LESSON 7 1 Preparing an Income Statement http

LESSON 7 -1 Preparing an Income Statement http: //www. youtube. com/watch? v=Z 7 C 4 cz 2 Hke. Y ACCOUNTING January 30, 2014

Welcome to Chapter 7 � Chapter 7 Covers the preparation of an income statement and a balance sheet for a proprietorship. � Not only is statement preparation covered but also the financial statement analysis of these statements (in simplest form).

American Eagle Outfitters Accounting in the Real World � Answer the critical Thinking questions that follow. Warm Up

Internet Activity � Chose two companies in the same industry. Go to the homepage for each company and search for its most current financial statements. � Answer the questions that follow. � HINT: Total expenses / Total Revenue �Net Income (loss) / total revenue

Chapter 7 -1 Reporting Financial Information � Adequate Disclosure › Applied when financial statements contain all information necessary to understand a business’s financial condition › Without it, financial information would be incomplete.

Objectives � Define Accounting Terms related to financial statements for a service business organized as a proprietorship. � Identify accounting concepts and practices related to preparation of an income statement. � Prepare an income statement and analyze an income statement using component percentages.

Question for YOU? � How many of you would work for a year, not knowing how much you were going to make during that year? Compare this with a company that waits until the end of the year to determine how much the company “made” during the year. This helps explain why a business would prepare an income statement every month-even if it is not required to do so.

Terminology 7 -1 � Component percentage: the percentage relationship between one financial statement item and the total that includes that item. (p. 184) � Stakeholders: any persons or groups who will be affected by an action (p. 181)

Important!!! � Income Statement reports information over a specific period of time. � The date used to prepare the income statement is obtained from the Income statement columns of a work sheet. � Remember that the heading of most financial statements answers the questions: WHO? WHAT? And WHEN?

INCOME STATEMENT INFORMATION ON A WORK SHEET LESSON 7 -1 10 page 182

HEADING OF AN INCOME STATEMENT page 182 1 2 3 1. Center the name of the company on the first line. 2. Center the name of the report on the second line. 3. Center the date of the report on the third line. LESSON 7 -1 11

Remember Revenue and Expenses? � Revenue an increase in owner’s equity resulting from the operation of a business. (p. 14) � Expense a decrease in owner’s equity resulting from the operation of a business. (p. 15)

Income Statement has 4 sections…. � Heading � Revenue � Expenses � Net Income or Loss � NOTE: the two columns on the income statement are not debit and credit columns.

Before we look…. � The account titles are indented under section titles to make the sections titles easier to read � The account balances are listed in the first column, totals in the second column.

REVENUE, EXPENSES, AND NET INCOME SECTIONS OF AN INCOME page 183 STATEMENT 7 Single line Revenue 1 Expenses 4 Account titles 5 Total expenses 8 2 Account title 3 6 Revenue amount Expense amount 9 Total of expenses 12 Net Income 11 Single line 14 Double lines 13 Record net income 10 Calculate net income LESSON 7 -1 15

COMPONENT PERCENTAGE ANALYSIS OF AN INCOME STATEMENT LESSON 7 -1 16 page 184

Character Counts � Try Aplia(Work Together and On Your Own) � Character Counts Key Term-Stakeholders……

Question for you…. � Can you name a business that might have more than one source of revenue from services? � Example: A music store might offer lessons and repairs on instruments.

REMINDER! � The data for the income statement is found on the work sheet. � Today, we will focus on how two sources of revenue can be documented on an income statement but it must be listed separately, similar to the way that each expense is listed.

What Happens when Total Expenses Exceed Total Revenue? � There � Let’s is a NET LOSS. take a look!!!!!

