Financial Statements for a Corporation

1. Financial Statements for a Corporation Chapter 19

2. Accounting for a Corporation • Recording the Ownership of a Corporation • Businesses organized as corporations have a Capital Stock account instead of the Owner’s Capital account of the sole proprietorship. • Capital Stock is classified as a stockholders’ equity account • Stockholders’ equity is the value of the stockholders’ claims to the corporation • Reporting Stockholders’ Equity in a Corporation • Equity contributed by stockholders (Capital Stock) • Equity earned through business profits (Retained Earnings) Pgs 552-553

3. Pgs 553-554

4. Characteristics of Financial Statements • End of the period reports summarize the changes that have taken place during the period and report the financial condition of the business at the end of the period. • They are used by • Managers • Stockholders • Creditors • Government Agencies • They need to • Be comparable • Be reliable • Be relevant • Fully disclose important information • Include all relevant material needed to make decisions Pgs 554-555

5. Reports for Merchandising Corporations • Income Statement • The Statement of Retained Earnings • The Balance Sheet • The Statement of Cash Flows • The Income Statement, Statement of Retained Earnings and Statement of Cash Flows show changes that occurred over the period • The Balance Sheet shows the financial position of the business on the last day of the period. Pg 555

6. The Income Statement • Revenue Realization Principal – revenue for a credit sale is recorded at the time of the sale because the account receivable is expected to be converted to cash. • Matching Principle – Expenses are matched with revenue earned in that period • Merchandising businesses have an additional cost – the cost of the merchandise that is purchased and then resold to customers. The income statement for a merchandising business is thus expanded to include the cost of merchandise sold. Pg 557

7. The Revenue Section of the Income Statement • This section reports the net sales for the period. • Accounts listed • Sales • Sales Discounts • Sales Returns and Allowances • Net Sales (not an account but the culmination of the three accounts listed above) Pg 558

8. The Cost of Merchandise Sold Section of the Income Statement Pg 559 • This is the actual cost to the business of the merchandise it sold to customers during the period. • Calculating the Cost of Merchandise Sold requires two steps: • Determine the cost of all merchandise available for sale • Add net purchases (all costs related to merchandise purchased during the period (Purchases + Transportation In – Purchases Discounts – Purchases Returns and Allowances)) • Calculate the cost of merchandise sold

9. Gross Profit on Sales Section of the Income Statement • After the cost of merchandise sold has been calculated, the gross profit on sales can be determined. • Gross Profit on Sales is the profit made before operating expenses are deducted. • It is found by subtracting the cost of merchandise sold from net sales. Pg 561

10. Pg 561

11. Operating Expenses Section and Net Income Section of the Income Stmt • Operating Expenses Section • The cost of the goods and services used in the process of earning revenue for the business. • Selling expenses • Administrative/operating expenses • Federal corporate Income Tax Expense is the only expense not listed. It is not an a cost related to earning revenue but instead a cost resulting from the revenue earned. • Net Income/Loss Section • This is reported both before and after federal corporate income taxes. This is done so that the income stmt shows the amount of operating income • Operating Income – the excess of gross profit over operating expenses. It is the amount of income earned before deducting federal corporate income taxes Pg 561

12. Pg 562

13. Analyzing Amounts on the Income Statement • Managers use financial analysis to evaluate the company’s financial performance. • Reports are prepared in dollar amounts but some analysis is better done using percentages • Percentages show relationships between accounts better for comparison purposes. • Vertical Analysis – each dollar amount reported on a financial statement is also reported as a percentage of another amount, called a base amount. • Ex. On the income statement, each amount is reported as a percentage of net sales. Pg 563

14. Pg 563

15. The Statement of Retained Earnings • A corporation has two stockholders’ equity accounts • Capital Stock – represents the stockholders’ investment in the corporation • Retained Earnings – summarizes the accumulated profits of the corporation minus any amounts paid to stockholders as returns on their investments. • Increased by net income • Decreased by net loss and payment of dividends • The final balance of the Retained Earnings account, as calculated on the statement of retained earnings, is used when preparing the balance sheet. Pgs 565 - 566

16. The Balance Sheet • Reports the balances of all Assets, Liabilities, and Stockholders’ Equity for a specific date. • In the Stockholders’ Equity section the Capital Stock balance is from the worksheet’s Balance Sheet section. The Retained Earnings account balance is from the Statement of Retained Earnings report you prepared earlier. Pg 566-567

17. Analyzing Amounts on the Balance Sheet • Horizontal Analysis – the comparison of the same items on financial statements for two or more accounting periods or dates and the determination of changes from one period or date to the next. • A base period is a period, usually a year, used for comparison. Pg 568

18. Statement of Cash Flows • Reports changes of cash balance during the accounting period. • Changes are classified as: operating, investing, or financing. • Operating Activities – all transactions that occurred during the accounting period as part of normal business operations • Accrual Basis of Accounting – revenue is recorded when it is earned and expenses are recorded when they are incurred, regardless of when items are actually paid. • To determine operating cash inflows and outflows for the accounting period, the accounting must convert income statement and balance sheet amounts to the cash basis of accounting. Recording revenue only when cash is received and expenses only when cash is paid out. This is the reason On Your Mark’s net sales reported on the income statement is $317,720.00 but sales to customers reported on the statement of cash flows is $315,536. • Investing Activities – loans, the business makes, payments received for those loans, purchase and sale of plant assets, and investments • Plan assets – property that will be used in the business for more than one year • During the year On Your Mark purchased delivery equipment, office equipment, and store equipment for cash. • Financing Activities – the borrowing activities needed to finance the company operations and the repayment of these debts Pgs 569-570

19. Typical Cash Flow Activities Statement of Cash Flows Pg 570