Preparing an Income Statement Chapter 7 Objectives Covers

Preparing an Income Statement Chapter 7

Objectives Covers the Preparation of an Income Statement and Balance Sheet for a proprietorship. Financial Statement Analysis of these statements.

Terms Stakeholders Any persons or groups who will be affected by an action Component Percentage The percentage relationship between one financial statement item and the total that includes that item. Adequate Disclosure Accounting Concept is applied when financial statements contain all information necessary to understand a business’s financial condition.

Reporting Financial Information We take information from our general ledger and help summarize, organize, and report it to the owners and managers. Accounting Concept – Adequate Disclosure Tech. Know prepares two financial statements Income Statement and Balance Sheet Accounting When Concept Going Concern financial statements are prepared with the expectation that a business will remain in operation indefinitely.

Income Statement Information on a Work Sheet

Income 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 14 Double lines 11 Single line 13 Record net income 10 Calculate net income

Component Percentage Analysis Revenue reported on an income statement is compared to two components: 1. Total Expenses 2. Net Income In making decisions a manager analyzes relationships between these two components. The percentage relationship between one financial statement item and the total that includes that item is called a component percentages.

Acceptable Component Percentages How do you know what is acceptable? Various industry organizations public average percentages for similar businesses. In the future, Tech. Know will also utilize previous fiscal periods as comparisons.

Total Expenses Component Percentages An acceptable total expenses component percentage is not more than 55% Tech. Know’s is 41. 1% Is it acceptable? Yes because it is less than 55% Total Expenses Total Sales = Total Expenses Component Percentages $1, 466 $3, 565 = 41. 1%

Net Income Component Percentage Acceptable Net Income CP is not less than 45% Tech. Know’s Is is 58. 9% it acceptable? Yes, it is greater than 45% and is acceptable. Net Income Total Sales = Total Expenses Component Percentages $2, 099 $3, 565 = 58. 9%

Component Percentage Analysis

Multiple Revenue Tech. Know receives revenue from only on source High. Note receives revenue from two sources, the sale of services for music lessons and services to repair musical instruments. Business owner wants to know revenue from each source. Two revenue accounts are used. Sales-Lessons and Sales-Repairs.

Company Ex. Of Two Revenue Sources 5 Revenue Account titles Total Revenue 1 2 3 Revenue amounts 4 Net Loss 6 7 Record Net Loss Total of revenue

Audit Your Understanding List the four sections of an income statement. 1. Heading 2. Revenue 3. Expenses 4. Net income or net loss What is the formula for calculating the total expenses component percentage? Total Expenses Total Sales = Total Expenses What is the formula for calculating the net income component percentage? Net Income Total Sales = Net Income

7. 2 Balance Sheet information on a Work Sheet

LESSON 7 -2 Balance Sheet Information on a Work Sheet

Objectives How to prepare a balance sheet using data from the work sheet

Balance Sheet Reports financial information on a specific date, indicating the financial condition of a business. Financial What condition = Financial Strength makes a company strong? Fewer liabilities and adequate assets You want your assets to be greater than your liabilities

Balance Sheet Information about assets, liabilities, and owner’s equity is in the general ledger accounts or from a work sheet. The information is easier to use if reported in an organized manner like a balance sheet. Found in two places on the work sheet Account Titles are obtained from the work sheet’s Account Title Column’s Account balances are obtained from the work sheet’s Balance Sheet columns.

Balance Sheet 1. Heading Answer’s the questions Who? What? and When? 2. Assets 3. Liabilities 4. Owner’s Equity

BALANCE SHEET 21

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.

ASSETS AND LIABILITIES SECTIONS OF A BALANCE SHEET

Calculating Capital Account Balance + Net Income - Drawing = Current Capital Account Balance – Net Loss – Drawing Account Balance = Current Capital OR use your formula! Assets = Liab. – OE Just subtract your Liab. From Assets

OWNER’S EQUITY SECTION OF A BALANCE SHEET 25

OWNER’S EQUITY REPORTED IN DETAIL ON A BALANCE SHEET

Audit Your Understanding List the four sections on a balance sheet. What is the formula for calculating current capital?