preparing an income statement chapter 7. objectives covers the preparation of an income statement...
TRANSCRIPT
Objectives
Covers the Preparation of an Income Statement and Balance Sheet for a proprietorship.
Financial Statement Analysis of these statements.
Terms
Stakeholders Any persons or groups who will be affected by an
action
Component Percentage The percentage relationship between one
financial statement item and the total that includes that item.
Adequate Disclosure Accounting Concept is applied when financial
statements contain all information necessary to understand a business’s financial condition.
Reporting Financial Information We take information from our general ledger
and help summarize, organize, and report it to the owners and managers.
Accounting Concept – Adequate Disclosure TechKnow prepares two financial statements
Income Statement and Balance Sheet
Accounting Concept Going Concern When financial statements are prepared with the
expectation that a business will remain in operation indefinitely.
Income Statement
1Revenue3 Revenue amount
4Expenses
5Account titles 6 Expense amount
8Total expenses 9 Total of expenses
12 Net Income
7 Single line
11 Single line
10 Calculate net income
14 Double lines
13 Record net income
2 Account title
Component Percentage Analysis
Revenue reported on an income statement is compared to two components:1. Total Expenses
2. Net Income
In making decisions a manager analyzes relationships between these two components.
The percentage relationship between one financial statement item and the total that includes that item is called a component percentages.
Acceptable Component Percentages
How do you know what is acceptable? Various industry organizations public average
percentages for similar businesses. In the future, TechKnow will also utilize previous
fiscal periods as comparisons.
Total Expenses Component Percentages
An acceptable total expenses component percentage is not more than 55%
TechKnow’s is 41.1% Is it acceptable?
Yes because it is less than 55%
Total Expenses
Total Sales
= Total Expenses Component Percentages
$1,466 $3,565 = 41.1%
Net Income Component Percentage
Acceptable Net Income CP is not less than 45%
TechKnow’s is 58.9% Is it acceptable?
Yes, it is greater than 45% and is acceptable. Net Income Total Sales
= Total Expenses Component Percentages
$2,099 $3,565 = 58.9%
Multiple Revenue
TechKnow receives revenue from only on source
HighNote receives revenue from two sources, the sale of services for music lessons and services to repair musical instruments.
Business owner wants to know revenue from each source.
Two revenue accounts are used. Sales-Lessons and Sales-Repairs.
Company Ex. Of Two Revenue Sources
1Revenue
3 Revenue amounts2Account titles
6Net Loss
7 Record Net Loss
5 Total Revenue
4 Total of revenue
Audit Your Understanding List the four sections of an income
statement.1. Heading
2. Revenue
3. Expenses
4. Net income or net loss
What is the formula for calculating the total expenses component percentage? Total Expenses Total Sales = Total Expenses
What is the formula for calculating the net income component percentage? Net Income Total Sales = Net Income
Balance Sheet
Reports financial information on a specific date, indicating the financial condition of a business. Financial condition = Financial Strength
What makes a company strong?Fewer liabilities and adequate assetsYou want your assets to be greater than your
liabilities
Balance Sheet
Information about assets, liabilities, and owner’s equity is in the general ledger accounts or from a work sheet.
The information is easier to use if reported in an organized manner like a balance sheet.
Found in two places on the work sheet Account Titles are obtained from the work sheet’s Account
Title Column’s
Account balances are obtained from the work sheet’s Balance Sheet columns.
Balance Sheet
1. Heading Answer’s the questions Who? What? and When?
2. Assets
3. Liabilities
4. Owner’s Equity
HEADING OF A BALANCE SHEET
1
2
3
1. Center the name of the company on the first line.
2. Center the name of the report on the second line.
3. Center the date of the report on the third line.
Calculating Capital
Capital Account Balance + Net Income - Drawing = Current Capital
Capital Account Balance – Net Loss – Drawing Account Balance = Current Capital
OR use your formula! Assets = Liab. – OE Just subtract your Liab. From Assets