CHAPTER SIXTEEN FINANCIAL STATEMENTS AND YEAREND ACCOUNTING FOR

CHAPTER SIXTEEN FINANCIAL STATEMENTS AND YEAR-END ACCOUNTING FOR A MERCHANDISING BUSINESS

INCOME STATEMENT § Purpose: Summarize the results of operations YES! Our § Shows: Income Statement shows we made a profit this year!! o The sources of revenue o Types of expenses o Amount of net income or loss for the period § Two forms: o Single-step o Multiple-step

Student Run Bookstore Income Statement For Year Ended December 31, 20 -- Let’s look at a Single-Step Income Statement.

SCC Student-Run Bookstore Income Statement For Year Ended December 31, 20 -Revenues: Net Sales Interest Revenue Rent Revenue Subscriptions Revenue Total Revenues $212, 800 900 8, 000 10, 000 $231, 700 Yes! I am the king of revenues!! I will do the money dance. . Money money, money!!! All the Revenue sources are listed and totaled.

SCC Student-Run Bookstore Income Statement For Year Ended December 31, 20 -Revenues: Net Sales Interest Revenue Rent Revenue Subscriptions Revenue Total Revenues Expenses: Cost of Goods Sold is listed with all the other expenses. $212, 800 900 8, 000 10, 000 $231, 700 $-111, 500

SCC Student-Run Bookstore Income Statement For Year Ended December 31, 20 -Revenues: Ribbet---These expenses are Net Sales cutting into the Interest Revenue bosses profits, he’s not going Rent Revenue to be too happy! Subscriptions Revenue Total Revenues Expenses: Cost of Goods Sold Wages Expense Advertising Expense Bank Credit Card Expense Rent Expense Supplies Expense Telephone Expense Utilities Expense $212, 800 900 8, 000 10, 000 $231, 700 $111, 500 42, 450 2, 500 1, 500 20, 000 1, 400 3, 500 12, 000

Bank Credit Card Expense Rent Expense Supplies Expense Telephone Expense La cukaracha, Utilities Expense la cukaracha! Insurance Expense. We made some money this Depreciation Expense - Building Depreciation Expense -year! Store Equipment Miscellaneous Expense Interest Expense Total Expenses Net Income 1, 500 20, 000 1, 400 3, 500 12, 000 1, 800 4, 000 3, 000 2, 250 3, 150 -209, 050 $ 22, 650 Expenses are totaled and subtracted from Revenues to determine Net Income or Loss.

Bank Credit Card Expense Rent Expense In a single step, I bet I could stuff an Supplies Expense entire chocolate Telephone Expense covered donut in my mouth. . yummm Utilities Expense Napkin please? ! Insurance Expense Depreciation Expense - Building Depreciation Expense - Store Equipment Miscellaneous Expense Interest Expense Total Expenses Net Income 1, 500 20, 000 1, 400 3, 500 12, 000 1, 800 4, 000 3, 000 2, 250 3, 150 It is called Single-Step because Expenses (including Cost of Goods Sold) are subtracted from Revenues in ONE step to determine Net Income or Loss. 209, 050 $ 22, 650

SCC Student-Run Bookstore Income Statement For Year Ended December 31, 20 -- Now let’s look at a Multi-Step Income Statement for the same company. Our mom called us a multiple birth because we have multiple personalities. . . get it. . . More than one! Ha! We are soooo funny!! Hee hee

SCC Student-Run Bookstore Income Statement For Year Ended December 31, 20 -Revenue from sales: Sales $214, 000 -1, 200 Less Sales Returns and Allow. Net Sales $212, 800 Sales revenue (less any returns, allowances or discounts) is shown first. The other revenues are listed at the end of the statement).