INCOME STATEMENT WITH TWO SOURCES OF REVENUE AND A NET LOSS 5 Revenue Account titles Total Revenue 1 2 3 Revenue amounts 4 Net Loss page 185 6 7 LESSON 7 -1 Record Net Loss 21 Total of revenue

TERMS REVIEW page 186 stakeholders � component percentage � � Component percentage: the percentage relationship between one financial statement item and the total that includes that item. (p. 184) � Stakeholders: any persons or groups who will be affected by an action (p. 181) LESSON 7 -1 22

Your Assignment � Aplia Application Problem 7 -1 � Math Work Sheet � Part A & Part B. � On the bottom of the worksheet answer the following questions

LESSON 7 -2 Balance Sheet Information on a Work Sheet

Objective � Identify accounting concept and practices related to the preparation of a balance sheet for a service business organized as a proprietorship. � Prepare a Balance Sheet for a service business organized as a proprietorship.

Do you Remember the Accounting Equation?

Do you Remember the Accounting Equation? � ASSETS = LIABILITIES + OWNERS EQUITY � The Balance Sheet uses the same format as the accounting equation. � This part of the chapter will discuss preparing a balance sheet using data on the work sheet.

Before we look at a Balance Sheet… � Balance Sheet Reports information for a SPECIFIC date. � The data used to prepare the balance sheet can be obtained from the balance sheet columns of the worksheet. � The heading of most financial statements answers the questions: WHO? WHAT & WHEN?

HEADING OF A BALANCE SHEET 1 2 3 1. Center the name of the company on the first line. 2. Center the name of the report on the second line. 3. Center the date of the report on the third line. LESSON 7 -2 29 page 187

What’s on a Balance Sheet? � Assets � Liabilities � Owner’s Equity

BALANCE SHEET The Information needed to prepare the assets section is obtained from the Balance Sheet Debit Column. LESSON 7 -2 31 page 187

BALANCE SHEET The Information needed to prepare the liabilities section is obtained from the Balance Sheet Credit Column. LESSON 7 -2 32 page 187

ASSETS AND LIABILITIES SECTIONS OF A BALANCE page 188 SHEET 6 Liability amounts Account titles 1 Assets Liabilities 4 Total Liabilities 8 Single line 2 Account titles 3 Asset amounts LESSON 7 -2 5 33 7 Total of liabilities 9

Lets Stop Here a Moment. � Read “Case for Critical Thinking” on page 197 and answer the question that follow. You can use the back of the work sheet provided to you. � Then Try Applied Communication on the same page and write down your advice to your new assistant.

Owner’s Equity � Owners Equity-the amount remaining after the value of all liabilities is subtracted from the value of all assets � The information needed to prepare the owner’s equity section of a balance sheet is obtained from the Balance Sheet columns of the work sheet

How to calculate the new capital balance… � Capital Account Balance-Net Loss-Drawing Account Balance=Current Capital (Page 189) � Lets look at the ten steps for preparing the owner’s equity section of a balance sheet.

1 OWNER’S EQUITY SECTION OF A BALANCE SHEET Owner’s Equity 4 Single line 2 Account title page 189 Total of assets 5 Capital amount 3 6 Total Assets Compare totals 7 Total Liab. and Owner’s Eq. 10 9 Double lines Total of Liabilities and Owner’s Equity LESSON 7 -2 37 8

Let’s look deeper… � The Owner’s Equity section of a balance sheet can show more detail than that shown on a balance sheet. �A business may choose to show more details in the owner’s equity section. � There are 9 steps used to prepare the owner’s equity section reported in detail on a balance sheet.

3 OWNER’S EQUITY REPORTED IN DETAIL ON A BALANCE page 190 SHEET Net Income Current capital amount 8 1 Beginning capital Difference Beginning capital amount 7 4 Ending capital Drawing 5 9 6 2 Single line Total Liabilities and Owner’s Equity LESSON 7 -2 39

Today… � Aplia 7 -2 Work Together and On Your Own. � Chapter 7 Study Guide � Extra Study Tools AND � Take Online Tutorial Quiz › www. c 21 accounting. com

Exit Ticket � List the four sections on a balance sheet. � What is the formula for calculating current capital?