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Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
Chapter 9 financial statements for a sole proprietorship
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Chapter 9 financial statements for a sole proprietorship

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  • Financial statements provide the essential financial information necessary for sound management decisions. The income statement communicates important details about profitability to a business owner.
  • Financial statements are prepared to summarize changes resulting from business transactions that occur during an accounting period. The preparation of the financial statements is the seventh step in the accounting cycle.
  • The financial statements may be handwritten or typed but most often are prepared on a computer.
  • The income statement reports the net income or net loss for the period. The main purpose of the income statement is to provide a report of revenue earned and the expenses incurred over a specific period of time.
  • Like the work sheet heading the heading of an income statement has three parts
  • When preparing an income statement heading, be sure to follow the wording and capitalization shown in the figure. The wording on the date line is especially important. The reporting period will vary from business to business and must be clearly identified.
  • After the heating enter the revenue for the period. The income statement section of the work sheet is the information source used in preparing the income statement. See figure 9-4 on page 207.
  • After total revenue is entered
  • The income statement is complete. If the amount shown on the worksheet doe not equal the amount on the income statement there is an error.
  • See figure 9-5 page 208 for help in how to report net loss
  • One way to evaluate how a company is performing is by tracking the increase or decrease in Owner’s equity.
  • The statement of changes in owner’s equity summarizes changes in the owners’ capital account as a result of business transactions during the period. This state is prepared at the end of the period. It is a supporting document of the balance sheet.
  • The balance sheet reports the financial position of the business at a specific point in time.
  • The balance sheet is a report of the balances in all assets, liabilities and owner equity account at the end of the period. These accounts are called permanent accounts The main purpose of the balance sheet is to provide a record of assets of the business and a summary of the claims against those assets on a specific date.
  • Remember unlike the Income statement the balance sheet is the business at a specific point in time.
  • The balance sheet is prepared in report form, the balance sheet accounts are shown one under the other.
  • This percentage show that for each dollar of sales/revenue $.43 is profit.
  • The current ratio is the relationship between current assets and current liabilities. Current assets are those that can convert to cash during the normal business cycle. They are cash in bank, accounts receivable and supplies. Current liabilities are debt of the business that must be paid within the next accounting period like accounts payable. A quick ratio measures the relationship between short-term assets and current liability. Short term assets are those that can be quickly converted to cash. It is computed by dividing total cash and receivable by total current liabilities. A ratio of 2:1 or higher is considered favorable by creditors.
  • Transcript

    • 1. Financial Statements for a Sole Proprietorship Chapter 9
    • 2. Exploring the World of Business <ul><li>New England Aquarium funds its operations in several different ways. Sources of funds includes </li></ul><ul><ul><li>Memberships sold to the public </li></ul></ul><ul><ul><li>Admissions fees </li></ul></ul><ul><ul><li>Sale of Aquarium-sponsored books and films </li></ul></ul><ul><ul><li>Grants from corporate sponsors </li></ul></ul><ul><li>What do you think? </li></ul><ul><ul><li>Why is it important for New England Aquarium to prepare financial statements even though their purpose is not to earn a profit. </li></ul></ul>
    • 3. The Income Statement Section 1
    • 4. What You’ll Learn <ul><li>Why financial statements are important for business decisions. </li></ul><ul><li>The purpose of the income statement. </li></ul><ul><li>How to prepare an income statement. </li></ul>
    • 5. Key Terms <ul><li>Financial Statement </li></ul><ul><li>Income Statement </li></ul>
    • 6.  
