1 Chapter 15 page 454 Objectives Define accounting

1 Chapter 15 page 454 Objectives: • Define accounting terms & identify accounting concepts & practices related to financial statements for a merchandising business organized as a corporation • Prepare an income statement for a merchandising business organized as a corporation • Analyze an income statement using component percentages and financial ratios • Prepare a statement of stockholders’ equity for a merchandising business organized as a corporation • Prepare a balance sheet for a merchandising business organized as a corporation CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -1

2 TERMS REVIEW n net sales n cost of merchandise sold n gross profit on sales n financial ratio n earnings per share n price-earning ratio page 454 n statement of stockholders’ equity n par value n current liabilities n long-term liabilities n supporting schedule CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -1

LESSON 15 -1: Preparing an Income Statement • An income statement is used to report a business’s financial progress during a fiscal period. • Information from a completed work sheet is used to prepare an income statement. • The income statement of a merchandising business has 3 main sections: 1. Revenue section 2. Cost of Merchandise Sold section 3. Expenses section CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

4 INCOME STATEMENT INFORMATION ON A WORK SHEET CENTURY 21 ACCOUNTING © 2009 South-Western,

Revenue Section of an Income Statement for a Merchandising Business • The heading should include three parts: 1. Business name 2. Statement name—Income Statement 3. Period of report— “For year ended December 31, 20—” • The Revenue section is calculated from three amounts found on the work sheet. The sum of the two contra accounts, Sales Discount and Sales Returns & Allowances, is deducted from Sales to calculate Net Sales. • Net Sales—total sales less sales discount and sales return and allowances CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

6 REVENUE SECTION OF AN INCOME STATEMENT page 449 FOR A MERCHANDISING BUSINESS 1 2 3 4 5 8 1. 2. 3. 4. 5. Heading Revenue section Title of revenue account Sales amount Less contra accounts 6 6. 7. 8. 9. 7 9 Contra account amounts Contra account total Net Sales Net sales amount CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -1

7 COST OF MERCHANDISE SOLD SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING page 450 BUSINESS • Cost of merchandise sold—the original price of all merchandise sold during a fiscal period • The Cost of Merchandise Sold section is unique to merchandising businesses. • The cost of merchandise sold is calculated from five amounts found on the work sheet. Three of these amounts are found in the Income Statement columns of the work sheet. Other amounts are found in the Trial Balance and Balance Sheet columns of the worksheet. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -1

8 COST OF MERCHANDISE SOLD SECTION OF AN INCOME STATEMENT FOR A MERCHANDISING page 450 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 5 6 4 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 6. Cost of merchandise sold LESSON 15 -1

9 COMPLETING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS page 452 • Gross profit on sales—the revenue remaining after cost of merchandise sold has been deducted; sales less cost of merchandise sold • Gross profit on sales is important information used by management in making decisions about a business. Gross profit is the amount remaining that is available to cover expenses and to provide a profit. • Each expense, except for federal income tax expense, is listed and the total entered on the income statement. • Corporations calculate net income before and after federal income taxes. • The percentage relationship between one financial statement item and the total that includes that item is known as a component percentage. • Component percentages are calculated for each of the significant amounts. • Component percentages are calculated by dividing each significant amount by the sales amount. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -1

10 COMPLETING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS 7 1 2 3 4 5 6 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning page 452 1. Gross Profit on Sales 2. Expenses section 3. Net Income before Federal Income Tax 4. Less Federal Income Tax Expense 5. Net Income after Federal Income Tax 6. Double lines 7. Component percentage LESSON 15 -1

LESSON 15 -1 Let’s do Work Together 15 -1 and On Your Own 15

LESSON 15 -2: Analyzing an Income Statement A percentage relationship between one financial statement item and the total that includes that item is known as a component percentage. Component Acceptable Industry percentages are useful Standards only if the following Sales 100% are considered: Cost of merchandise Not more than 46% industry standards, sold past performance of Gross profit on sales Not less than 54% the company in more Total expenses Not more than 35% than one fiscal period, Net income before Not less than 19% and company’s goals federal income tax and objectives. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

Analysis of Component Percentages 13 page 456 • Cost of Merchandise Sold Component Percentage—The cost of merchandise sold is a major cost and must be kept as low as possible • Gross Profit on Sales Component Percentage—Gross profit must be large enough to cover total expenses and the desired amount of net income • Total Expenses Component Percentage—Total expenses must be less than gross profit on sales to provide a desirable net income • Net Income before Federal Income Tax Component Percentage— The component percentage for net income before federal income tax shows the progress being made by a business. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -2

