1. GLENCOE / McGraw-Hill

2. Financial Statements
and Closing Procedures

3. Preparing the Financial Statements
Section Objectives
Prepare a classified income statement from the worksheet.
Prepare a statement of owner’s equity from the worksheet.
Prepare a classified balance sheet from the worksheet.

4. Classified Financial Statements
At the end of the period, Modern Casuals prepares three financial statements:
Income statement
Statement of owner's equity
Balance sheet
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5. This makes the financial statements more useful to the readers.
The income statement and the balance sheet are arranged in a classified format.
This makes the financial statements more useful to the readers.
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6. What is a classified financial statement?
QUESTION:
What is a classified financial statement?
A classified financial statement is a format in which items are divided into groups of similar accounts and a subtotal is given for each group.
ANSWER:
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7. The Classified Income Statement
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8. Prepare a classified income statement from the worksheet.
Objective 1
Prepare a classified income statement from the worksheet.
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9. The Classified Income Statement
A classified income statement is sometimes called a multiple-step income statement.
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10. What is a multiple-step income statement?
QUESTION:
What is a multiple-step income statement?
A multiple-step income statement is a type of income statement on which several subtotals are computed before the net income is calculated.
ANSWER:
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11. What is a single-step income statement?
QUESTION:
What is a single-step income statement?
A single-step income statement is a format in which only one computation is needed to determine the net income.
ANSWER:
(Total Revenue – Total Expenses = Net Income)
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12. Single-step Income Statement
The format lists all revenues in one section and all expenses in another section.
Carter Consulting Services
Income Statement
Month Ended December 31, 2004
Revenue
Fees Income ,000.00
Expenses
Salaries Expense ,000.00
Utilities Expense
Supplies Expense
Rent Expense ,000.00
Depreciation Expense - Equipment
Total Expenses ,683.00
Net Income for the Month ,317.00
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13. Operating Revenue
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14. Operating Revenue
The first section of the classified income statement contains the revenue from operations.
This is the revenue earned from normal business activities.
Other income is presented separately near the bottom of the statement.
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15. Operating Revenue
The operating revenue for Modern Casuals is net sales of merchandise.
Sales
(Sales Returns and Allowances)
Net Sales
The parentheses indicate that the amount is subtracted.
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16. Operating Revenue
Net sales for Modern Casuals
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17. Cost of Goods Sold
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18. Cost of Goods Sold
The Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period.
Three elements are needed to compute the cost of goods sold:
Beginning inventory
Net delivered cost of purchases
Ending inventory
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19. Net Delivered Cost of Purchases
+ Freight In
(Purchases Returns and Allowances)
(Purchases Discounts)
Net Delivered Cost of Purchases
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20. Total Merchandise Available for Sale
Beginning Merchandise Inventory
+ Net Delivered Cost of Purchases
Total Merchandise Available for Sale
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21. Cost of Goods Sold Beginning Merchandise Inventory
+ Net Delivered Cost of Purchases
Total Merchandise Available for Sale
(Ending Merchandise Inventory)
Cost of Goods Sold
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22. Merchandise Inventory is the one account that appears on both the income statement and the balance sheet.
Beginning and ending merchandise inventory balances appear on the income statement.
Ending merchandise inventory also appears on the balance sheet in the Assets section.
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23. Cost of Goods Sold Net delivered cost of purchases
Merchandise available for sale
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Cost of goods sold

