Financial Statements for a Corporation - Maximizing Reporting Efficiency

1. CHAPTER 15 Financial Statements for a Corporation Benchmark 7 Financial reporting is a critical outcome of accounting

2. Gap, Inc. p. 445 • Quickly read 3 paragraphs • #1 Should a single set of financial statements be prepared for Gap or should financial statements be prepared for each brand?

3. Ethical decisions p. 446 • Do Elena’s actions violate the confidentiality rule?

4. LESSON 15-1 Preparing an Income Statement • net sales • cost of merchandise sold • gross profit on sales

5. Accounting cycle process • Record financial activities in journal and ledgers • Prepare work sheet at end of fiscal period to organize and summarize info. • Use completed work sheet to prepare financial statements • Income statement • Statement of stockholders’ equity • Balance sheet

6. Use of Financial Statements • Provide primary source of info. needed by owners/managers to make decisions • Provide info. about financial condition, changes in financial condition, and progress of operations (adequate disclosure) • Comparing financial condition and progress for more than 1 fiscal period also helps make decisions – reported same way (consistent reporting)

7. INCOME STATEMENT INFORMATION ON A WORK SHEET

8. Income Statement • Used to report business’s financial progress • Revenue, cost of merchandise sold, gross profit on sales, expenses, net income/loss • Compare current and previous income statements to determine reasons for increase/decrease in net income • Use information from completed work sheet – all amounts in revenue and expense accounts and merchandise inventory • 3 sections – revenue, cost of merchandise sold, expenses

9. REVENUE SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS 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 NOTE: contra amounts written in 2nd column, total written in 3rd

10. Cost of Merchandise sold • Original price of all merchandise sold during a fiscal period (historical cost) • Also known as cost of goods sold, cost of sales

11. INCOME STATEMENT INFORMATION ON A WORK SHEET

12. 5 6 4 COST OF MERCHANDISE SOLD SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS 1. Cost of Merchandise Sold section 2. Beginning inventory 1 3. Purchases section 2 3 4. Total cost of merchandise available for sale 5. Ending inventory 6. Cost of merchandise sold

13. INCOME STATEMENT INFORMATION ON A WORK SHEET

14. 6 COMPLETING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS 1. Gross Profit on Sales 2. Expenses section 7 3. Net Income before Federal Income Tax 1 4. Less Federal Income Tax Expense 2 5. Net Income after Federal Income Tax 6. Double lines 3 4 7. Component percentage 5

15. Completing an Income Statement • Revenue remaining after cost of merchandise sold is deducted is called gross profit on sales – measure of how effectively business is buys and sells merchandise • Compare performance to prior fiscal periods • Component percentage – percentage relationship between 1 financial statement item and total that includes the item – calculated amounts in 4th column

16. Lesson 1 Review • http://accountingxtra.swlearning.com/multicolumn/xtra/games/ch15/games.html#

17. 15-1 Work Together p. 454

18. 15-1 Work Together p. 454

19. 15-1 Work Together p. 454

20. 15-1 Work Together p. 454

21. 15-1 Work Together p. 454

22. LESSON 15-2 Analyzing an Income Statement • financial ratio • earnings per share • price-earning ratio

23. Component Percentages • Percentage relationship between 1 financial statement item and total that includes that item • Every sales dollar reported on income statement includes 4 components: cost of merchandise sold, gross profit on sales, total expenses, net income before income tax • Analyze relationships to make decisions about future operations • P. 455

24. Component Percentages • Business needs to know acceptable percentages – make comparisons with prior fiscal periods and with industry standards • Each percentage represents amount of each sales dollar that is considered acceptable • Unacceptable percentages are a warning that management action is necessary • 3 ingredients to earning net income – sales, cost of merchandise sold, total expenses

25. Component Percentages • Examples of component percentages for this class • Why is there a difference between what a customer pays and what the merchant pays? • How much is an appropriate difference?

