Financial Statements for a Corporation

1. Chapter 19 $ Financial Statements for a Corporation $ Making Accounting Relevant Public corporations often offer Web sites where they provide financial data. $ $ Discuss what types of financial information might be of interest to potential stockholders.

2. Chapter 19 $ Section 1 The Ownership of a Corporation • What You’ll Learn • Which equity accounts are used in corporation accounting. • How equity earned through business profits is reported. • Which end-of-period financial statements are prepared for a corporation. $ $ $

3. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Why It’s Important To properly prepare end-of-period financial reports for a corporation, you need to understand how equity for a corporation is handled and the differences in equity between corporations and sole proprietorships. $ $ • Key Terms • Capital Stock • stockholders’ equity • retained earnings • comparability $ • reliability • relevance • full disclosure • materiality

4. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Recording the Ownership of a Corporation $ • Capital Stock represents the investments in the corporation by its stockholders (owners). • Capital Stock is classified as a stockholders’ equity account. $ $

5. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Recording the Ownership of a Corporation (cont'd.) $ Business Transaction On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. $ ANALYSISIdentify 1. The accounts affected are Cash in Bank and Capital Stock. Classify 2.Cash in Bank is an asset account. Capital Stock is a stockholders’ equity account. $ + / – 3.Cash in Bank is increased by $25,000. Capital Stock is increased by $25,000.

6. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Recording the Ownership of a Corporation (cont'd.) $ Business Transaction On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. $ DEBIT-CREDIT RULE4. Increases to asset accounts are recorded as debits. Debit Cash in Bank for $25,000. 5. Increases to stockholders’ equity accounts are recorded as credits. Credit Capital Stock for $25,000. $

7. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Recording the Ownership of a Corporation (cont'd.) $ Business Transaction On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. $ T ACCOUNTS6. Insurance Prepaid Expense Insurance Debit + 25,000 Credit – Debit – Credit + 25,000 $

8. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Recording the Ownership of a Corporation (cont'd.) $ Business Transaction On January 1, stockholders invested $25,000 in exchange for shares of stock of the corporation, Receipt 997. $ JOURNAL ENTRY7. $

9. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Stockholders’ Equity • Equity contributed by stock-holders • Equity earned through business profits • Retained earnings represents the increase in stockholders’ equity from the portion of net income not distributed to the stockholders. $ $ $

10. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Characteristics of Financial Information Financial statements are used by many groups. $ • Managers analyze the financial statements to help evaluate past performance and to make informed decisions. • Stockholders are interested in the performance, potential future growth, and success of the business. $ $

11. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Characteristics of Financial Information (cont'd.) $ • Creditors want to know the ability of the business to pay its debts. • Government agencies, employees, consumers, and the general public are also interested in the financial position of the business. $ $

12. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Comparability • For accounting information to be useful, it must be understandable and comparable. • Comparability allows accounting information to be compared from one fiscal period to another. $ $ $

13. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Reliability • Users of accounting data assume that the data are reliable. • Reliability relates to the confidence users have that the financial information is reasonably free from bias and error. $ $ $

14. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Relevance • Not all information about a business is relevant to financial decision making. • Relevance means that the information “makes a difference” to a user in reaching a business decision. $ $ $

15. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Full Disclosure $ • To “disclose” means “to uncover or to make known.” • Full disclosure means that financial reports include enough information so that the report is complete. $ $

16. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Materiality $ • If something is “material,” it is important. • Materiality means that information deemed relative should be included in financial reports. $ $

17. Section 1 The Ownership of a Corporation (cont'd.) Chapter 19 $ Check Your Understanding $ What is the purpose of preparing the same types of financial statements at the end of each period? $ $