SCC Student-Run Bookstore Income Statement For Year Ended December 31, 20 -Revenue from sales: Sales $214, 000 -1, 200 Less Sales R &A Net Sales $212, 800 Cost of Goods Sold: $ 26, 000 Merch. Inv. Jan. 1, 20 -Purchases $105, 000 $ 800 Less: Purchases R&A -1, 800 1, 000 Purchases Disc. Net Purchases $103, 200 +300 Add Freight-In Cost of Goods Pur. +103, 500 Goods Avail. for Sale $129, 500 Less Merchandise Inv. Dec -18, 000 31 -Cost of Goods Sold 111, 500

A simple way to look at Cost of Goods Sold: Beginning Inv= 5 candy bars @$1 each Purchased another 40 candy bars @$1 each How many do you have available to sell during the year? 45 total bars. . . If you have 10 candy bars left at the end of the year what happened to the missing bars? Right! You sold them! Cost of Goods Sold = 35 bars! (45 total available -10 EI= 35 Sold)

$129, 500 -18, 000 Goods Avail. for Sale Less Merchandise Inv. Dec 31 - Cost of Goods Sold Gross Profit -111, 500 $101, 300 After Cost of Goods Sold is computed. . . Then, subtract the Cost of Goods Sold from Net Sales to arrive at Gross Profit.

$129, 500 Goods Avail. for Sale Less M. I. Dec. 31, 20 --18, 000 Cost of Goods Sold -111, 500 $101, 300 Gross Profit Operating Expenses are Operating Expenses: listed and totaled. Wages Expense $ 42, 450 2, 500 Advertising Expense 1, 500 Bank Credit Card Exp. Then, subtract the total 20, 000 Rent Expense expenses from Gross Profit. 1, 400 Supplies Expense Compute“ Income from Telephone Expense 3, 500 Operations” Utilities Expense 12, 000 Insurance Expense 1, 800 Depreciation Exp. -Bldg. 4, 000 3, 000 Deprec. Exp. -Store Eq. Miscellaneous Expense 2, 250 Total Oper. Expenses -94, 400 $ 6, 900 Income from Operations

$129, 500 Goods Avail. for Sale Less M. I. Dec. 31, 20 -18, 000 Cost of Goods Sold 111, 500 $101, 300 Gross Profit Operating Expenses: Operating Expenses can$ 42, 450 Wages Expense be further divided into 2, 500 Advertising Expense subcategories of 1, 500 Bank Credit Card Exp. Selling Expenses and Rent Expense 20, 000 General Expenses. 1, 400 The Supplies Expense How come its accountant Telephone Expense 3, 500 said a not divided up Utilities Expense raccoon got 12, 000 here? into her Insurance Expense 1, 800 garden so she Depreciation Exp. -Bldg 4, 000 didn’t have 3, 000 Deprec. Exp-Store Eq. time. Miscellaneous Expense 2, 250 Total Oper. Expenses 94, 400 $ 6, 900 Income from Operations

SELLING EXPENSE § Expenses directly associated with selling activities § Examples: o Sales Salaries Expense o Sales Commissions Expense o Advertising Expense o Bank Credit Card Expense o Delivery Expense o Depreciation Expense - Store Equipment and Fixtures

GENERAL EXPENSES § Expenses associated with administrative, office, or general operating activities § Examples: o Rent Expense o Office Salaries Expense o Office Supplies Expense o Telephone Expense o Utilities Expense o Insurance Expense o Depreciation Expense - Office Equipment

Income from Operations Other Revenues: Interest Revenue Rent Revenue Subscriptions Revenue Total Other Rev: Other Expenses: Interest Expense Net Income After you calculate, Income from Operations then the last step is to see if there any other revenues or expenses which need to be included at the bottom of the Income Statement. . . $ 6, 900 $ 900 8, 000 10, 000 $ +18, 900 -3, 150 +15, 750 $ 22, 650 Add Other Revenues and subtract Other Expenses to arrive at Net Income.

STATEMENT OF OWNER’S EQUITY § Purpose: Summarize all changes in the owner’s equity during the period § Sources needed to prepare statement: o Work sheet o General Ledger Capital account § Includes: o Beginning and ending Capital balances o Investments and withdrawals by owner o Net Income or Loss

SCC Student-Run Bookstore Statement of Owner’s Equity For Year Ended December 31, 20 -- Let’s look at the Statement of Owner’s Equity for SCC Student-Run Bookstore.