26. Component Percentages • Cost of Merchandise Sold Component Percentage • Major cost and keep as low as possible, acceptable if not more than acceptable % • Gross Profit on Sales Component Percentage • Large enough to cover total expenses and desired amount of net income, acceptable if not less than acceptable % • Total Expenses Component Percentage • Total expenses must be less than gross profit to provide desirable net income, not more than acceptable % • Net Income before Federal Income Tax Component Percentage • Shows progress being made, not less than acceptable %

27. Component Percentages • Cost of merchandise sold and total expenses reduce owner’s equity • want actual component % to be less than acceptable % • Want gross profit and net income to be as high as possible

28. Component Percentages • (Net Loss) – total expenses greater than gross profit on sales • Corporation can file for a tax refund if paid at least equal amount of federal income taxes in previous 3 years • Tax refund (federal income tax expense) reduced amount of net loss – p. 457 • Analyze income statement to determine reason for net loss • Controlling cost of merchandise inventory? • Controlling expenses?

29. ANALYZING AN INCOME STATEMENT SHOWING A NET LOSS

30. Correct unacceptable component percentages – page 458 • Gross profit – increase sales revenue, decrease cost of merchandise sold, or both • Total expenses – see if major increases in any expense accounts

31. Financial Ratios • Comparison between 2 items of financial information • Earnings per share (EPS)– amount of net income after federal income tax belonging to single share of stock, net income after federal tax divided by number of shares outstanding, most widely recognized measures of financial performance, compared to prior years and market price of stock

32. Financial Ratios • Price-earnings ratio (P-E ratio) – relationship between market value per share and earnings per share of stock • Provides investors with info. Concerning the price of the stock relative to the earnings • Low associated with slow growth companies • High associated with dynamic growth • Investors analyze earnings trend to project future earnings

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

34. Lesson 2 Review • http://accountingxtra.swlearning.com/multicolumn/xtra/games/ch15/games.html#

35. 15-2 work together p. 460

36. LESSON 15-3 Preparing a Statement of Stockholder’s Equity

37. Statement of Stockholder’s Equity • Financial statement that shows changes in corporation’s ownership for a fiscal period • 2 sections – capital stock, retained earnings • Par value – value assigned to share of stock • Stockholders invest money in corporation when they purchase stock, corporation retains portion of income and distributes portion to stockholders (dividends) • This information isn’t reported on income statement or balance sheet

38. Statement of Stockholder’s Equity • Net income increases corporation’s total capital • Some income may be retained for business expansion, some may be distributed as dividends to provide stockholders with a return on their investments

39. CAPITAL STOCK SECTION OF THE STATEMENT OF STOCKHOLDERS’ EQUITY 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

40. 5 6 7 RETAINED EARNINGS SECTION OF THE STATEMENT OF STOCKHOLDERS’ EQUITY 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

41. Lesson 3 Review • http://accountingxtra.swlearning.com/multicolumn/xtra/games/ch15/games.html#

42. 15-3 work together

43. LESSON 15-4 Preparing a Balance Sheet • current liabilities • long-term liabilities • supporting schedule

44. Balance Sheet • Reports assets, liabilities, and stockholder’s equity on a specific date • Lets management know if should incur additional liabilities to acquire more plant assets • Information comes from work sheet balance columns and statement of stockholder’s equity

45. Balance Sheet • Assets – current and plant sections • Have related contra accounts that reduce the value (book value) • List asset balance, contra balance, book value • Liabilities – current (due within a year) and long-term (owed longer than a year) • Stockholders’ equity – capital stock and retained earnings – reported on statement of stockholders’ equity • Assets = liabilities and stockholder’s equity

46. BALANCE SHEET INFORMATION ON A WORK SHEET

47. CURRENT ASSETS SECTION OF A BALANCE SHEET 1 2 3 4 5 1. Heading 3. Book value of accounts receivable 4. Asset accounts 2. Begin assets section 5. Current assets

48. 4 5 PLANT ASSETS SECTION OF A BALANCE SHEET 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.

49. 2 LIABILITIES SECTION OF A BALANCE SHEET 1. Heading 2. Account title and amount of each current liability 1 3. Total liabilities 3

50. 3 2 4 5 6 STOCKHOLDERS’ EQUITY SECTION OF A BALANCE SHEET 1 1. Stockholders’ Equity 2. Capital stock 5. Total liabilities and stockholders’ equity 3. Retained earnings 4. Total stockholders’ equity 6. Double rules