred to as gross profit on sales.
Lesson 16-1
Cost of Merchandise Sold Section of an Income Statement for a Merchandising Business
LO1
The original price of all merchandise sold during a fiscal period is called the cost of merchandise sold.
Cost of merchandise sold is also known as cost of goods sold or cost of sales.
The operating revenue remaining after cost of merchandise sold has been deducted is called gross profit.
Gross profit is often referred to as gross profit on sales.

7. Lesson 16-1
Cost of Merchandise Sold Section of an Income Statement for a Merchandising Business
LO1
Cost of Merchandise Sold Section 1
Beginning Inventory 2
Vertical Analysis Percentages 8
Purchases Section 3
Ending Inventory 5
Total Cost of Merchandise Available for Sale 4
Cost of Merchandise Sold 6
Gross Profit 7

8. Lesson 16-1
Cost of Merchandise Sold Section of an Income Statement for a Merchandising Business
LO1
Total of adjacent column

9. Completing an Income Statement for a Merchandising Business
Lesson 16-1
Completing an Income Statement for a Merchandising Business
LO1
The expenses incurred by a business in its normal operations are called operating expenses.
The operating revenue remaining after the cost of merchandise sold and operating expenses have been deducted is called income from operations.
Income from operations is also referred to as operating income.

10. Completing an Income Statement for a Merchandising Business
Lesson 16-1
Completing an Income Statement for a Merchandising Business
LO1
Operating Expenses Section 1
Vertical Analysis Percentages 8
Income from Operations 2
Other Revenue Section 3
Net Income before Federal Income Tax 4
Less Federal Income Tax Expense 5
Double Rules 7
Net Income after Federal Income Tax 6

11. © 2014 Cengage Learning. All Rights Reserved.
Learning Objective
LO2 Prepare a statement of stockholders’ equity for a business organized as a corporation.
© 2014 Cengage Learning. All Rights Reserved.

12. Using Component Percentages
Lesson 16-1
Using Component Percentages
LO1
Acceptable Component Percentages:
Acceptable Industry Standards
Hobby Shack Component Percentages
Sales
100%
Cost of Merchandise Sold
Not more than 46.0%
44.9%
Gross profit on Sales
Not less than 54.0%
55.1%
Total Expenses
Not more than 35.0%
33.9%
Net income before Taxes
Not less than 19.0%
21.2%

13. Using Component Percentages
Lesson 16-1
Using Component Percentages
LO1
Unacceptable component percentages serve as a warning that management action is needed.
Calculating and reporting component percentages is an example of how accounting information can help management planning and decision making.
Effective managers rely on the information provided from accounting records.

14. Lesson 16-1
Financial Ratios
LO1
A comparison between two items of financial information is called a financial ratio.
The amount of net income after federal income tax belonging to a single share of stock is called earnings per share.
The relationship between the market value per share and earnings per share of stock is called the price-earnings ratio.

15. © 2014 Cengage Learning. All Rights Reserved.
Learning Objective
LO2 Prepare a statement of stockholders’ equity for a business organized as a corporation.
© 2014 Cengage Learning. All Rights Reserved.

16. Stockholders’ Equity Information
Lesson 16-2
Stockholders’ Equity Information
LO2
A financial statement that shows changes in a corporation’s ownership for a fiscal period is called a statement of stockholders’ equity.

17. Stockholders’ Equity Information
Lesson 16-2
Stockholders’ Equity Information
LO2

18. Capital Stock Section of the Statement of Stockholders’ Equity
Lesson 16-2
Capital Stock Section of the Statement of Stockholders’ Equity
LO2
A value assigned to a share of stock and printed on the stock certificate is called par value.
When issuing shares of stock, a corporation can assign any par value allowed by laws in the state in which it incorporates.

19. Capital Stock Section of the Statement of Stockholders’ Equity
Lesson 16-2
Capital Stock Section of the Statement of Stockholders’ Equity
LO2
Capital Stock Section 2
Heading 1
Stock Issued During the Year 4
Stock at Beginning of Year 3
Total Stock Issued 5

20. Retained Earnings Section of the Statement of Stockholders’ Equity
Lesson 16-2
Retained Earnings Section of the Statement of Stockholders’ Equity
LO2
Retained Earnings Section 1
Net Income after Federal Income Tax 3
Beginning Balance 2
Increase in Retained Earnings 5
Dividends Declared 4
Ending Balance 6
Total Stockholders’ Equity 7

21. © 2014 Cengage Learning. All Rights Reserved.
Learning Objective
LO3 Prepare a balance sheet for a business organized as a corporation.
© 2014 Cengage Learning. All Rights Reserved.

22. Balance Sheet Information on a Trial Balance
Lesson 16-3
Balance Sheet Information on a Trial Balance
LO3

23. Current Assets Section of a Balance Sheet
Lesson 16-3
Current Assets Section of a Balance Sheet
LO3
Current Assets Section 2
Heading 1
Book Value of Accounts Receivable 3
Remaining Current Asset Accounts 4
Total Current Assets 5

24. Plant Assets Section of a Balance Sheet
Lesson 16-3
Plant Assets Section of a Balance Sheet
LO3
Book Value of Office Equipment 2
Plant Assets Section 1
Book Value of Store Equipment 3
Total Plant Assets 4
Total Assets 5

25. Liabilities Section of a Balance Sheet
Lesson 16-3
Liabilities Section of a Balance Sheet
LO3
Liabilities are classified according to the length of time until they are due.
Liabilities due within a short time, usually within a year, are called current liabilities.
Liabilities owed for more than a year are called long-term liabilities.

26. Liabilities Section of a Balance Sheet
Lesson 16-3
Liabilities Section of a Balance Sheet
LO3
Liabilities Section 1
Account Title and Amount of Each Current Liability 2
Total Liabilities 3

27. Stockholders’ Equity Section of a Balance Sheet
Lesson 16-3
Stockholders’ Equity Section of a Balance Sheet
LO3
Stockholders’ Equity Section 1
Retained Earnings 3
Capital Stock 2
Double Rule 6
Total Stockholders’ Equity 4
Total Liabilities and Stockholders’ Equity 5

28. Completed Balance Sheet
Lesson 16-3
Completed Balance Sheet
LO3

29. Supporting Schedules for a Balance Sheet
Lesson 16-3
Supporting Schedules for a Balance Sheet
LO3
A report prepared to give details about an item on a principal financial statement is called a supporting schedule.
A supporting schedule is sometimes referred to as a supplementary report or an exhibit.