Chapter 9

1. Chapter 9 Financial Statements for a Sole Proprietorship

2. Chapter 9 Objectives • Explain the purpose of the Income Statement • Prepare an Income Statement • Explain the purpose of the Statement of Changes in Owner’s Equity • Prepare a Statement of Changes of Owner’s Equity • Explain the purpose of a Balance Sheet • Prepare a Balance Sheet • Explain the Purpose of the Statement of Cash Flows • Explain the ratio of analysis and compute ratios

3. What do you think? • What information would owners, managers, and investors want to know about a business? • Types of transactions the business has • The monetary changes occurred for the period • Whether there was a profit or loss • How do people who read financial statements use the information? • Financial Statements provide essential information for making sound decisions.

4. Chapter 9.1 Objectives • Learn the four financial statements prepared for a business • How to prepare an Income Statement

5. Financial Statements • Summarize the changes resulting from business transactions that occur during the accounting period • Preparing Financial Statements is STEP #7 in the Accounting Cycle

6. Four Financial Statements All derived from the Work Sheet • Income Statement • Balance Sheet • Statement of Changes in Owner’s Equity • Statement of Cash Flows

7. The Income Statement • Reports net income and/or net loss of a business for a specified period of time • Also called, Profit-and-Loss Statement, or an Earnings Statement

8. Income Statement Sections • Heading • Revenue for the period • Expenses for the period • Net Income and/or Net Loss for the period

9. Income Statement Sections: Heading • Who? • What? • When?

10. Income Statement Sections: Revenue Give some examples of sources of revenue the Walt Disney company might have. • Write Revenue: on the first line at the left side of the form • Enter the revenue account names beginning on the 2nd line, indented about ½” from the left edge • Enter the balance of each revenue account in the 1st amount column • Enter the total revenue in the 2nd amount column beneath the last revenue amount and write Total Revenue to the left • If there is only one revenue account, no Total Revenue is needed and you can simply write the amount in the 2nd column

11. Income Statement from Work Sheet: Revenue

12. Income Statement Sections:Expenses • On the line following the revenue section, write Expenses: at the left side • Enter expense account names beginning on the next line and enter the balances in the 1st amount column • Single rule under the balance • Write Total Expenses on the line under the last expense account name • Add the balances for the expense accounts and enter the amount in the 2nd amount column under the last expense account balance

13. Income Statement from Work Sheet: Expenses

14. Income Statement Sections: Net Income/Net Loss Is this the first time we have calculated Net Income or Loss? If not, where have we calculated this amount before? • Draw a single rule under the total expenses account • Subtract the total expenses from the total revenue and enter the value in the 2nd amount column under the total expenses amount • To the left of this value, write Net Income (Loss) • If this amount matches the amount on the work sheet, double rule beneath the net income amount

15. Income Statement from Work Sheet

16. Income Statement: Reporting a Net Loss • If total expenses are greater than total revenue, a net loss exists • To Record a Net Loss • Enter the net loss amount in the 2nd amount column beneath the total expenses amount • Write Net Loss to the left of this value

17. Closure Ticket Answer the following questions: • What are the primary financial statements for a sole proprietorship? • What are the Income Statement sections? • What are other names for the Income Statement? • What period other than a month does the Income Statement cover?

18. To Do • 9.1: Text p. 224, Wbk p. 164 • 9.4: Text p. 242, Wbk p. 165-166

19. What do you think? • What decisions would an owner make based on the changes in owner’s equity for a period? • Whether an increase meets expectations • What to do if OE decreased • Whether the owner can continue to make withdrawals at the same amount, etc

20. Chapter 9.2 Objectives • The purpose of the statement of changes in owner’s equity • How to prepare a statement of changes in owner’s equity

21. The Statement of Changes in Owner’s Equity • Summarizes the changes in the owner’s capital account as a result of business transactions that occur during the period • Balances of revenue, expenses, and the owner’s withdrawal account transfer to the owner’s capital account • Prepared at the end of the period • Information to prepare this statement is found in • The work sheet • The income statement • The owner’s capital account in the GL • Use standard 3 line heading, • Company - WHO • Statement of Changes of Owner’s Equity - WHAT • For the month ended Dec 31, 2013 - WHEN

22. The Statement of Changes in Owner’s Equity • On the first line, write Beginning Capital, followed by a comma and the first day of the period • Enter the balance of the capital account in the 2nd column, found in the GL • Enter the increases to the capital account: • Write: Add: Investments by Owner – 1st amount column • Next line, write indented Net Income (line up with Investments by Owner), ruled and write total amount in 2nd amount column, rule the amount in the 1st column • Write Total Increase in Capital below the increases and write the amount in the 2nd amount column, rule it

23. The Statement of Changes in Owner’s Equity • Write Subtotal on the next line • Add the beginning capital amount and total increases in capital • Write that amount in the 2nd amount column under the total increases in capital • List the decreases to the capital account beginning on the next line • Withdrawals • Net loss • Label and enter the withdrawal amounts to the 2nd amount column and rule • On the next line, write Ending Capital, followed by a comma and the last day of the period • Subtract the withdrawals amount from the subtotal to get the ending balance of the capital account. Double rule

24. The Statement of Changes in Owner’s Equity

25. The Statement of Changes in Owner’s Equity • For a current business, the capital account balance on the work sheet may not reflect the balance at the beginning of the period • Where to look to find the current owner’s capital account balance • The General Ledger • Subtract additional investments from the balance shown on the work sheet

26. The Statement of Changes in Owner’s Equity: Net Loss • Why is net loss added to owner’s withdrawals? • Both decrease the OE. • What increased and decreased owner’s equity? • Owner’s investment, increase; owner’s wd and net loss, decrease

27. Did you know? • The restaurant industry is a key part of the of the US economy • Employs more than 11 million people • Restaurants take in revenues of about $400B a year

28. The Statement of Changes in Owner’s Equity • How would you express information on the statement of changes in owner’s equity as an equation? • Beginning capital + Investments + Net Income – Withdrawals = Ending Capital • What does this statement mean to you? “The statement of changes in OE shows whether revenue or additional owner’s investment caused the increase” • Shows specifically where the increase/decrease come from • Whether the increase is due to revenue or addt’l owner investment

29. Exit Ticket • What is in the heading of a statement of Owner’s Equity? • What are the sources of information used to prepare the statement of changes in owner’s equity? • Where can you find the owner’s capital balance at the beginning of the period? • What elements cause increases to the capital account? • What elements cause decreases to the capital account?

