1. Financial Statements for a Corporation
Chapter 19 $
Financial Statements for a Corporation $
Making Accounting Relevant
Public corporations often offer Web sites where they provide financial data. $ $
Discuss what types of financial information might be of interest to potential stockholders.

2. $ $ $ $ Section 1 The Ownership of a Corporation What You’ll Learn
Chapter 19 $
Section 1 The Ownership of a Corporation
What You’ll Learn
Which equity accounts are used in corporation accounting.
How equity earned through business profits is reported.
Which end-of-period financial statements are prepared for a corporation. $ $ $

3. $ $ $ $ Why It’s Important Key Terms Chapter 19 Capital Stock
Section 1 The Ownership of a Corporation (cont'd.)
Chapter 19 $
Why It’s Important
To properly prepare end-of-period financial reports for a corporation, you need to understand how equity for a corporation is handled and the differences in equity between corporations and sole proprietorships. $ $
Key Terms
Capital Stock
stockholders’ equity
retained earnings
comparability $
reliability
relevance
full disclosure
materiality

4. $ $ $ $ Recording the Ownership of a Corporation Chapter 19
Section 1 The Ownership of a Corporation (cont'd.)
Chapter 19 $
Recording the Ownership of a Corporation $
A sole proprietorship is owned by one person. A corporation can be owned by one person or by thousands of people.
The ownership of a corporation is represented by shares of stock.
Capital Stock (replaces Owner’s Equity) represents the investments in the corporation by its stockholders (owners).
Capital Stock is classified as a stockholders’ equity account. $ $

5. $ $ $ $ Recording the Ownership of a Corporation (cont'd.) Chapter 19
Section 1 The Ownership of a Corporation (cont'd.)
Chapter 19 $
Recording the Ownership of a Corporation (cont'd.) $
Business Transaction
On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. $
T ACCOUNTS
Cash in Bank Capital Stock
Debit +
25,000
Credit –
Debit –
Credit +
25,000 $

6. $ $ $ $ Recording the Ownership of a Corporation (cont'd.) Chapter 19
Section 1 The Ownership of a Corporation (cont'd.)
Chapter 19 $
Recording the Ownership of a Corporation (cont'd.) $
Business Transaction
On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. $
JOURNAL ENTRY 7. $

7. $ $ $ $ Stockholders’ Equity
Section 1 The Ownership of a Corporation (cont'd.)
Chapter 19 $
Stockholders’ Equity
We are dealing with corporations so the Owner’s Equity section of the balance sheet is now called the Stockholders’ Equity Section.
The first part of Stockholder’s Equity is the amount of money invested by stockholders. This amount is comparable to investments made by the owner in a sole proprietorship. $ $ $

8. $ $ $ $ Stockholders’ Equity Chapter 19
Section 1 The Ownership of a Corporation (cont'd.)
Chapter 19 $
Stockholders’ Equity
The second part of stockholder’s equity is the amount of accumulated Net Income earned and retained by the corporation.
This is comparable to the amount of Net Income minus the Withdrawals in a sole-proprietorship.
Retained earnings represents the increase in stockholders’ equity from the portion of net income not distributed to the stockholders.
Retained earnings is a stockholder’s equity account. Like Capital Stock, it has a normal credit balance. $ $ $

9. $ $ $ $ Characteristics of Financial Information Chapter 19
Section 1 The Ownership of a Corporation (cont'd.)
Chapter 19 $
Characteristics of Financial Information
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. $ $

10. $ $ $ $ Characteristics of Financial Information (cont'd.) Chapter 19
Section 1 The Ownership of a Corporation (cont'd.)
Chapter 19 $
Characteristics of Financial Information (cont'd.) $
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.
What do they count on? … $ $

11. $ $ $ $ Comparability Chapter 19
Section 1 The Ownership of a Corporation (cont'd.)
Chapter 19 $
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.
Therefore, the same reports are created each period and the same length of time is utilized. That way trends can be analyzed and patterns identified…  $ $ $

12. $ $ $ $ Reliability Chapter 19
Section 1 The Ownership of a Corporation (cont'd.)
Chapter 19 $
Reliability
Users of accounting data assume that the data is reliable.
Reliability relates to the confidence users have that the financial information is reasonably free from bias and error.
Big problem in recent years … think Enron! $ $ $

13. $ $ $ $ Relevance Chapter 19
Section 1 The Ownership of a Corporation (cont'd.)
Chapter 19 $
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. $ $ $

14. $ $ $ $ Full Disclosure Chapter 19
Section 1 The Ownership of a Corporation (cont'd.)
Chapter 19 $
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. $ $

