Preparing an Income
Statement
LESSON 15-1
New Vocabulary
 Net sales: Total sales less sales
discount and sales returns and
allowances
 Cost of merchandise sold: The original
price of all merchandise sold during a
fiscal period
 Gross profit on sales: The revenue
remaining after cost of merchandise
sold has been deducted
INCOME STATEMENT INFORMATION
ON A WORK SHEET
page 448
REVENUE SECTION OF AN INCOME STATEMENT
FOR A MERCHANDISING BUSINESS
page 449
1
2
3
4
5
8
6
7
9
COST OF MERCHANDISE SOLD SECTION OF AN INCOME
STATEMENT FOR A MERCHANDISING BUSINESS
page 450
1
2
3
5
6
4
COMPLETING AN INCOME STATEMENT FOR A
MERCHANDISING BUSINESS
7
1
2
3
4
5
6
page 452
Audit Your Understanding
What is the major difference between the
income statement for merchandising
business and a service business?
 The cost of merchandise sold section
How was the cost of merchandise sold
calculated?
 Beginning merchandise inventory, plus net
purchases, equals total cost of merchandise
available for sale, less ending merchandise
inventory, equals cost of merchandise sold
Audit Your Understanding
How can the amount of net income
calculated on the income
statement be verified?
 Compare it with the amount on the
worksheet
Work Together
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15-2 Analyzing an Income Statement
New Vocabulary
 Financial ratio: A comparison
between two items of financial
information
 Earnings per share: The amount of
net income after federal income tax
belonging to a single share of stock
 Price-earnings ratio: The relationship
between the market value per share
and earnings per share of a stock
ANALYZING AN INCOME STATEMENT
SHOWING A NET LOSS
page 457
FINANCIAL RATIOS
page 459
Earnings per Share
Net Income
after Federal
Income Tax
$80,313.95
÷
÷
Number of
Shares
Outstanding
2,500
=
Earnings
per Share
=
$32.13
Price-Earnings Ratio
Market Price
per Share
$345.00
Earnings
÷
per
Share
÷
$32.13
Price-Earnings
=
Ratio
=
10.7
Audit Your Understanding
For a merchandising business, every sales
dollar includes what four components?
 (1) cost of merchandise sold, (2) gross
profit on sales, (3) total expenses, and (4)
net income
How does a company determine acceptable
component percentages?
 By making comparisons with prior fiscal
periods as well as with industry standards
Work Together
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15-3 Preparing a Statement of
Stockholder’s Equity
New Vocabulary
 Statement of stockholders equity:
A financial statement that shows
changes in a corporation’s
ownership for fiscal period
 Par Value: A value assigned to a
share of stock and printed on the
stock certificate
CAPITAL STOCK SECTION OF THE STATEMENT OF
STOCKHOLDERS’ EQUITY
Multiply par page 461
value by number
Shares
$50 x 2,000
1. Stock at the beginning of the year
2. Stock issued during the year
3. Total stock issued at the end of the year
RETAINED EARNINGS SECTION OF THE
STATEMENT OF STOCKHOLDERS’ EQUITY
The two changes:
Net Income and
Dividends
page 462
Audit Your Understanding
What financial information does a statement
of stockholders equity report?
 The changes in a corporation’s ownership
for fiscal period
What are the two major sections of a
statement of stockholders’ equity?
 Capital stock and retained earnings
Audit Your Understanding
Where is the information found to prepare
the capital stock section of the statement
of stockholders’ equity
 In the capital stock general ledger account
Where is the beginning balance of retained
earnings found?
 In the Balance Sheet credit column of the
worksheet
Audit Your Understanding
How does a corporation distribute a
portion of income to stockholders?
 As a dividend
Where is the amount of dividends found?
 In the Balance Sheet debit column of a
worksheet
Work Together
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15-4 BALANCE SHEET INFORMATION ON A
WORK SHEET
page 464
CURRENT ASSETS SECTION OF A BALANCE SHEET
page 465
2. Assets
section
1. Heading Book Value
Book value of accounts receivable
of Accts.
Receivable
PLANT ASSETS SECTION OF A BALANCE SHEET
page 466
Book
Value
New Vocabulary
 Current liabilities: Liabilities due within
a short time, usually within a year
 Example: Accounts Payable
 Long-term liabilities: Liabilities for
more than a year
 Example: Mortgage or a Car Loan
LIABILITIES SECTION OF A BALANCE SHEET
page 467
 Account title
2
and amount
of each
current
liability
 Total liabilities
STOCKHOLDERS’ EQUITY SECTION OF A BALANCE
SHEET
page 468
COMPLETED BALANCE SHEET
page 469
(continued on next slide)
COMPLETED BALANCE SHEET
page 469
(continued from previous slide)
New Vocabulary
 Supporting schedule: A
report prepared to give
details about an item on a
financial statement
 Examples:
 Schedule of Accounts Receivable &
Schedule of Accounts Payable
Audit Your Understanding
What are the two ways assets are
classified?
 Current and plant assets
What three items are listed on the
balance sheet for accounts having a
related contra asset account?
 (1) the balance of the asset account, (2)
the balance of the asset’s contra
account, and (3) book value
Audit Your Understanding
What is an example of a long-term liability?
 Mortgage payable
What are the two supporting schedules that
might accompany a balance sheet?
 Schedule of accounts payable and
schedule of accounts receivable
Work Together
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The End