24. Gross Profit on Sales
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25. QUESTION:
What is gross profit?
Gross profit is the difference between net sales and the cost of goods sold.
ANSWER:
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26. Gross Profit on Sales
For Modern Casuals net sales is the revenue earned from selling clothes.
Cost of goods sold is what Modern Casuals paid for the clothes that were sold during the fiscal period.
Gross profit is what is left to cover operating expenses and provide a profit.
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27. Gross Profit on Sales The format to compute gross profit on sales is:
Net Sales
(Cost of Goods Sold)
Gross Profit on Sales
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28. Gross profit on sales for Modern Casuals
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29. Operating Expenses
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30. Operating Expenses
Operating expenses are expenses that arise from normal business activities.
Modern Casuals separates operating expenses into two categories:
Selling Expenses
General and Administrative Expenses
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31. Operating Expenses
Salaries for salespersons and advertising are examples of selling expenses.
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32. Operating Expenses
Rent, utilities, and salaries for office employees are examples of general and administrative expenses.
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33. Net Income or Net Loss from Operations
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34. Net Income or Net Loss from Operations
The format for determining net income (or net loss) from operations is:
Gross Profit on Sales
(Total Operating Expenses)
Net Income (or Net Loss) from Operations
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35. Net income from operations
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36. Other Income and Other Expenses
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37. Other Income and Other Expenses
Income that is earned from sources other than normal business activities appears in the Other Income section.
For Modern Casuals other income includes interest on notes receivable and one miscellaneous income item.
Expenses that are not directly connected with business operations appear in the Other Expenses section.
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38. Other Income and Other Expenses
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39. Net Income or Net Loss
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40. Net Income or Net Loss
Net income is all the revenue minus all the expenses.
If there is a net loss, it appears in parentheses.
Net income or net loss is used to prepare the statement of owner's equity.
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41. Net income for Modern Casuals
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42. The Statement of Owner’s Equity
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43. Prepare a statement of owner’s equity from the worksheet.
Objective 2
Prepare a statement of owner’s equity from the worksheet.
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44. The Statement of Owner's Equity
The statement of owner's equity reports the changes that occurred in the owner's financial interest during the period.
The ending capital balance for Sonia Sanchez, $81,923.25, is used to prepare the balance sheet.
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45. The Classified Balance Sheet
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46. Prepare a classified balance sheet from the worksheet.
Objective 3
Prepare a classified balance sheet from the worksheet.
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47. Current Assets
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48. What are current assets?
QUESTION:
What are current assets?
Current assets are assets consisting of cash, items that normally will be converted into cash within one year, or items that will be used up within one year.
ANSWER:
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49. Current Assets
Current assets are usually listed in order of liquidity.
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50. Liquidity is the ease with which an item can be converted into cash.
QUESTION:
What is liquidity?
Liquidity is the ease with which an item can be converted into cash.
ANSWER:
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51. Current Assets
Current assets for Modern Casuals
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52. Plant and Equipment
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53. What is plant and equipment?
QUESTION:
What is plant and equipment?
Plant and equipment is property that will be used in the business for longer than one year.
ANSWER:
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54. Plant and Equipment Noncurrent assets are called long-term assets.
An important category of long-term assets is plant and equipment.
For many businesses plant and equipment represents a sizable investment.
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55. Plant and Equipment
The balance sheet shows three amounts for each category of plant and equipment :
Asset
(Accumulated depreciation)
Book value
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56. Plant and Equipment
Total plant and equipment
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57. Current Liabilities
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58. What are current liabilities?
QUESTION:
What are current liabilities?
Current liabilities are debts that must be paid within one year.
ANSWER:
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59. Current Liabilities
Current liabilities are usually listed in order of priority of payment.
Management must ensure that funds are available to pay current liabilities when they become due in order to maintain the firm's good credit reputation.
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60. Total current liabilities
Assets
Prepaid Interest
75.00
5,000.00
Total Current Assets
104,610.00
Total Plant and Equipment
23,550.00
Total Assets
128,160.00
Liabilities and Owner’s Equity
Current Liabilities
Notes Payable-Trade
2,000.00
Notes Payable-Bank
9,000.00
Accounts Payable
24,129.00
Interest Payable
20.00
Social Security Tax Payable
1,177.00
Medicare Tax Payable
271.75
Employee Income Tax Payable
990.00
Fed. Unemployment Tax Pay.
12.00
State Unemployment Tax Pay.
81.00
Salaries Payable
1,500.00
Sales Tax Payable
7,056.00
Total Current Liabilities
46,236.75
Modern Casuals
Balance Sheet
Year Ended December 31, 2004
Total current liabilities
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61. Long-Term Liabilities
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62. What are long-term liabilities?
QUESTION:
What are long-term liabilities?
Long-term liabilities are debts of a business that are due more than one year in the future.
ANSWER:
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63. Long-Term Liabilities
Although repayment of long-term liabilities might not be due for several years, management must make sure that periodic interest is paid promptly.
Long-term liabilities include mortgages, notes payable, and loans payable.
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64. Owner's Equity
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65. Owner's Equity
Modern Casuals prepares a separate statement of owner's equity that reports all information about changes that occurred in the owner's financial interest during the period.
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66. Owner's Equity
The ending balance from the statement of owner’s equity is transferred to the Owner's Equity section of the balance sheet.
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67. Complete the following sentences: multiple-step income statementR E V I W
Complete the following sentences:
A classified income statement is also called a(n) ___________________________.
multiple-step income statement
Gross profit
___________ is the difference between net sales and the cost of goods sold.
_____________ are assets consisting of cash, items that normally will be converted into cash within one year, or items that will be used up within one year.
Current assets

68. Complete the following sentences: Long-term liabilitiesV I W
Complete the following sentences:
Current liabilities
_______________ are debts that must be paid within one year.
Liquidity
________ is the ease with which an item can be converted into cash.
Long-term liabilities
_________________ are debts of a business that are due more than one year in the future.

69. College Accounting, Tenth Edition
Thank You
for using
College Accounting, Tenth Edition
Price • Haddock • Brock