15. $ $ $ $ Materiality Chapter 19
Section 1 The Ownership of a Corporation (cont'd.)
Chapter 19 $
Materiality $
If something is “material,” it is important.
Materiality means that information deemed relative should be included in financial reports. $ $

16. $ $ $ $ Financial Statements Chapter 19
On Your Mark Athletic Wear is a merchandising corporation.
They prepare three different financial statements:
Income Statement
Statement of Retained Earnings
Balance Sheet $ $ $

17. $ $ $ $ INCOME STATEMENT Chapter 19
Section 2 The Income Statement
Chapter 19 $
INCOME STATEMENT
The income statement reports the net income or loss for the period and indicates whether or not the business is operating efficiently. $ $ $

18. $ $ $ $ The Income Statement Chapter 19
Section 2 The Income Statement (cont'd.)
Chapter 19 $
The Income Statement
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)

19. $ $ $ $ The Revenue Section
Section 2 The Income Statement (cont'd.)
Chapter 19 $
The Revenue Section
This section reports the net sales for the period. $ $ $

20. $ $ $ $ The Cost of Merchandise Sold Section Chapter 19
Section 2 The Income Statement (cont'd.)
Chapter 19 $
The Cost of Merchandise Sold Section
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 $

21. $ $ $ $ Net Purchases Chapter 19
Section 2 The Income Statement (cont'd.)
Chapter 19 $
Net Purchases
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 $ $

22. $ $ $ $ Cost of Merchandise Sold Chapter 19
Section 2 The Income Statement (cont'd.)
Chapter 19 $
Cost of Merchandise Sold $ $ $

23. $ $ $ $ The Gross Profit on Sales Section Chapter 19
Section 2 The Income Statement (cont'd.)
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. $ $

24. $ $ $ $ The Operating Expenses Section Chapter 19
Section 2 The Income Statement (cont'd.)
Chapter 19 $
The Operating Expenses Section $
Operating expenses are the costs of the goods and services used in the process of earning revenue for the business. $ $

25. $ $ $ $ The Net Income Section Chapter 19
Section 2 The Income Statement (cont'd.)
Chapter 19 $
The Net Income Section
The final section of the income statement reports the net income (or net loss) for the period.
Operating income is the amount of income earned before federal corporate income taxes are deducted.
To calculate operating income, subtract the total operating expenses from the gross profit on sales. $ $ $

26. $ $ $ $ The Net Income Section Chapter 19
Section 2 The Income Statement (cont'd.)
Chapter 19 $
The Net Income Section
Once you have your Operating Income, you are almost done!
All that is left to do?
Just subtract out the Federal Corporate Income Tax Expense.
What you are left with is the Net Income or Net Loss for the period! $ $ $

27. $ $ $ $ Analyzing Amounts on the Income Statement Chapter 19
Section 2 The Income Statement (cont'd.)
Chapter 19 $
Analyzing Amounts on the Income Statement
The income statement is analyzed to evaluate the financial performance of the business.
With vertical analysis, 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. $ $ $

28. Chapter 19 $
Section 3 The Statement of Retained Earnings and the Balance Sheet $
What You’ll Learn
How to prepare a statement of retained earnings for a merchandising corporation.
How to prepare a balance sheet for a merchandising corporation.
How to analyze the balance sheet. $ $

29. $ $ $ $ The Statement of Retained Earnings Chapter 19
Section 3 The Statement of Retained Earnings and the Balance Sheet (cont'd.)
Chapter 19 $
The Statement of Retained Earnings
A statement of retained earnings reports the changes that take place in the Retained Earnings account during the period.
These changes result from business operations and the distribution of earnings to stockholders through dividends. $ $ $

30. $ $ $ $ The Statement of Retained Earnings (cont'd.) Chapter 19
Section 3 The Statement of Retained Earnings and the Balance Sheet (cont'd.)
Chapter 19 $
The Statement of Retained Earnings (cont'd.) $ $ $

31. $ $ $ $ The Balance Sheet Chapter 19
Section 3 The Statement of Retained Earnings and the Balance Sheet (cont'd.)
Chapter 19 $
The Balance Sheet $
The balance sheet reports the balances of all asset, liability, and stockholders’ equity accounts for a specific date. $ $

32. $ $ $ $ Analyzing Amounts on the Balance Sheet Chapter 19
Section 3 The Statement of Retained Earnings and the Balance Sheet (cont'd.)
Chapter 19 $
Analyzing Amounts on the Balance Sheet $
Horizontal analysis is 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.
There are many formulas and ratios to help you complete a horizontal analysis. Let’s look at an example… $ $

33. Current Assets – Current Liabilities = Working Capital
Section 3 The Statement of Retained Earnings and the Balance Sheet (cont'd.)
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 Assets – Current Liabilities = Working Capital
$110, – $17, = $92,589.91