30. To Do • 9.2: Text p. 229, Wbk p. 164 • 9.5: Text p. 242, Wbk p. 166 - 167

31. What do you think? • What decisions would you make if you had information showing how much money you spent last month? • Whether you are spending too much • Whether you need to save • How you can pay for something you want but do not have enough money in a given month

32. Chapter 9.3 Objectives • How to prepare a balance sheet • The purpose of a statement of cash flows • How to perform ratio analysis

33. The Balance Sheet • A report of the balances in the permanent accounts at the end of the period • Snapshot or photo of the business at a specific point in time • Reports the assets and the claims against those assets on a specific date • It summarizes • What a business owns • What a business owes • What a business is worth • Prepared from the information in • Balance Sheet section of the work sheet • The statement of owner’s equity • AKA statement of financial position

34. The Balance Sheet • Sections of the Balance Sheet • Heading • Assets Section • Liabilities and Owner’s Equity Sections

35. The Balance Sheet • Heading • Standard Three Line • Name of the Business – WHO • Name of the Financial Statement – WHAT • Date of the Balance Sheet - WHEN

36. The Balance Sheet • Balance Sheet is listed in report form, listing the balance sheet sections under one another Assets • Write Assets on the first line centered in the column for account names • On the following lines, list the asset accounts in the order they appear on the BS section of the work sheet and their balances (in the first amount column) • Single rule under the last account balance • Indented and write Total Assets and then indicate the calculated total in the second amount column **Do not double rule until you have the Liabilites & OE sections done**

37. The Balance Sheet Liabilities & Owner’s Equity • On the line after Total Assets, write the heading Liabilities centered • On the following lines, list the liability accounts, in order, as they’re listed on the BS sections of the work sheet and their balances (in the first amount column) • Single rule under the last balance • Indented, write Total Liabilities, on the line under the last liability account and enter the balance in the second amount column

38. The Balance Sheet Owner’s Equity • On the line under Total Liabilities center and write Owner’s Equity • On the next line, write the name of the capital account and in the second amount column, enter the ending balance (as shown on the statement of owner’s equity)

39. The Balance Sheet

40. The Balance Sheet

41. The Balance Sheet Proving Assets = Liabilities + Owner’s Equity • Draw a single rule under the balance of the capital account • On the next line, indented, write Total Liabilities and Owner’s Equity • Then add Total Liabilities and Owner’s Equity • This total must equal the Total Assets • Check the balances, if they match, move ahead! If not, go back and find and correct the error • Lastly, after A = L + OE, double rule under the Total Assets amount, and double rule under the Total Liabilities & OE amount

42. Statement of Cash Flows • What questions would a statement of cash flows answer about the business? • Cash balance + or – • What was source of cash that came into the business • Where did paid out cash go • Did any area have an unusually high or low amount of cash inflow or outflow

43. Statement of Cash Flows • Covers one accounting period • Summarizes • Amount of cash the business took in • Sources of cash • Amount of cash the business paid out • Uses of cash

44. Statement of Cash Flows • Ratio Analysis AKA percentage analysis • The process of evaluating the relationship between various amounts in the financial statements • Used by owners/managers to determine financial strength, activity, and debt-paying ability of a business

45. Statement of Cash Flows • Profitability Ratios • Used to evaluate the earnings performance of the business during the accounting period • Earning power measures company ability to grow and earn revenue

46. Statement of Cash Flows • Return on Sales • Commonly used profitability ratio • Used to examine the portion of each sales dollar that represents the profit TO CALCULATE: • Divide Net Income by Sales For Example: RoadRunner Delivery Service Net Income = $1,150 RoadRunner Sales (Revenue on work sheet)= $2,650 1150/2650 = 0.434 = 43.4% Return on Sales • So, for every dollar of sales, RoadRunner earns 43.4 cents

47. Statement of Cash Flows • For 2014, net income for RoadRunner increases to $2,750 and Sales increases to $5,000 • What is the return on sales for 2014? • What is the increase over 2013? • 2750/5000 = 0.550 or 55.0% • 55.0 – 43.4 = 11.6 cent increase over 2013

48. Statement of Cash Flows • Liquidity Measures • Liquid – an asset that can easily be converted to cash • Current Assets are those used up or converted to cash during the normal operating cycle of the business • A/R • Cash in Bank • Supplies • Current Liabilities are debts of the business that must be paid within the next accounting period • A/P

49. Statement of Cash Flows • Working Capital is the amount by which current assets exceeds current liabilities • Current liabilities are paid out of current assets, working capital tells us the assets left over to continue operations • Can find these numbers on the balance sheet For example, RoadRunner Working Capital • Current Assets = $22,575 • Current Liabilities = $11,725 • CA – CL = Working Capital • $22,575 - $11,725 = $10,850

50. Statement of Cash Flows • Liquidity Ratio • Current Ratio & Quick Ratio • Measure of the ability of the business to pay its current debts as are due • Provide for an unexpected need of cash