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LESSON 7-1

LESSON 7-1. Preparing an Income Statement. Original created by M.C. McLaughlin, Thomson/South-Western Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School. Preparing an Income Statement.

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LESSON 7-1

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  1. LESSON 7-1 Preparing an Income Statement Original created by M.C. McLaughlin, Thomson/South-Western Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School

  2. Preparing an Income Statement • To make the general ledger information more usable, the information is summarized, organized, and reported to the owners & managers in the form of financial statements • When financial statements contain all information necessary to understand a business’s financial condition the accounting concept adequate disclosure is applied. • The accounting concept Going Concern is applied when financial statements are prepared with the expectation that a business will remain in operation indefinitely LESSON 7-1

  3. Preparing an Income Statement • An income statement reports financial information over a specific period of time, indicating the financial progress of a business in earning a net income or a net loss. • The income statement for a service business has 4 sections: • Heading • Revenue • Expenses • Net income or Net loss LESSON 7-1

  4. INCOME STATEMENT INFORMATION ON A WORK SHEET page 182 • Information for preparing an income statement is obtained from two places on the work sheet. • Account titles are obtained from the work sheet’s Account Title column • Account balances are obtained from the work sheet’s Income Statement columns LESSON 7-1

  5. HEADING OF AN INCOME STATEMENT page 182 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. LESSON 7-1

  6. Single line 7 Revenue 1 Revenue amount 3 Account title 2 Expenses 4 Expense amount 6 Account titles 5 Total expenses 8 Total of expenses 9 Single line 11 Net Income 12 Record net income 13 Calculate net income 10 Double lines 14 REVENUE, EXPENSES, AND NET INCOME SECTIONS OF AN INCOME STATEMENT page 183 LESSON 7-1

  7. COMPONENT PERCENTAGE ANALYSIS OF AN INCOME STATEMENT • For a service business, the revenue reported on an income statement includes 2 components: • total expenses • Net income • The percentage relationship between one financial statement item & the total that includes that item is called a component percentage. • Component percentages are calculated by dividing the amount of each component by the total amount of sales • These percentages are analyzed to help managers make future decisions about operations of the business LESSON 7-1

  8. COMPONENT PERCENTAGE ANALYSIS OF AN INCOME STATEMENT page 184 • For a component % to be useful, the business needs to know what component percentages are acceptable for similar businesses. • Industry organizations publish average percentages for similar businesses LESSON 7-1

  9. INCOME STATEMENT WITH TWO SOURCES OF REVENUE AND A NET LOSS If a business receives revenue from more than one source, both revenue accounts are listed. If total expenses exceed total revenue, a net loss is reported on an income statement. Net Loss LESSON 7-1

  10. Total Revenue 5 Revenue 1 Revenue amounts 3 Account titles 2 Total of revenue 4 Net Loss 6 Record Net Loss 7 INCOME STATEMENT WITH TWO SOURCES OF REVENUE AND A NET LOSS page 185 LESSON 7-1

  11. TERMS REVIEW page 186 • stakeholders • component percentage LESSON 7-1

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