CLASSIFIED BALANCE SHEET AND
INCOME STATEMENT
LINKAGE
 ENHANCE YOUR PREVIOUS KNOWLEDGE REGARDING
FINANCIAL STATEMENTS
 YOU WILL BE ABLE TO PREPARE FINANCIAL STATEMENTS IN
PROFESSIONAL FORMAT
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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OUTCOME of THIS SESSION
HOW TO PREPARE PROFESSIONAL
FINANCIAL STATEMENTS
FINANCIAL STATEMENT ANALYSIS
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Introduction to Financial Accounting, 9/e
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CLASSIFIED BALANCE SHEET AND
INCOME STATEMENT
STRUCTURE OF THIS SESSION
50:50
 Active participation is sought
PARTICIPATION MEANS
Contributing innovative and effective ideas
towards the current topic
Answering various questions
Following the mentor’s instructions
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Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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CLASSIFIED BALANCE SHEET AND INCOME
STATEMENT
WIIFM
o THIS SESSION WILL HELP YOU IN LEARNING HOW
TO PREPARE FINANCIAL STATEMENTS IN A
PROFESSIONAL FORMAT
o HOW TO ANALYZE FINANCIAL INFORMATION
PRESENTED IN FINANCIAL STATEMENTS
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Classified Balance Sheet
• A classified balance sheet further groups
asset, liability, and owners’ equity accounts into
subcategories
• Assets are classified into two groups:
– Current assets
– Noncurrent (or long-term) assets
• Liabilities are classified into
– Current liabilities
– Noncurrent (or long-term) liabilities
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Classified Balance Sheet
• Current assets are cash and other assets that
a company expects to convert to cash, sell, or
consume during the next 12 months (or within
the normal operating cycle if longer)
• Current assets are listed in the order in which
they are likely to be converted to cash during the
coming year
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Classified Balance Sheet
• Current liabilities are those that come due
within the next year (or within the operating cycle
if longer)
• Current liabilities are listed in the order in which
they will decrease cash during the coming year
• Working capital is the excess of current assets
over current liabilities
• The following slide shows the classified balance
sheet for Chan Audio Company:
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Classified Balance Sheet
Chan Audio Company
Balance Sheet
January 31, 20X2
Assets
Current assets:
Cash
$ 71,700
Accounts receivable
160,300
Note receivable
40,000
Accrued interest receivable
400
Merchandise inventory
250,200
Prepaid rent
10,000
Total current assets
$532,600
Long-term asset:
Store equipment $114,900
Accumulated
depreciation
1,000 113,900
Total
$646,500
© 2006 Prentice Hall Business Publishing
Liabilities and Owners’ Equity
Current liabilities:
Accounts payable
$117,100
Unearned rent revenue
2,500
Accrued wages payable
3,750
Accrued interest payable
750
Accrued income taxes payable 11,200
Note payable
100,000
Total current liabilities
$235,300
Stockholders’ Equity:
Paid-in capital
$400,000
Retained earnings
11,200 411,200
Total
Introduction to Financial Accounting, 9/e
$646,500
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Formats of Balance Sheets
• A balance sheet may be presented in the
– Report format
– Account format
• The report format presents the accounts
vertically
• The account format puts the assets at the left
and liabilities and owners’ equity at the right
• Either format is acceptable
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Income Statement Formats
• Two commonly used formats for income
statements are the
– Single-step income statement
– Multiple-step income statement
• The next slide presents a single-step income
statement for Chan Audio Company
– It groups all types of revenue together
– It lists and deducts all expenses without drawing any
intermediate subtotals
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Single-Step Income Statement
Chan Audio Company
Income Statement
For the Month Ended January 31, 20X2
Sales
$160,000
Rent revenue
500
Interest revenue
400
Total sales and other revenues
$160,900
Expenses:
Cost of goods sold
$100,000
Wages
31,750
Depreciation
1,000
Rent
5,000
Interest
750
Income taxes
11,200
Total Expenses
149,700
Net income
$ 11,200
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Multiple-Step Income Statements
• Most multiple-step income statements disclose
– Gross profit (gross margin)
• The excess of sales revenue over the cost of the
inventory that was sold
– Operating expenses
• A group of recurring expenses that pertain to the
firm’s routine, ongoing operations (wages, rent,
depreciation, telephone, heat, advertising, etc.)