14 ANALYZING AN INCOME STATEMENT SHOWING A NET LOSS page 457 • When a business’s total expenses are greater than the gross profit on sales, the difference is known as a net loss. • A business must analyze the income statement to determine the reason for the net loss. Calculating component percentages can help locate the reason for the net loss. • A tax refund (benefit) reduces the net loss. • Negative amounts on a financial statement are written within parentheses. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -2

15 ANALYZING AN INCOME STATEMENT SHOWING A NET LOSS CENTURY 21 ACCOUNTING © 2009

16 FINANCIAL RATIOS page 459 Financial ratio—a comparison between two items of financial info Earnings per share (EPS)—the amount of net income after federal income tax belonging to a single share of stock Net Income Number of Earnings after Federal ÷ Shares = per Share Income Tax Outstanding $80, 313. 95 ÷ 2, 500 = $32. 13 Earnings per share is the most widely recognized measure of financial performance. EPS is compared to prior year’s earnings per share or the market price of the stock. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -2

17 FINANCIAL RATIOS page 459 Price earnings ratio (P-E ratio)—relationship between the market value per share and earnings per share of a stock Earnings Market Price-Earnings ÷ per = per Share Ratio Share $345. 00 ÷ $32. 13 = 10. 7 The price earnings ratio provides investors with information concerning the price of the stock relative to the earnings. Low price earnings ratios are typically associated with slow growth companies. Companies expected to have dynamic growth in future earnings typically have a high price earnings ratio. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -2

LESSON 15 -2 Let’s do Work Together 15 -2 and On Your Own 15

LESSON 15 -3: Preparing a Statement of Stockholders’ Equity • Statement of Stockholders’ Equity—financial statement that shows changes in a corporation’s ownership for a fiscal period • Contains two sections: capital stock and retained earnings • Par Value—a value assigned to a share of stock and printed on the stock certificate CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

20 CAPITAL STOCK SECTION OF THE STATEMENT page 461 OF STOCKHOLDERS’ EQUITY 1 2 3 1. 2. 3. 4. 5. 4 5 Heading Capital Stock and Par Value Stock at the beginning of the year Stock issued during the year Total stock issued at the end of the year CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -3

21 RETAINED EARNINGS SECTION OF THE STATEMENT OF STOCKHOLDERS’ EQUITY 1 3 2 page 462 5 4 6 1. Retained Earnings 2. Beginning balance 3. Net income after federal income tax 4. 5. 6. 7. 7 Dividends declared Increase in retained earnings Ending balance Total stockholders’ equity CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -3

LESSON 15 -3 Let’s do Work Together 15 -3 and On Your Own 15

LESSON 15 -4: Preparing a Balance Sheet • A balance sheet reports a business’s financial condition on a specific date. • A balance sheet may be prepared in account form or report form. • Information used to prepare a balance sheet is obtained from two sources: 1) the Balance Sheet columns of a work sheet and 2) the statement of stockholders’ equity. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

24 CURRENT ASSETS SECTION OF A BALANCE SHEET page 465 1 2 3 4 5 1. Heading 2. Begin assets section 3. Book value of accounts receivable 4. Remaining current asset accounts 5. Current assets CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -4

25 PLANT ASSETS SECTION OF A BALANCE SHEET page 466 1 2 4 3 1. 2. 3. 4. 5. 5 Write the heading Plant Assets. Calculate the book value of office equipment. Use the same procedure to calculate the book value of store equipment. Calculate total plant assets. Calculate total assets. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -4

26 LIABILITIES SECTION OF A BALANCE SHEET page 467 1. Heading 2. Account title and amount of each current liability 3. Total liabilities 1 Current liabilities— liabilities due within a short time, usually within a year 2 3 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Long term liabilities —liabilities owed for more than a year LESSON 15 -4

27 STOCKHOLDERS’ EQUITY SECTION OF A BALANCE SHEET page 468 • Capital Stock—the amount invested by stockholders • Retained Earnings—the amount retained by the corporation and not yet distributed to stockholders • Amounts in the Stockholders’ Equity section are obtained from the statement of stockholders’ equity CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 15 -4

28 STOCKHOLDERS’ EQUITY SECTION OF A BALANCE SHEET 1 3 page 468 2 4 5 1. 2. 3. 4. Stockholders’ Equity Capital stock Retained earnings Total stockholders’ equity 5. Total liabilities and stockholders’ equity 6. Double rule CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 6 LESSON 15 -4

29 COMPLETED BALANCE SHEET page 469 (continued on next slide) CENTURY 21 ACCOUNTING ©

30 COMPLETED BALANCE SHEET page 469 (continued from previous slide) CENTURY 21 ACCOUNTING ©

Supporting Schedules for a Balance Sheet • Supporting schedule—a report prepared to give details about an item on a principal financial statement • Schedule of accounts payable—shows the balance for each vendor • Schedule of accounts receivable—shows the balance for each customer CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning