0. The Ownership of a Corporation
SECTION 19.1
Accounting for a Corporation
A corporation may be owned by one person or thousands. The ownership of a corporation is represented by shares of stock.
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1. The Ownership of a Corporation
SECTION 19.1
Recording the Ownership of a Corporation
Corporations have a Capital Stock account instead of the sole proprietorship’s owner’s capital account. This is a stockholders’ equity account that is the value of the stockholders’ claims to the corporation.
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2. The Ownership of a Corporation
SECTION 19.1
Reporting Stockholders’ Equity in a Corporation
The owner’s equity section is called stockholders’ equity and must be reported in two parts:
equity contributed by the stockholders
equity earned through business profits
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3. The Ownership of a Corporation
SECTION 19.1
Equity Contributed by Stockholders
Stockholders contribute to equity by purchasing shares of stock. This amount is recorded in the Capital Stock account.
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4. The Ownership of a Corporation
SECTION 19.1
Equity Earned Through Business Profits
The net income earned and retained by a corporation is called retained earnings. This amount is recorded in the Retained Earnings account.
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5. The Ownership of a Corporation
SECTION 19.1
Balance Sheet Presentation
Compare the capital section of the balance sheet to a sole proprietorship and a corporation.
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6. The Ownership of a Corporation
SECTION 19.1
Characteristics of Financial Information
Financial statements are used by many groups:
managers
stockholders
creditors
government agencies, employees, consumers, and the general public
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7. The Ownership of a Corporation
SECTION 19.1
Comparability
For accounting information to be useful, it must be comparable. Comparability allows
information to be compared from one period to another, and
the comparison of information between businesses.
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8. The Ownership of a Corporation
SECTION 19.1
Reliability
Reliability refers to the confidence users have that financial information is reasonably free from bias and error.
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9. The Ownership of a Corporation
SECTION 19.1
Relevance
Relevance is the requirement that all information that would affect decisions of financial statement users be disclosed in the financial reports.
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10. The Ownership of a Corporation
SECTION 19.1
Full Disclosure
Full disclosure means that financial reports include enough information to be complete.
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11. The Ownership of a Corporation
SECTION 19.1
Materiality
Materiality means that relevant information should be included in financial reports.
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12. The Ownership of a Corporation
SECTION 19.1
A Corporation’s Financial Statements
A merchandising corporation can prepare four financial statements:
the income statement
the statement of retained earnings
the balance sheet
the statement of cash flows
Many of today’s businesses depend on computers to maintain the general ledger and subsidiary ledgers and to prepare the end-of-period financial statements.
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13. The Income Statement The Income Statement
SECTION 19.2
The Income Statement
When preparing the income statement, the revenue realization and the matching principles are applied.
Merchandising businesses have the cost of merchandise purchased and resold to customers, so the income statement has five sections instead of the service business’s three sections:
Revenue
Cost of Merchandise Sold
Gross Profit on Sales
Operating Expenses
Net Income (or Loss)
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14. The Income Statement The Revenue Section
This section reports the net sales for the period. To complete the revenue section:
Enter Revenue: at the left edge on the first line.
On the second line, enter Sales (indented).
Enter deductions from Sales on the next lines.
Add the balances of the contra revenue accounts and enter the total below Sales in the third amount column.
Enter the words Net Sales (indented) on the next line. Subtract the total of the contra revenue accounts from the Sales account and enter the amount in the fourth amount column.
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15. The Income Statement The Revenue Section SECTION 19.2
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16. The Income Statement The Cost of Merchandise Sold Section
The cost of merchandise sold is calculated as follows:
Computing the cost of merchandise sold requires two steps:
Determine the cost of all merchandise available for sale.
Calculate the cost of merchandise sold.
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17. The Income Statement
SECTION 19.2
Calculating Cost of Merchandise Available for Sale
Add net purchases to the beginning inventory amount. Use the following to calculate net purchases:
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18. The Income Statement Calculating Cost of Merchandise Sold
SECTION 19.2
Calculating Cost of Merchandise Sold
Subtract the ending merchandise inventory amount from the cost of merchandise available for sale to calculate the cost of merchandise sold. The following is an example of the Income Statement completed through Gross Profit on Sales.
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19. The Income Statement Calculating Cost of Merchandise Sold SECTION 19.2
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20. The Income Statement The Gross Profit on Sales Section
The gross profit on sales is the profit made before operating expenses are deducted. Subtracting the cost of merchandise sold from net sales will give the gross profit on sales.
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21. The Income Statement The Operating Expenses Section
The operating expenses are the costs of goods and services used in the process of earning revenue. Operating expenses can be further classified into selling expenses (incurred to sell or market the merchandise sold) and administrative expenses (related to the management of the business).
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22. The Income Statement The Net Income Section
The federal corporate income tax amount is presented separately on the income statement so the income statement shows the amount of operating income. Operating income is the amount of income earned before deducting federal corporate income taxes.
An example follows of the completed Income Statement.
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23. The Income Statement SECTION 19.2
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24. The Income Statement Analyzing Amounts on the Income Statement
SECTION 19.2
Analyzing Amounts on the Income Statement
The information reported on financial statements is expressed in dollars. Vertical analysis reports each dollar amount as a percentage of a base amount, which enables users to more easily view the relationships among the items on the financial statements. .
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25. The Income Statement SECTION 19.2
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26. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows
SECTION 19.3
The Statement of Retained Earnings
A statement of retained earnings reports the changes in the Retained Earnings account during the period. The changes result from business operations and dividends.
The statement is prepared from information on the work sheet and is used when preparing the balance sheet.
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27. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows
SECTION 19.3
The Balance Sheet
The balance sheet reports the balances of all asset, liability, and stockholders’ equity accounts for a specific date. The assets are listed first, followed by the Liabilities section and the Stockholders’ Equity section.
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28. The Balance Sheet SECTION 19.3
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29. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows
SECTION 19.3
Analyzing Amounts on the Balance Sheet
Horizontal analysis uses dollar amounts expressed as percentages to compare the same items on financial statements for two or more accounting periods or dates.
A base period, usually a year, is used for comparison.
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30. Analyzing Amounts on the Balance Sheet
SECTION 19.3
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31. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows
SECTION 19.3
The Statement of Cash Flows
The information on the statement of cash flows is vital for decision making. The statement shows a company’s cash flow, which indicates the ability of the company to pay its debts and pay dividends. Cash inflows come into and cash outflows go out of a business.
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32. The Statement of Cash Flows
SECTION 19.3
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33. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows
SECTION 19.3
Cash Flows from Operating Activities
Operating activities include all transactions that occurred during the accounting period as part of normal business operations.
To determine operating cash inflows and outflows, the income statement and balance sheet amounts are converted to the cash basis of accounting.
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34. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows
SECTION 19.3
Cash Flows from Investing Activities
Investing activities include
loans the business makes,
payments received for those loans,
purchase and sale of plant assets, and
Investments.
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35. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows
SECTION 19.3
Cash Flows from Financing Activities
Financing activities are the borrowing activities needed to finance the company operations and the repayment of these debts.
The following table shows typical cash inflows and outflows for operating, investing, and financing activities.
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36. The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows
SECTION 19.3
Cash Flows from Financing Activities
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