Financial Statements for a CorporationFinancial Statements for a Corporation

Why It’s ImportantThe income statement reports the net

income or loss for the period and indicates whether or not the business is operating efficiently.

Why It’s ImportantThe income statement reports the net

income or loss for the period and indicates whether or not the business is operating efficiently.

Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)

Key Terms net sales

net purchases

gross profit on sales

operating expenses

Key Terms net sales

net purchases

gross profit on sales

operating expenses

selling expenses administrative

expenses operating income vertical analysis

selling expenses administrative

expenses operating income vertical analysis

The Income Statement

An income statement for a merchandising business has five sections:

The Income Statement

An income statement for a merchandising business has five sections:

Revenue Revenue

Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)

Cost of Merchandise Sold Cost of Merchandise Sold

Gross Profit on Sales Gross Profit on Sales

Operating Expenses Operating Expenses

Net Income (or Loss) Net Income (or Loss)

The Revenue Section

This section reports the net sales for the period.

The Revenue Section

This section reports the net sales for the period.

Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)

Cost of Merchandise SoldCost of Merchandise Sold

Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)

The Cost of Merchandise Sold Section

The “cost of merchandise sold” is the actual cost to the business of the merchandise that was sold to customers during the period.

The Cost of Merchandise Sold Section

The “cost of merchandise sold” is the actual cost to the business of the merchandise that was sold to customers during the period.

Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)

Beginning Merchandise Inventory

+ Net Purchases During the Period

Cost of Merchandise Available for Sale

– Ending Merchandise Inventory

Cost of Merchandise Sold

Beginning Merchandise Inventory

+ Net Purchases During the Period

Cost of Merchandise Available for Sale

– Ending Merchandise Inventory

Cost of Merchandise Sold

Net Purchases

Net purchases is all the costs related

to merchandise purchased during the

period.

Net Purchases

Net purchases is all the costs related

to merchandise purchased during the

period.

Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)

Purchases

+ Transportation In

Cost of Delivered Merchandise

– Purchases Discounts

– Purchases Returns and Allowances

Net Purchases

Purchases

+ Transportation In

Cost of Delivered Merchandise

– Purchases Discounts

– Purchases Returns and Allowances

Net Purchases

The Gross Profit on Sales SectionThe Gross Profit on Sales Section

The gross profit on sales is the

profit made during the period

before operating expenses are

deducted.

Gross profit on sales is found by

subtracting the cost of

merchandise sold from net sales.

The gross profit on sales is the

profit made during the period

before operating expenses are

deducted.

Gross profit on sales is found by

subtracting the cost of

merchandise sold from net sales.

Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)

The Operating Expenses SectionThe Operating Expenses Section

Operating expenses are the

costs of the goods and

services used in the process

of earning revenue for the

business.

Operating expenses are the

costs of the goods and

services used in the process

of earning revenue for the

business.

Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)

The Net Income SectionThe Net Income Section

The final section of the income statement reports the net income (or net loss) for the period.

Operating income is the amount of income earned before federal corporate income taxes are deducted.

To calculate operating income, subtract the total operating expenses from the gross profit on sales.

The final section of the income statement reports the net income (or net loss) for the period.

Operating income is the amount of income earned before federal corporate income taxes are deducted.

To calculate operating income, subtract the total operating expenses from the gross profit on sales.

Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)

Section 2 The Income Statement (con’t.)Section 2 The Income Statement (con’t.)

• Net Sales = Sales - Sales Discounts - Sales Returns and Allowances

• Cost of Merchandise Sold=Beginning Inventory + Net purchases –Ending Inventory **(Net Purchases=Purchases + Transportation In - Purchases

Discounts - Purchases Returns and Allowances)

• Gross Profit=Net Sales – Cost of Merchandise Sold

• Operating Income =Gross Profit – Operating Expense

• Net Income Before Taxes=Operating Income +/- Net Addition/Deductions

• Net Income=Net Income Before Taxes – Fed. Corp. Income Tax Expense

The Income Statement FormulasThe Income Statement Formulas

The Statement of Retained Earnings

A statement of retained earnings

reports the changes that take place

in the Retained Earnings account

during the period. These changes

result from business operations and

the distribution of earnings to

stockholders through dividends.

The Statement of Retained Earnings

A statement of retained earnings

reports the changes that take place

in the Retained Earnings account

during the period. These changes

result from business operations and

the distribution of earnings to

stockholders through dividends.

Section 3 The Statement of Retained Earnings and the Balance Sheet (con’t.)

