Financial Statements for a
Corporation
Chapter 19
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
1. Equity contributed by stockholders (Capital Stock)
2. Equity earned through business profits (Retained
Earnings)
Pgs 552-553
Pgs 553-554
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
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Managers
Stockholders
Creditors
Government Agencies
• They need to
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Be comparable
Be reliable
Be relevant
Fully disclose important information
Include all relevant material needed to make decisions
Pgs 554-555
Reports for Merchandising
Corporations
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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
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
The Revenue Section of the
Income Statement
• This section reports the net sales for the period.
• Accounts listed
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Sales
Sales Discounts
Sales Returns and Allowances
Net Sales (not an account but the culmination of the
three accounts listed above)
Pg 558
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:
1. Determine the cost of all merchandise available for sale
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Add net purchases (all costs related to merchandise purchased
during the period (Purchases + Transportation In – Purchases
Discounts – Purchases Returns and Allowances))
2. Calculate the cost of merchandise sold
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
Pg 561
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
Pg 562
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
Pg 563
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
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
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
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
Typical Cash Flow Activities
Statement of Cash Flows
Pg 570