Mastering Financial Statements for Corporations

1. Chapter 15 Financial Statements for a Corporation

2. Financial statements for a Corporation Revisiting accounting concepts: Adequate Disclosure – provide accurate financial information Consistent Reporting – reported the same way each fiscal period Income statement – reports revenue, cost of merchandise sold, gross profit on sales, expenses, and net income/loss Balance sheet – reports assets, liabilities, and stockholders’ equity on a specific date Statement of stockholders’ equity – reports changes in a corporation’s ownership for a fiscal period Statement of cash flows – report summarizing cash receipts and payments during a fiscal period

3. 15. Preparing and analyzing an income statement Income statement for a sole proprietorship Income statement for a corporation

4. 15. Preparingand analyzing an income statement Net sales – total sales less sales discount and sales returns and allowances Cost of merchandise sold – the original price of all merchandise sold during a fiscal period Gross profit on sales – revenue remaining after cost of merchandise sold is deducted from net sales (used to determine how effectively business is buying and selling merchandise)

5. INCOME STATEMENT INFORMATION ON A WORK SHEET page 448 LESSON 15-1

6. REVENUE SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS page 449 1 2 3 4 5 8 9 6 7 1. Heading 6. Contra account amounts 2. Revenue section 7. Contra account total 8. Net Sales 3. Title of revenue account 4. Sales amount 9. Net sales amount 5. Less contra accounts LESSON 15-1

7. 5 6 4 COST OF MERCHANDISE SOLD SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS page 450 1. Cost of Merchandise Sold section 2. Beginning inventory 1 3. Purchases section 2 4. Total cost of merchandise available for sale 3 5. Ending inventory 6. Cost of merchandise sold LESSON 15-1

8. 6 COMPLETING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS page 452 1. Gross Profit on Sales 2. Expenses section 7 1 3. Net Income before Federal Income Tax 4. Less Federal Income Tax Expense 2 5. Net Income after Federal Income Tax 6. Double lines 3 7. Component percentage 4 5 LESSON 15-1

9. 15. Preparing and analyzing an income statement Acceptable component percentages: determined by making comparisons with previous fiscal periods as well as with industry standards published by industry organizations Actions to correct unacceptable percentages: – the goal of any business is to earn an acceptable net income; when unacceptable percentages exist, management must take action Examples: 1. Increase sales revenue (how?) 2. Decrease cost of merchandise (how?) 3. Small increase in sales, small decrease in cost 4. Review individual expenses

10. 15. Preparing and analyzing an income statement Financial ratio – a comparison between two items of financial information Earnings per share – the amount of net income after federal income tax belonging to a single share of stock (one of the most widely used measure of a corporation’s financial performance) Price-earnings ratio (P-E ratio) – the relationship between the market value per share and earnings per share of stock (lower = sluggish growth; higher = dynamic growth)

11. Market Priceper Share Net Incomeafter FederalIncome Tax ÷ ÷ Earnings perShare Number of SharesOutstanding = = Price-EarningsRatio Earningsper Share FINANCIAL RATIOS page 459 Earnings per Share $80,313.95 ÷ 2,500 = $32.13 Price-Earnings Ratio $345.00 ÷ $32.13 = 10.7 LESSON 15-2

12. 16. Preparing a statement of stockholders’ equity 2 part: capital stock and retained earnings Par value – a value assigned to a share of stock and printed on the stock certificate

13. CAPITAL STOCK SECTION OF THE STATEMENT OF STOCKHOLDERS’ EQUITY page 461 1 2 3 4 5 1. Heading 2. Capital Stock and Par Value 3. Stock at the beginning of the year 4. Stock issued during the year 5. Total stock issued at the end of the year LESSON 15-3

14. 5 6 7 RETAINED EARNINGS SECTION OF THE STATEMENT OF STOCKHOLDERS’ EQUITY page 462 1 3 2 4 1. Retained Earnings 4. Dividends declared 2. Beginning balance 5. Increase in retained earnings 3. Net income after federal income tax 6. Ending balance 7. Total stockholders’ equity LESSON 15-3

15. 17. Preparing a balance sheet Balance sheet for a sole proprietorship

16. 17. Preparing a balance sheet page 469 Balance sheet for a corporation (continued on next slide) LESSON 15-4

17. page 469 (continued from previous slide) LESSON 15-4

18. 17. Preparing a balance sheet Information obtained from the work sheet AND equity statement Business having both current and plant assets: list separate Assets with contra accounts have: (1) asset balance; (2) contra account balance; (3) book value listed (next slide) Current liabilities – liabilities due within a short time (usually one year) Long-term liabilities – liabilities owed for more than a year

19. CURRENT ASSETS SECTION OF A BALANCE SHEET page 465 1 2 3 4 5 1. Heading 4. Remaining current asset accounts 2. Begin assets section 5. Current assets 3. Book value of accounts receivable LESSON 15-4

20. 4 5 PLANT ASSETS SECTION OF A BALANCE SHEET page 466 1 2 3 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. LESSON 15-4

21. 2 LIABILITIES SECTION OF A BALANCE SHEET page 467 1. Heading 2. Account title and amount of each current liability 1 3. Total liabilities 3 LESSON 15-4

22. 17. Preparing a balance sheet Some corporations call the stockholders’ equity section owner’s equity

23. 3 2 4 5 6 STOCKHOLDERS’ EQUITY SECTION OF A BALANCE SHEET page 468 1 1. Stockholders’ Equity 5. Total liabilities and stockholders’ equity 2. Capital stock 6. Double rules 3. Retained earnings 4. Total stockholders’ equity LESSON 15-4