Financial Statements. Chapter 19 Study Guide

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1 Financial Statements Chapter 19 Study Guide

2 Financial Statements Discuss the nature of a consolidated financial statement? Understand the relationship between the work sheet and the financial statements. Explain the how the financial statements differ between a corporation and sole proprietorship Analyze the financial data contained on the statement and how to utilize this information internally and externally. Determine the cost of inventory Prepare an Income Statement for a Corporation Notes and practice problem (yes there are formulas~ you need to know)

3 Chapter 19 Terms to Know soon administrative expenses base year capital stock comparability cost of merchandise sold full disclosure gross profit on sales horizontal analysis materiality net purchases net sales operating income operating expenses relevance reliability retained earnings selling expense statement of retained earnings stockholders equity vertical analysis working capital

4 Understanding Ownership of A Corporation How the ownership for a corporation differs from the ownership of a sole proprietorship? Sole Proprietorship Owned by one person Corporation Ownership is owned by one person or by thousands of people through Share of Stock

5 Recording Ownership: Sole Proprietorship: Cash in Bank Sanchez, Capital DR CR DR CR ,000 25,000 Corporation s Ownership: Cash in Bank Capital Stock DR CR DR CR ,000 25,000

6 Recording Ownership: On June 30 stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipts 997. Corporation s Ownership: Cash in Bank Capital Stock DR CR DR CR ,000 25,000

7 Recording Ownership: The main difference in the way the sole proprietorship and corporation is the way it is reported on the balance sheet. Corporations Owner s Equity account on the balance sheet is now called Stockholders Equity

8 Stockholders Equity has 2 laws Equity contributed by stock holders 2. Equity earned through business profits Must be reported in either of these two parts.

9 Equity Earned Contributions Stockholders contribute to equity by buying shares of stock issued by corporation, this transaction This is recorded In the capital stock account

10 Equity Earned through business profits Stockholders equity increased that is retained by the corporation; however, not distributed to the stockholders most of the time reinvested into the company Oil & Gas use this for further exploration activities

11 Comparison of Capital Sections: Sole Proprietorship Owner s Equity : Owner s, Capital Corporation Stockholders Equity: Capital Stock Retained Earnings

12 Financial Statements are used by Managers to evaluate past performance and project future operational needs. Stockholders are interested in the performance, potential growth Creditors review it to know the ability to pay back its debts timely. Government, employees, potential employees and consumers interested in the financial position of the business.

13 Characteristics & Guidelines 1. Comparability compare apples to apples 2. Reliability confidence it is true 3. Relevance make a difference for the user 4. Full Disclosure make known 5. Materiality deemed relative include it

14 Income Statement 5 sections for a merchandising business 1. Revenue 2. Cost of Merchandise Sold 3. Gross Profit on Sales 4. Operating Expenses 5. Net Income (or Loss)

15 Income Statement Comparison Service Business Revenue - Expenses Net Income (Loss) Merchandising Business Revenue - Cost of Merchandise Sold Gross Profit on Sales - Operating Expenses Net Income (Loss)

16 Income Statement 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

17 Income Statement Net Purchase: Purchases + Transportation In Cost of Delivered Merchandise - Purchases Discount - Purchases Returns & Allowances Net Purchases

18 Example of an Income Statement

19 Parts of the Income Statement Four columns

20 Parts of the Income Statement Total column

21 This is the amount used to complete the next statement.

22 Practice Income Statement Problem 19-5 (use worksheet on page workbook) use file in teachers resource folder Prepare an income statement with all the appropriate sections and calculations for an merchandising company. 1. Revenue 2. Cost of Merchandise Sold 3. Gross Profit on Sales 4. Operating Expenses 5. Net Income (or Loss)

23 Income Statement Chapter 19 study guide completed All terminology Formulas to calculate all major and minor sections of the worksheet Net Purchases Net Sales

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