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Income statement presentation @ DOMS
 

Income statement presentation @ DOMS

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Income statement presentation @ DOMS

Income statement presentation @ DOMS

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    Income statement presentation @ DOMS Income statement presentation @ DOMS Presentation Transcript

    • FINANCIAL ACCOUNTING BASICS
    • Part Three
      • J. Income Statement
      • K. Income Statement Presentation
      • L. Retained Earnings Statement
      • M. Journal and Ledger
    • J. INCOME STATEMENT
      • In Part Two we saw that transactions that increase income are reflected on the balance sheet in Retained Earnings.
      • During the month of January, Retained Earnings for ABC Company increased by $1,500.
      • Income earned during the month of January was $1,500.
      • Income was generated as follows:
    • J. INCOME STATEMENT (cont)
      • 5. Rather than recording revenues and expenses directly into the
      • Retained Earnings account, separate Revenue and Expense
      • accounts are used.
      • 6. Accounting Conventions
        • Retained earnings are increased through credits
        • Revenues increase Retained earnings, so
        • Revenues are:
          • increased by making credits
        • Retained earnings are decreased through debits
        • Expenses decrease Retained Earnings, so
        • Expenses are:
          • increased by making debits
    • J. INCOME STATEMENT (cont)
      • Illustration
      • Transaction 4: On January 9, ABC Company sells inventory that cost
      • $2,000 for $2,500 in cash.
      • Transaction 6: On January 12, ABC Company sells inventory that cost
      • $4,000 for $5,000, on account.
      Revenues increase retained earnings, so revenues are credited Expenses decrease retained earnings, so expenses are debited
    • J. INCOME STATEMENT (cont) Cash Retained Earnings Expenses Revenues Inventory Accounts Receivable 2,500 2,500 Begin 8,000 2,000 2,000 4,000 5,000 5,000 4,000 End 2,000 6,000 6,000 6,000 7,500 7,500 7,500 0 0 Transaction 4: On January 9, ABC Company sells inventory that cost $2,000 for $2,500 in cash. Transaction 6: On January 12, ABC Company sells inventory that cost $4,000 for $5,000, on account. 1,500
    • K. INCOME STATEMENT PRESENTATION Note that the income statement presents several measures of profit/income: (1) gross profit, (2) operating income, (3) income before taxes, and (4) net income. The next slide describes the classification of expenses.
    • K. INCOME STATEMENT PRESENTATION (cont)
      • Expenses normally are classified as: operating and nonoperating .
      • Operating expenses – include:
          • Cost of goods sold
          • Selling expenses
          • General and administrative expenses
          • Research and development expenses
      • Nonoperating expenses – include:
          • Interest expense – this is a financing expense
          • Other (miscellaneous) expenses
            • includes losses on sales of assets
      • Income tax expense ( Provision for income taxes ) is also an operating expense. It is always shown separate from other operating expenses, after the calculation of Income before Taxes.
    • L. RETAINED EARNINGS STATEMENT
      • The Retained Earnings Statement summarizes the changes in Retained earnings that occurred during the accounting period.
      • Net income increases Retained earnings.
      • Dividends decrease (are paid out) of Retained earnings.
        • Many companies prepare a Statement of Changes in Stockholders’ Equity that summarizes the changes in all Stockholders’ equity accounts, including Retained earnings, during the accounting period.
    • M. JOURNAL AND LEDGER
      • Accountants record transactions in “books” – the primary books used are the Journa l and the Ledger .
      • Journal – transactions are first entered into a journal (the journal is the company’s diary) – an explanation of each transaction is provided.
      • Ledger – journal entries are then posted to the ledger (each account has a separate page in the ledger) – easier to determine balance in accounts.
      • The next slide shows ABC Company’s Journal for the month of January, Year 1. Each transaction 1 – 7 has been recorded in a debit/credit journal entry. Remember that debits increase assets and decrease liabilities and stockholders’ equity; credits decrease assets and increase liabilities and stockholders’ equity.
    • M. JOURNAL AND LEDGER (cont) Journal Date Accounts Debit (Dr.) Credit (Cr.) Jan. 2 Cash Paid-in Capital 10,000 10,000 3 Cash Notes Payable 5,000 5,000 4 Inventory Accounts Payable 8,000 8,000 9 Cash Revenues 2,500 2,500 Expenses Inventory 2,000 2,000 10 Accounts Payable Cash 8,000 8,000 12 Accounts Receivable Revenues 5,000 5,000 Expenses Inventory 4,000 4,000 31 Cash Accounts Receivable 5,000 5,000
    • M. JOURNAL AND LEDGER (cont)
      • The next slide shows the pages in the ledger for Cash (Acct. No. 101) and Paid-in Capital (Acct. No. 301).
      • From the Ledger , it is possible to determine the balance in each account at any point in time.
        • For example, we can see that Cash had a balance of $17,500 on January 9.
      • It is more difficult to determine the balance in an account from the Journal .
    • M. JOURNAL AND LEDGER (cont) Ledger Account Title Cash Account Number 101 Account Title Paid-in Capital Account Number 301 Date Explanation Debit Credit Balance Jan. 2 Investment by owners 10,000 10,000 3 Borrowing from bank 5,000 15,000 9 Sale of goods 2,500 17,500 10 Payment of suppliers 8,000 9,500 31 Collection from customers 5,000 14,500 Date Explanation Debit Credit Balance Jan. 2 Investment by owners 10,000 10,000
    • M. JOURNAL AND LEDGER (cont)
      • 4. Most companies have a computerized accounting system, in which:
          • The accountant analyzes transaction to determine which accounts are affected and whether each account is increased or decreased (debit or credit).
          • The accountant then inputs data (DATE, ACCOUNTS, DEBIT/CREDIT ) into the system, and the journal entry is prepared and automatically posted to ledger.
          • End of Part Three