Section 3 The Statement of Retained Earnings and the Balance Sheet (con’t.)

Stockholders’ EquityStockholders’ Equity

Equity contributed by stock-

holders

Equity earned through business

profits

Retained earnings represents the

increase in stockholders’ equity

from the portion of net income

not distributed to the

stockholders.

Equity contributed by stock-

holders

Equity earned through business

profits

Retained earnings represents the

increase in stockholders’ equity

from the portion of net income

not distributed to the

stockholders.

Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)

The Statement of Retained Earnings (con’t.)

The Statement of Retained Earnings (con’t.)

Section 3 The Statement of Retained Earnings and the Balance Sheet (con’t.)

Section 3 The Statement of Retained Earnings and the Balance Sheet (con’t.)

The Balance SheetThe Balance Sheet

The balance sheet reports

the balances of all asset,

liability, and stockholders’

equity accounts for a specific

date.

The balance sheet reports

the balances of all asset,

liability, and stockholders’

equity accounts for a specific

date.

Section 3 The Statement of Retained Earnings and the Balance Sheet (con’t.)

Section 3 The Statement of Retained Earnings and the Balance Sheet (con’t.)

The Balance Sheet (con’t.)The Balance Sheet (con’t.)

Section 3 The Balance Sheet (con’t.)Section 3 The Balance Sheet (con’t.)

Find on Statement of Changes in O.E

All balances found on the worksheet

Capital Stock 20,000Retained Earnings 6,050 Total Stockholders Equity 26,050Total Liabilities and Stockholders’Equity 37,775

Characteristics of Financial Information

Financial statements are used by many groups.

Characteristics of Financial Information

Financial statements are used by many groups.

Managers analyze the financial

statements to help evaluate past

performance and to make informed

decisions.

Stockholders are interested in the

performance, potential future growth,

and success of the business.

Managers analyze the financial

statements to help evaluate past

performance and to make informed

decisions.

Stockholders are interested in the

performance, potential future growth,

and success of the business.

Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)

Characteristics of Financial Information (con’t.)

Characteristics of Financial Information (con’t.)

Creditors want to know the ability of

the business to pay its debts.

Government agencies, employees,

consumers, and the general public

are also interested in the financial

position of the business.

Creditors want to know the ability of

the business to pay its debts.

Government agencies, employees,

consumers, and the general public

are also interested in the financial

position of the business.

Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)

ComparabilityComparability

For accounting information to be

useful, it must be

understandable and comparable.

Comparability allows accounting

information to be compared

from one fiscal period to

another.

For accounting information to be

useful, it must be

understandable and comparable.

Comparability allows accounting

information to be compared

from one fiscal period to

another.

Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)

ReliabilityReliability

Users of accounting data assume

that the amounts are reliable.

Reliability relates to the

confidence users have that the

financial information is

reasonably free from bias and

error.

Users of accounting data assume

that the amounts are reliable.

Reliability relates to the

confidence users have that the

financial information is

reasonably free from bias and

error.

Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)

RelevanceRelevance

Not all information about a

business is relevant to financial

decision making.

Relevance means that the

information “makes a difference”

to a user in reaching a business

decision.

Not all information about a

business is relevant to financial

decision making.

Relevance means that the

information “makes a difference”

to a user in reaching a business

decision.

Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)

Full DisclosureFull Disclosure

To “disclose” means “to uncover

or to make known.”

Full disclosure means that

financial reports include enough

information so that the report is

complete.

To “disclose” means “to uncover

or to make known.”

Full disclosure means that

financial reports include enough

information so that the report is

complete.

Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)

MaterialityMateriality

If something is “material,” it is

important.

Materiality means that

information deemed relative

should be included in financial

reports.

If something is “material,” it is

important.

Materiality means that

information deemed relative

should be included in financial

reports.

Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)

Why It’s ImportantTo properly prepare end-of-period

financial reports for a corporation, you need to understand how equity for a corporation is handled and the differences in equity between corporations and sole proprietorships.

Why It’s ImportantTo properly prepare end-of-period

financial reports for a corporation, you need to understand how equity for a corporation is handled and the differences in equity between corporations and sole proprietorships.

Section 1 The Ownership of a Corporation (con’t.)Section 1 The Ownership of a Corporation (con’t.)

Key Terms Capital Stock stockholders’ equity retained earnings comparability

Key Terms Capital Stock stockholders’ equity retained earnings comparability

reliability relevance full disclosure materiality

reliability relevance full disclosure materiality