SCC Student-Run Bookstore Statement of Owner’s Equity For Year Ended December 31, 20 -Rock Studley, capital, January 1, 20 -Add additional investments Total investment Beginning capital and investments are found in the General Ledger Capital account. Rock Studley for the owner? Humm… Sounds kinda hunky. . $104, 400 10, 000 $114, 400

SCC Student-Run Bookstore Statement of Owner’s Equity For Year Ended December 31, 20 -Rock Studley, capital, January 1, 20 -Add additional investments Total investment Net Income for the year $ 22, 650 Net Income is found on the work sheet and on the Income Statement (which we prepared right before this). $104, 400 10, 000 $114, 400

SCC Student-Run Bookstore Statement of Owner’s Equity For Year Ended December 31, 20 -Rock Studley, capital, January 1, 20 -Add additional investments Total investment Net Income for the year $ 22, 650 Less withdrawals for the year -20, 000 Increase in Capital Withdrawals, from the worksheet, are subtracted from Net Income to determine the increase in capital this period. $104, 400 +10, 000 $114, 400 2, 650

SCC Student-Run Bookstore Statement of Owner’s Equity For Year Ended December 31, 20 -Rock Studley, Capital, January 1, 20 -Add additional investments From first Total investment day of period to Net Income for the year $ 22, 650 Less withdrawals for the yearlast day of 20, 000 period Increase in Capital Rock Studley, Capital, December 31, 20 -- The ending capital on December 31, is computed. Remember, that this statement shows the changes in the Owner’s Capital from the first day to the last day of the period. $104, 400 10, 000 $114, 400 2, 650 $117, 050

SCC Student-Run Bookstore Balance Sheet December 31, 20 -- Let’s look at The SCC Student-Run Bookstore’s Classified Balance Sheet. It’s the last one! I promise, cross my heart and hope to die—stick a needle in my eye if I am lying! Argh!@#% Not another Balance Sheet! You’re killing me!

SCC Student-Run Bookstore Balance Sheet December 31, 20 -Assets Current assets:

CURRENT ASSETS § Cash and other assets which are: o Expected to be converted into cash, or o Consumed within one year or the normal operating cycle, whichever is longer § Examples: o Cash, Receivables, o merchandise inventory o and prepaid expenses § Listed in order of liquidity: o Most liquid shown first

OPERATING CYCLE § Length of time generally required for a business to: o Buy inventory o Sell it o Collect the cash § Generally, it is less than one year.

SCC Student-Run Bookstore Balance Sheet December 31, 20 -Assets Current assets: Cash Accounts Receivable Merchandise Inventory Supplies Prepaid Insurance Total current assets $20, 000 15, 000 18, 000 400 600 Merchandise Inventory is a current asset that is unique to merchandising businesses. $54, 000

PROPERTY, PLANT & EQUIPMENT § Assets that are expected to be used: o For more than one year o In the operation of a business § Examples: o Land, Buildings, o Office Equipment, Store Equipment, and Delivery Equipment

SCC Student-Run Bookstore Balance Sheet December 31, 20 -Assets Current assets: Cash Accounts Receivable Merchandise Inventory Supplies Prepaid Insurance Total current assets Property, plant, and equipment: Land Building $ 90, 000 20, 000 Less accumulated deprec. Store Equipment $ 50, 000 Less accumulated deprec. 18, 000 Total prop. , pt. , and equip. $20, 000 15, 000 18, 000 400 600 $ 54, 000 $10, 000 70, 000 32, 000 $112, 000

Total current assets Property, plant, and equipment: Land Building Less accumulated deprec. Store Equipment Less accumulated deprec. $ 54, 000 $10, 000 $90, 000 20, 000 $50, 000 18, 000 Total property, plant and equip. Total assets Don’t you just love it when accountants say you have great assets? ? That is so sexis t! 70, 000 32, 000 112, 000 $166, 000 Yeah! Especially if they’re hot!

