LESSON 7-1. How and why do you prepare an income statement? CENTURY 21 ACCOUNTING 2009 South-Western, Cengage Learning

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1 LESSON 7-1 How and why do you prepare an income statement?

2 2 Reporting Financial Information General ledger information must be summarized, organized, and reported to the owners and managers General ledger information is very detailed needs to be made more usable Concept: adequate disclosure Financial statements must contain all information necessary to understand a business s financial condition Concept: accounting period cycle Financial statements must be prepared at the end of each fiscal period Concept: going concern Financial statements are prepared with the expectation that a business will remain in operation indefinitely LESSON 7-1

3 3 Preparing an income statement Reports financial information over a specific period of time How much profit/loss did a company earn for the month, year, etc. Concept: matching expenses with revenue Revenue earned and the expenses incurred to earn that revenue are reported in the same fiscal period Information for the income statement is obtained from the Account Title and Income Statement sections of the work sheet Income statement has four sections: 1. Heading 2. Revenue 3. Expenses 4. Net income or net loss LESSON 7-1

4 INCOME STATEMENT INFORMATION ON A WORK SHEET page LESSON 7-1

5 5 HEADING OF AN INCOME STATEMENT page 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

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

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

8 8 Component percentages Revenue reported on an income statement is compared to two components: Total expenses Net income Business owners and managers analyze relationships between these two income statement components and the total sales Component percentage percentage relationship between one financial statement item and the total that includes that item Divide the amount of each component by the total amount of sales Compare to previous years; compare to industry standard LESSON 7-1

9 INCOME STATEMENT WITH TWO SOURCES OF REVENUE AND A NET LOSS 9 page Total Revenue Revenue Account titles Revenue amounts 4 Total of revenue Net Loss 6 7 Record Net Loss LESSON 7-1

10 10 TERMS REVIEW page 186 component percentage LESSON 7-1

11 LESSON 7-2 Balance Sheet Information on a Work Sheet

12 12 Balance Sheet Reports information on a specific date, indicating the financial position of a business Amount assets vs. liabilities Information is transferred from general ledger and work sheet to balance sheet to make it easier to use Information is obtained from the Account Title and Balance Sheet sections of the Work Sheet Balance sheet has four sections: 1. Heading 2. Assets 3. Liabilities 4. Owner s equity LESSON 7-2

13 13 BALANCE SHEET page 187 LESSON 7-2

14 14 HEADING OF A BALANCE SHEET page 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

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

16 OWNER S EQUITY SECTION OF A BALANCE SHEET page Owner s Equity 4 Single line 2 Account title Capital amount 3 16 Total of assets 6 5 Total Assets 7 Total Liab. and Owner s Eq. Compare totals 9 10 Double lines Total of Liabilities and Owner s Equity 8 LESSON 7-2

17 New Capital Amount Calculations To calculate the new Capital amount for the Balance Sheet use this formula: Old Capital Account Balance (from the Work Sheet) + Net Income (or Net Loss) - Drawing Account Balance New Capital Account Balance

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