– Operating income
• The remainder of gross profit after the deduction of
operating expenses
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Multiple-Step Income Statements
– Nonoperating revenues and expenses
• Revenues and expenses not directly related to the
mainstream of a firm’s operation
– Other (nonoperating) revenue and expenses
• Revenues and expenses that are not part of the
ordinary operations of selling goods or services;
i.e., interest revenue and interest expense
• Income taxes appear in both income statement
formats
• The next slide presents a multiple-step income
statement for Chan Audio Company
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Multiple-Step Income Statement
Chan Audio Company
Income Statement
For the Month Ended January 31, 20X2
Sales
$160,000
Cost of goods sold
100,000
Gross profit
60,000
Operating expenses:
Wages
$ 31,750
Depreciation
1,000
Rent
5,000 37,750
Operating income
$ 22,250
Other revenues and expenses:
Rent revenue
$
500
Interest revenue
400
Total other revenue
$
900
Deduct: Interest expense
750
150
Income before income taxes
$ 22,400
Income taxes (at 50%)
11,200
Net income
$ 11,200
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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LIQUIDITY RATIOS
(Current Ratio)
• Liquidity is a company’s ability to pay its
immediate financial obligations with cash and
near-cash assets
• The current ratio evaluates a company’s
liquidity
Current Ratio =
Current assets
Current liabilities
• Chan Audio’s current ratio is $532,600 = 2.3
$235,300
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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LIQUIDITY RATIOS
(Current Ratio)
• The quick ratio removes Inventory (and other
less liquid assets such as Prepaid Expenses)
from the numerator of the calculation
• Chan Audio’s quick ratio is
$532,600 - $250,200 = 1.2
$235,300
• The current ratio should be greater than 2.0
• The quick ratio should be greater than 1.0
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Profitability Evaluation Ratios
• Profitability measures affect the investment
decisions of investors, creditors, and managers
• The four basic profitability ratios are
–
–
–
–
Gross profit margin
Return on sales
Return on common stockholders’ investment
Return on assets
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Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Gross Profit Margin
• The Chan Audio Company’s gross profit
percentage is presented below:
Gross profit percentage = Gross profit / Sales
= $60,000 / $160,000
= 37.5%
• Gross profit percentages vary greatly by industry
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Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Return on Sales or Net Profit Margin
• The return on sales ratio (also known as the
net profit margin ratio) gauges a company’s
ability to control the level of all its expenses
relative to the level of its sales
• The return on sales percentage tends to vary by
industry
© 2006 Prentice Hall Business Publishing
Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Return on Sales or Net Profit Margin
• Chan Audio’s return on sales ratio is
Return on sales = Net income / sales
= $11,200 / $160,000
= 7%
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Introduction to Financial Accounting, 9/e
Horngren/Sundem/Elliott/Philbrick
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Return on Common Stockholders’ Equity
• Return on common stockholders’ equity ratio
(ROE or ROCE) compares net income with
invested capital
• The return on common stockholders’ equity for
Chan Audio is
Return on common stockholders’ equity =
=
=
=
© 2006 Prentice Hall Business Publishing
Net income / Average common stockholders’ equity
$11,200 / ½ ($400,000 + $411,200)
$11,200 / $405,600
2.8% (for 1 month)
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Return on Assets
• The return on assets ratio
– Compares net income with invested capital as
measured by average total assets
– Measures how effectively those assets generate
profits
• The return on assets ratio for Chan Audio for the
month of January is
Return on assets =
=
=
=
© 2006 Prentice Hall Business Publishing
Net income / Average total assets
$11,200 / ½ ($620,000 + $646,500)
$11,200 / $633,250
1.8% (for 1 month)
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