Total assets Liabilities Current liabilities: $166, 000

CURRENT LIABILITIES § Obligations that are due within one year or the normal operating cycle, whichever is longer § Require the use of current assets § Examples: o Notes Payable, Accounts Payable, Wages Payable, Utilities Payable, Unearned Subscriptions Revenue, and the current portion of Mortgage Payable

$166, 000 Total assets Liabilities Current liabilities: Notes Payable Accounts Payable Wages Payable Utilities Payable Unearned subscriptions revenue Mortgage Pay. (current portion) Total current liabilities I better hurry up and earn some more money so I can pay off all of these debts this year! $ 5, 000 10, 000 450 1, 500 2, 000 500 $19, 450

LONG-TERM LIABILITIES § Obligations that will extend beyond one year or the normal operation cycle, whichever is longer § Mortgage Payable is a common long-term liability. o Used to reflect an obligation that is secured by a mortgage on certain property

$166, 000 Total assets Liabilities Current liabilities: Notes Payable Accounts Payable Wages Payable Utilities Payable Unearned subscriptions revenue Mortgage Pay. (current portion) Total current liabilities Long-term liabilities: Mortgage Payable Less current portion Total liabilities $ 5, 000 10, 000 450 1, 500 2, 000 500 $19, 450 $30, 000 500 29, 500 $ 48, 950

OWNER’S EQUITY § Accounts are determined by type of organization: o Sole Proprietorships: • One capital account

$166, 000 Total assets Liabilities Current liabilities: Notes Payable Accounts Payable Wages Payable Utilities Payable Unearned subscriptions revenue Mortgage Pay. (current portion) Total current liabilities Long-term liabilities: Mortgage Payable Less current portion Total liabilities Owner’s Equity Rock Studley, Capital Total liabilities and owner’s equity $ 5, 000 10, 000 450 1, 500 2, 000 500 $ 19, 450 $30, 000 500 29, 500 $ 48, 950 117, 050 $166, 000

CLOSING ENTRIES § Similar to closing entries of a service business: o But additional merchandising accounts that also must be closed § Easiest to use work sheet to prepare closing entries

ACCOUNT TITLE 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 INCOME STMT BALANCE SHEET DR. CR. Rock Studley, Capital 20, 000 Rock Studley, Drawing Income Summary 26, 000 18, 000 214, 000 Sales Returns & Allow. 1, 200 Interest Revenue 900 Rent Revenue 8000 10, 000 Subscriptions Revenue Purchases 105, 000 800 Purchases Ret. & Allow. Purchases Discounts 1, 000 Freight-In 300 42, 450 Wages Expense Advertising Expense 2, 500 Entry#1 Bank Credit Card Expense 1, 500 credit balance Rent Expense DEBIT - all 20, 000 1, 400 accounts Supplies Expense Income Statement 3, 500 Telephone Expense CREDIT - Income 12, 000 Summary Utilities Expense Insurance Expense 114, 400

GENERAL JOURNAL DATE DESCRIPTION Closing Entries 1 20 -2 Dec. 31 Sales 3 Subscriptions Revenue 4 Interest Revenue 5 6 7 8 9 10 11 Rent Revenue Purch. Returns & Allow. Purchases Discounts Income Summary PR DEBIT CREDIT 214, 000 10, 000 900 8, 000 800 1, 000 234, 700

ACCOUNT TITLE 21 Sales Returns & Allow. 25 26 27 28 29 30 31 32 33 34 35 36 INCOME STMT DR. CR. BALANCE SHEET CR. DR. 1, 200 Purchases 105, 000 Purch. Returns & Allow. Purchases Discounts 300 Freight-In Wages Expense 42, 450 Advertising Expense 2, 500 1, 500 Bank Credit Card Exp. Rent Expense 20, 000 1, 400 Supplies Expense Telephone Expense 3, 500 Utilities Expense 12, 000 Insurance Expense 1, 800 4, 000 Depr. Expense -Building 3, 000 Depr. Expense -Store Eq. Miscellaneous Expense 2, 250 Interest Expense 3, 150 800 1, 000 Entry #2: DEBIT- Income Summary CREDIT- Income Statement debit balance accts.

