1. Preparing an Income Statement Chapter 7

2. Objectives  Covers the Preparation of an Income Statement and Balance Sheet for a proprietorship.  Financial Statement Analysis of these statements.

3. Terms  Stakeholders  Any persons or groups who will be affected by an action  Component Percentage  The percentage relationship between one financial statement item and the total that includes that item.  Adequate Disclosure  Accounting Concept is applied when financial statements contain all information necessary to understand a business’s financial condition.

4. Reporting Financial Information  We take information from our general ledger and help summarize, organize, and report it to the owners and managers.  Accounting Concept – Adequate Disclosure  TechKnow prepares two financial statements  Income Statement and Balance Sheet  Accounting Concept Going Concern  When financial statements are prepared with the expectation that a business will remain in operation indefinitely.

5. Income Statement Information on a Work Sheet

6. Income Statement 1 Revenue 3 Revenue amount 4 Expenses 5 Account titles 6 Expense amount 8 Total expenses 9 Total of expenses 12 Net Income 7 Single line 11 10 Calculate net income 14 Double lines 13 Record net income 2 Account title

7. Component Percentage Analysis  Revenue reported on an income statement is compared to two components: 1. Total Expenses 2. Net Income  In making decisions a manager analyzes relationships between these two components.  The percentage relationship between one financial statement item and the total that includes that item is called a component percentages.

8. Acceptable Component Percentages  How do you know what is acceptable?  Various industry organizations public average percentages for similar businesses.  In the future, TechKnow will also utilize previous fiscal periods as comparisons.

9. Total Expenses Component Percentages  An acceptable total expenses component percentage is not more than 55%  TechKnow’s is 41.1%  Is it acceptable?  Yes because it is less than 55% Total Expenses  Total Sales =Total Expenses Component Percentages $1,466  $3,565=41.1%

10. Net Income Component Percentage  Acceptable Net Income CP is not less than 45%  TechKnow’s is 58.9%  Is it acceptable?  Yes, it is greater than 45% and is acceptable. Net Income  Total Sales =Total Expenses Component Percentages $2,099  $3,565=58.9%

11. Component Percentage Analysis

12. Multiple Revenue  TechKnow receives revenue from only on source  HighNote receives revenue from two sources, the sale of services for music lessons and services to repair musical instruments.  Business owner wants to know revenue from each source.  Two revenue accounts are used.  Sales-Lessons and Sales-Repairs.

13. Company Ex. Of Two Revenue Sources 1 Revenue 3 Revenue amounts 2 Account titles 6 Net Loss 7 Record Net Loss 5 Total Revenue 4 Total of revenue

14. Audit Your Understanding  List the four sections of an income statement. 1. Heading 2. Revenue 3. Expenses 4. Net income or net loss  What is the formula for calculating the total expenses component percentage?  Total Expenses  Total Sales = Total Expenses  What is the formula for calculating the net income component percentage?  Net Income  Total Sales = Net Income

15. 7.2 Balance Sheet information on a Work Sheet

16. LESSON 7-2 Balance Sheet Information on a Work Sheet

17. Objectives  How to prepare a balance sheet using data from the work sheet

18. Balance Sheet  Reports financial information on a specific date, indicating the financial condition of a business.  Financial condition = Financial Strength  What makes a company strong?  Fewer liabilities and adequate assets  You want your assets to be greater than your liabilities

19. Balance Sheet  Information about assets, liabilities, and owner’s equity is in the general ledger accounts or from a work sheet.  The information is easier to use if reported in an organized manner like a balance sheet.  Found in two places on the work sheet  Account Titles are obtained from the work sheet’s Account Title Column’s  Account balances are obtained from the work sheet’s Balance Sheet columns.

20. Balance Sheet 1. Heading  Answer’s the questions Who? What? and When? 2. Assets 3. Liabilities 4. Owner’s Equity

21. BALANCE SHEET 21

22. HEADING OF A BALANCE SHEET 1 2 3 1.Center the name of the company on the first line. 2.Center the name of the report on the second line. 3.Center the date of the report on the third line.

23. ASSETS AND LIABILITIES SECTIONS OF A BALANCE SHEET

24. Calculating Capital  Capital Account Balance + Net Income - Drawing = Current Capital  Capital Account Balance – Net Loss – Drawing Account Balance = Current Capital  OR use your formula! Assets = Liab. – OE  Just subtract your Liab. From Assets

25. OWNER’S EQUITY SECTION OF A BALANCE SHEET 25

26. OWNER’S EQUITY REPORTED IN DETAIL ON A BALANCE SHEET

27. Audit Your Understanding  List the four sections on a balance sheet.  What is the formula for calculating current capital?