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LESSON 7-1

LESSON 7-1. Preparing an Income Statement. http://www.youtube.com/watch?v=Z7C4cz2HkeY. ACCOUNTING January 30, 2014. Welcome to Chapter 7. Chapter 7 Covers the preparation of an income statement and a balance sheet for a proprietorship.

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LESSON 7-1

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  1. LESSON 7-1 Preparing an Income Statement http://www.youtube.com/watch?v=Z7C4cz2HkeY ACCOUNTING January 30, 2014

  2. Welcome to Chapter 7 • Chapter 7 Covers the preparation of an income statement and a balance sheet for a proprietorship. • Not only is statement preparation covered but also the financial statement analysis of these statements (in simplest form).

  3. American Eagle OutfittersAccounting in the Real World • Answer the critical Thinking questions that follow. Warm Up

  4. Internet Activity • Chose two companies in the same industry. Go to the homepage for each company and search for its most current financial statements. • Answer the questions that follow. • HINT: Total expenses / Total Revenue • Net Income (loss) / total revenue

  5. Chapter 7-1Reporting Financial Information • Adequate Disclosure • Applied when financial statements contain all information necessary to understand a business’s financial condition • Without it, financial information would be incomplete.

  6. Objectives • Define Accounting Terms related to financial statements for a service business organized as a proprietorship. • Identify accounting concepts and practices related to preparation of an income statement. • Prepare an income statement and analyze an income statement using component percentages.

  7. Question for YOU? • How many of you would work for a year, not knowing how much you were going to make during that year? Compare this with a company that waits until the end of the year to determine how much the company “made” during the year. This helps explain why a business would prepare an income statement every month-even if it is not required to do so.

  8. Terminology 7-1 • Component percentage: the percentage relationship between one financial statement item and the total that includes that item. (p. 184) • Stakeholders: any persons or groups who will be affected by an action (p. 181)

  9. Important!!! • Income Statement reports information over a specific period of time. • The date used to prepare the income statement is obtained from the Income statement columns of a work sheet. • Remember that the heading of most financial statements answers the questions: WHO? WHAT? And WHEN?

  10. INCOME STATEMENT INFORMATION ON A WORK SHEET page 182 LESSON 7-1

  11. HEADING OF AN INCOME STATEMENT page 182 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. LESSON 7-1

  12. Remember Revenue and Expenses? • Revenue an increase in owner’s equity resulting from the operation of a business. (p. 14) • Expense a decrease in owner’s equity resulting from the operation of a business. (p. 15)

  13. Income Statement has 4 sections…. • Heading • Revenue • Expenses • Net Income or Loss • NOTE: the two columns on the income statement are not debit and credit columns.

  14. Before we look…. • The account titles are indented under section titles to make the sections titles easier to read • The account balances are listed in the first column, totals in the second column.

  15. Single line 7 Revenue 1 Revenue amount 3 Account title 2 Expenses 4 Expense amount 6 Account titles 5 Total expenses 8 Total of expenses 9 Single line 11 Net Income 12 Record net income 13 Calculate net income 10 Double lines 14 REVENUE, EXPENSES, AND NET INCOME SECTIONS OF AN INCOME STATEMENT page 183 LESSON 7-1

  16. COMPONENT PERCENTAGE ANALYSIS OF AN INCOME STATEMENT page 184 LESSON 7-1

  17. Character Counts • Try Aplia(Work Together and On Your Own) • Character Counts Key Term-Stakeholders……

  18. Question for you…. • Can you name a business that might have more than one source of revenue from services? • Example: A music store might offer lessons and repairs on instruments.

  19. REMINDER! • The data for the income statement is found on the work sheet. • Today, we will focus on how two sources of revenue can be documented on an income statement but it must be listed separately, similar to the way that each expense is listed.

