Financial Statements
Chapter 19
Study Guide
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)
Chapter 19 Terms to Know…soon
administrative expenses
net sales
base year
operating income
capital stock
operating expenses
comparability
relevance
cost of merchandise sold
reliability
full disclosure
retained earnings
gross profit on sales
selling expense
horizontal analysis
statement of retained earnings
materiality
stockholders equity
net purchases
vertical analysis
working capital
Understanding Ownership of
A Corporation
How the ownership for a corporation differs from
the ownership of a sole proprietorship?
•
Sole
Proprietorship
•
•
Corporation
Owned by one person
Ownership is owned by one
person or by thousands of people
through Share of Stock
Recording Ownership:
Sole Proprietorship:
Cash in Bank
DR
CR
+
25,000
Sanchez, Capital
DR
CR
+
25,000
Corporation’s Ownership:
__Cash in Bank___
Capital Stock
DR
CR
DR
CR
+
+
25,000
25,000
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___
DR
CR
+
25,000
__Capital Stock__
DR
CR
+
25,000
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
Stockholders Equity has 2 laws. . .
1.
Equity contributed by stock holders
2.
Equity earned through business profits
Must be reported in either of these two
parts.
Equity Earned Contributions
Stockholders contribute to equity by
buying shares of stock issued by
corporation, this transaction
This “stockholders’ investment” is recorded
In the capital stock account
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”
Comparison of Capital Sections:
Sole Proprietorship
Corporation
Owner’s Equity :
Owner’s, Capital
Stockholders’ Equity:
Capital Stock
Retained Earnings
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.
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”
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)
Income Statement Comparison
Service Business
Merchandising Business
Revenue
- Expenses
Net Income (Loss)
Revenue
- Cost of Merchandise Sold
Gross Profit on Sales
- Operating Expenses
Net Income (Loss)
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
Income Statement
Net Purchase:
Purchases
+ Transportation In
Cost of Delivered Merchandise
- Purchases Discount
- Purchases Returns & Allowances
Net Purchases
Example of an Income Statement
Parts of the Income Statement
Four columns




Parts of the Income Statement
Total column







This is the
amount
used to
complete
the next
statement.
Practice Income Statement
Problem 19-5 (use worksheet on page 520-523 workbook)
use file in teachers resource folder
Prepare an income statement with all the
appropriate sections and calculations for
an merchandising company.
1.
2.
3.
4.
5.
Revenue
Cost of Merchandise Sold
Gross Profit on Sales
Operating Expenses
Net Income (or Loss)
Income Statement
Chapter 19 study guide completed
All terminology
Formulas to calculate all major and minor sections of
the worksheet
 Net Purchases
 Net Sales