1. Preparing an Income Statement

2.  Financial statements provide the primary source of information needed by owners and managers to make decisions on the future activity of a business.   The financial statements should provide information about the business’s financial condition, changes in this financial condition, and the progress of operations. Comparing financial condition and progress for more than one fiscal period also helps owners and managers make sound business decisions. Therefore, financial information must be reported the same way from one fiscal period to the next.   A corporation prepares: Income Statement Balance Sheet Statement of Stockholders’ Equity

3. LESSON 15-1 3 page 448

4.  Merchandising Businesses report revenue, cost of merchandise sold, gross profit on sales, expenses, and net income or loss.  Current and previous income statements can be compared to determine the reasons for increases or decreases in net income.

5.  Three main section of an income statement: Revenue section Cost of merchandise sold Expenses section   Total sales – sales discount and sales returns and allowances = Net Sales   The original price of all merchandise sold during a fiscal period is called the cost of merchandise sold.   The revenue remaining after cost of merchandise sold has been deducted is called gross profit on sales. 

6. LESSON 15-1 6 6.Contra account amounts 1 2 34 5 6 page 449 7 89 1.Heading 7.Contra account total 3.Title of revenue account 8.Net Sales 4.Sales amount9.Net sales amount 5.Less contra accounts 2.Revenue section

7. LESSON 15-1 7 1 2 3 page 450 4 6 5 1.Cost of Merchandise Sold section 2.Beginning inventory 3.Purchases section 4.Total cost of merchandise available for sale 5.Ending inventory 6.Cost of merchandise sold

8. LESSON 15-1 8 1 2 4 5 7 3 6 7.Component percentage 6.Double lines 5.Net Income after Federal Income Tax 4.Less Federal Income Tax Expense 3.Net Income before Federal Income Tax 2.Expenses section 1.Gross Profit on Sales

9.  net sales  cost of merchandise sold  gross profit on sales LESSON 15-1 9 page 454

10. Analyzing an Income Statement

11.  A percentage relationship between one financial statement item and the total that includes that item is known as a component percentage.  For Hobby Shack, a merchandising business, every sales dollar reported on the income statement includes four components (1) cost of merchandise sold (2) gross profit on sales (3) total expenses (4) net income before income tax.  LOOK ON p. 455 in book for example

12. LESSON 15-2 12

13.  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.

14. LESSON 15-2 14 Price-Earnings Ratio = Earnings per Share ÷ Market Price per Share Earnings per Share = Number of Shares Outstanding ÷ Net Income after Federal Income Tax page 459 Earnings per Share Price-Earnings Ratio $32.13=2,500÷$80,313.95 10.7=$32.13÷$345.00

15.  financial ratio  earnings per share  price-earning ratio LESSON 15-2 15 page 460

16. Preparing a Statement of Stockholders ’ Equity

17.  A financial statement that shows changes in a corporation’s ownership for a fiscal period is called a statement of stockholders’ equity.  The amount of capital stock issued as of the beginning of the year is the beginning balance of the capital stock account. Any additional stock transactions recorded in the general ledger during the fiscal year would be added to calculate the amount of stock issued during the fiscal year.   Thus, the amounts in the capital stock section of the statement of stockholders’ equity are obtained from the general ledger account, Capital Stock.

18.  Each share of stock issued by a corporation has a monetary value. A value assigned to a share of stock and printed on the stock certificate is called par value.

19. LESSON 15-3 19 1 2 3 4 5 page 461 1.Heading 2. Capital Stock and Par Value 5.Total stock issued at the end of the year 3.Stock at the beginning of the year 4.Stock issued during the year

20. LESSON 15-3 20 1 2 3 4 page 462 4.Dividends declared 6 7 5 2.Beginning balance 7.Total stockholders’ equity 6.Ending balance3.Net income after federal income tax 5.Increase in retained earnings 1.Retained Earnings

21.  statement of stockholders ’ equity  par value LESSON 15-3 21 page 463

22. Preparing a Balance Sheet

23. LESSON 15-4 23 page 464

24. LESSON 15-4 24 1 2 3 4 5 page 465 3. Book value of accounts receivable 4. Remaining current asset accounts1. Heading 2. Begin assets section 5. Current assets

25. LESSON 15-4 25 1 2 3 page 466 4 5 1.Write the heading Plant Assets. 2.Calculate the book value of office equipment. 3.Use the same procedure to calculate the book value of store equipment. 4.Calculate total plant assets. 5.Calculate total assets.

26.  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.

27. LESSON 15-4 27 1 3 page 467 1.Heading 2.Account title and amount of each current liability 3.Total liabilities 2

28. LESSON 15-4 28 1 5.Total liabilities and stockholders’ equity 4 5 23 2.Capital stock 1.Stockholders’ Equity 3.Retained earnings 4.Total stockholders’ equity 6.Double rules 6

29. LESSON 15-4 29 page 469 (continued on next slide)

30. LESSON 15-4 30 page 469

31.  A report prepared to give details about an item on a principal financial statement is called a supporting schedule.

32.  current liabilities  long-term liabilities  supporting schedule LESSON 15-4 32 page 471