  20. What Happens when Total Expenses Exceed Total Revenue? • There is a NET LOSS. • Let’s take a look!!!!!

  21. Total Revenue 5 Revenue 1 Revenue amounts 3 Account titles 2 Total of revenue 4 Net Loss 6 Record Net Loss 7 INCOME STATEMENT WITH TWO SOURCES OF REVENUE AND A NET LOSS page 185 LESSON 7-1

  22. TERMS REVIEW page 186 • stakeholders • component percentage • Component percentage: the percentage relationship between one financial statement item and the total that includes that item. (p. 184) • Stakeholders: any persons or groups who will be affected by an action (p. 181) LESSON 7-1

  23. Your Assignment • Aplia Application Problem 7-1 • Math Work Sheet • Part A & Part B. • On the bottom of the worksheet answer the following questions

  24. LESSON 7-2 Balance Sheet Information on a Work Sheet

  25. Objective • Identify accounting concept and practices related to the preparation of a balance sheet for a service business organized as a proprietorship. • Prepare a Balance Sheet for a service business organized as a proprietorship.

  26. Do you Remember the Accounting Equation?

  27. Do you Remember the Accounting Equation? • ASSETS = LIABILITIES + OWNERS EQUITY • The Balance Sheet uses the same format as the accounting equation. • This part of the chapter will discuss preparing a balance sheet using data on the work sheet.

  28. Before we look at a Balance Sheet… • Balance Sheet Reports information for a SPECIFIC date. • The data used to prepare the balance sheet can be obtained from the balance sheet columns of the worksheet. • The heading of most financial statements answers the questions: WHO? WHAT & WHEN?

  29. HEADING OF A BALANCE SHEET page 187 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. LESSON 7-2

  30. What’s on a Balance Sheet? • Assets • Liabilities • Owner’s Equity

  31. BALANCE SHEET page 187 The Information needed to prepare the assets section is obtained from the Balance Sheet Debit Column. LESSON 7-2

  32. BALANCE SHEET page 187 The Information needed to prepare the liabilities section is obtained from the Balance Sheet Credit Column. LESSON 7-2

  33. 1 6 Assets Liability amounts 5 Account titles 2 Account titles 4 Liabilities 7 Single line 8 Total Liabilities 9 Total of liabilities 3 Asset amounts ASSETS AND LIABILITIES SECTIONS OF A BALANCE SHEET page 188 LESSON 7-2

  34. Lets Stop Here a Moment. • Read “Case for Critical Thinking” on page 197 and answer the question that follow. You can use the back of the work sheet provided to you. • Then Try Applied Communication on the same page and write down your advice to your new assistant.

  35. Owner’s Equity • Owners Equity-the amount remaining after the value of all liabilities is subtracted from the value of all assets • The information needed to prepare the owner’s equity section of a balance sheet is obtained from the Balance Sheet columns of the work sheet

  36. How to calculate the new capital balance… • Capital Account Balance-Net Loss-Drawing Account Balance=Current Capital (Page 189) • Lets look at the ten steps for preparing the owner’s equity section of a balance sheet.

  37. 1 Owner’s Equity 2 Account title 3 Capital amount 4 Single line 5 Total Assets 7 Total Liab. and Owner’s Eq. 9 Compare totals 6 Total of assets 10 8 Double lines Total of Liabilities and Owner’s Equity OWNER’S EQUITY SECTION OF A BALANCE SHEET page 189 LESSON 7-2

  38. Let’s look deeper… • The Owner’s Equity section of a balance sheet can show more detail than that shown on a balance sheet. • A business may choose to show more details in the owner’s equity section. • There are 9 steps used to prepare the owner’s equity section reported in detail on a balance sheet.

  39. 3 Net Income Current capital amount 8 1 Beginning capital Difference 6 Beginning capital amount 2 7 Ending capital 5 Single line 4 9 Drawing Total Liabilities and Owner’s Equity OWNER’S EQUITY REPORTED IN DETAIL ON A BALANCE SHEET page 190 LESSON 7-2

  40. Today… • Aplia 7-2 Work Together and On Your Own. • Chapter 7 Study Guide • Extra Study Tools AND • Take Online Tutorial Quiz • www.c21accounting.com

  41. Exit Ticket • List the four sections on a balance sheet. • What is the formula for calculating current capital?

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