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 31 Income Summary Sales Returns & Allow. Purchases Freight-In Wages Expense Advertising Expense Bank Credit Card Exp. Rent Expense Supplies Expense Telephone Expense Utilities Expense Insurance Expense Depreciation Exp. - Bldg. Deprec. Exp. - Store Eq. Miscellaneous Expense Interest Expense 204, 050 1, 200 105, 000 300 42, 450 2, 500 1, 500 20, 000 1, 400 3, 500 12, 000 1, 800 4, 000 3, 000 2, 250 3, 150

ACCOUNT TITLE 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 INCOME STMT DR. CR. BALANCE SHEET DR. CR. Purchases 105, 000 800 Purchases Ret. & Allow. Purchases Discounts 1, 000 300 Freight-In 42, 450 Wages Expense Advertising Expense 2, 500 #3 Entry Bank Credit Card Exp 1, 500 DEBIT Income 20, 000 Summary Rent Expense Supplies Expense CREDIT -1, 400 Capital account 3, 500 amount Telephone Expense for Net Income Utilities Expense 12, 000 Insurance Expense 1, 800 4, 000 Depr. Expense Building Depr. Expense -Store Eq. 3, 000 2, 250 Miscellaneous Expense 3, 150 Interest Expense 230, 050 252, 700 224, 000 22, 650 Net Income 252, 600 252, 700 224, 000 201, 350 22, 650 224, 000

20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 Utilities Expense Insurance Expense Deprec. Exp. - Building Deprec. Exp. - Store Equip. Miscellaneous Expense Interest Expense 31 Income Summary Rock Studley, Capital 12, 000 1, 800 4, 000 3, 000 2, 250 3, 150 22, 650

ACCOUNT TITLE 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 INCOME STMT CR. DR. BALANCE SHEET CR. DR. Rock Studley, Capital 20, 000 Rock Studley, Drawing Income Summary 26, 000 18, 000 214, 000 Sales Returns & Allow. 1, 200 Interest Revenue 900 Rent Revenue 8000 10, 000 Subscriptions Revenue Purchases 105, 000# 4 Entry 800 Purchases Ret. & Allow Purchases Discounts DEBIT - Capital 1, 000 Freight-In. CREDIT to close the 300 Drawing Account 42, 450 Wages Expense Advertising Expense 2, 500 Bank Credit Card Expense 1, 500 Rent Expense 20, 000 1, 400 Supplies Expense 3, 500 Telephone Expense 12, 000 Utilities Expense Insurance Expense 114, 400

20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 Utilities Expense Insurance Expense Deprec. Exp. - Building Deprec. Exp. - Store Equip. Miscellaneous Expense Interest Expense 12, 000 1, 800 4, 000 3, 000 2, 250 3, 150 31 Income Summary Rock Studley, Capital 22, 650 31 Rock Studley, Capital Rock Studley, Drawing 20, 000 22, 650 20, 000

After posting the four closing journal entries: We are almost finished!! We need to verify that our General Ledger still balances. . . We will prepare another Trial Balance. This last Trial Balance is called the Post-Closing Trial Balance

POST-CLOSING TRIAL BALANCE § Trial Balance prepared after the closing journal entries have been posted. § Purpose: to prove that the general ledger is in balance at the beginning of a new accounting period.

SCC Student-Run Bookstore Post-Closing Trial Balance December, 31, 20 -Account Title Acct # Debit Bal Credit Bal 20, 000 101 Cash Accounts Receivable 122 15, 000 Merchandise Inventory 131 18, 000 Supplies 400 141 145 600 Prepaid Insurance 161 10, 000 Land Building 90, 000 171 Accumulated Depreciation - Building 171. 1 20, 000 Store Equipment 181 50, 000 181. 1 18, 000 Accumulated Depreciation - Store Eq. 201 Notes Payable 5, 000 10, 000 Accounts Payable 202 219 Wages Payable 450 231 1, 500 Sales Tax Payable 241 2, 000 Unearned Subscriptions Revenue 30, 000 251 Mortgage Payable 117, 050 Rock Studley, Capital 311 204, 000

REVERSING ENTRIES § Prepared at the beginning of an accounting period § Reverses adjusting entries made last period. § To simplify the recording of transactions in the new accounting period. § Except for the first year of operations, only adjustments that INCREASED an ASSET OR LIABILITY account from a zero balance Did I mention should be reversed. that reversing entries are optional!?