    • 7. Financial Statements <ul><li>The primary statements prepared for a sole proprietorship is </li></ul><ul><ul><li>Income statement </li></ul></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Statement of changes in Owner Equity </li></ul></ul>
    • 8. Income Statement <ul><li>The income statement contained the following section: </li></ul><ul><ul><li>The heading </li></ul></ul><ul><ul><li>The revenue for the period </li></ul></ul><ul><ul><li>The expenses for the period </li></ul></ul><ul><ul><li>The net income or net loss for the period </li></ul></ul>
    • 9. The Heading <ul><li>The name of the business (Who?) </li></ul><ul><li>The name of the report (What?) </li></ul><ul><li>The period covered (When?) </li></ul>
    • 10. The Heading (Cont.) For the Year Ended June 30, 20-- One year For the Quarter Ended March 30, 20-- One quarter For the Month Ended October 31, 20-- One month Wording of Date Line Reporting Period
    • 11. The Revenue Section <ul><li>Write “Revenue” on the first line at the left side of the form </li></ul><ul><li>Enter the revenue account names beginning on the second line, indented about half an inch from the left edge of the form. </li></ul><ul><li>Enter the balance of the revenue account </li></ul><ul><li>** If the business has more than one revenue account the balances are entered in the first column. Total revenues is then written in the second amount column. </li></ul><ul><li>** The words “Total Revenue is indented approx 1 inch from the left edge of the form </li></ul>
    • 12. The Expenses Section <ul><li>On the line following the revenue section write “Expenses” at the left side of the form. </li></ul><ul><li>On the following line, write the names of the expense accounts, indented half an inch, in order that they appear on the work sheet. </li></ul><ul><ul><li>Since there are several expense accounts enter the individual balances in the first amount column. </li></ul></ul>
    • 13. Expense Section (Cont) <ul><li>Draw a single rule under the last expense account balance. </li></ul><ul><li>Write the words “Total Expenses” on the line following the last expense account name, indent 1 inch </li></ul><ul><li>Add the balances for all the expense accounts write the total in the second amount column, one line below the last expense account balance. </li></ul>
    • 14. The Net Income Section <ul><li>Draw a single rule under the total expenses amount </li></ul><ul><li>Subtract the total expenses from total revenue to find net income. Enter the net income in the second amount column under the total expense amount. </li></ul><ul><li>On the same line write the words ”Net Income” at the left side of the form. </li></ul><ul><li>If the amount of net income matches the amount shown on the work sheet, draw a double rule under the net income amount. </li></ul>
    • 15. Showing a Net Loss <ul><li>If total expenses are greater than total revenue, there is a net loss. </li></ul><ul><li>Enter the net loss amount in the second amount column under the total expenses </li></ul><ul><li>Write the words “Net Loss” on the same line at the left side of the form. </li></ul>
    • 16. Section 1 Check your Understanding <ul><li>Thinking Critically </li></ul><ul><li>Communicating Accounting </li></ul><ul><li>Problem 9-1 Analyzing a Source Document </li></ul>
    • 17. The Statement of Changes in Owner’s Equity Section 2
    • 18. What You’ll Learn <ul><li>The purpose of the statement of changes in owner’s equity </li></ul><ul><li>How to prepare the statement of changes in owner’s equity. </li></ul>
    • 19. Key Terms <ul><li>Statement of changes in owner’s equity </li></ul>
    • 20. The Heading of the Statement of Changes <ul><li>The first line consists of the name of the business (Who?) </li></ul><ul><li>The second line indicates the name of the statement (What?) </li></ul><ul><li>The third line indicates the period covered (When?) </li></ul>
    • 21. Completing the Statement of Changes in Owner’s Equity <ul><li>On the first line, write “Beginning Capital” followed by a comma and then by the first day of the period. </li></ul><ul><li>In the second amount column, enter the balance of the capital account at the beginning of the period. The source of the information is the capital account </li></ul><ul><li>Next enter the increases to the capital account. Investments made by the owner during the period. On the next line write the words “Net Income” indent so the word line up with Investment by Owner”. Enter the amount in the first amount column, enter the net income amount. </li></ul>
    • 22. Completing the Statement of Changes (cont.) <ul><li>Write the words “Total Increase in Capital” on the next line at the left side of the form. Add the investments by owner and net income amount and enter total in the second amount column. Draw a single rule under the amount. </li></ul><ul><li>Write “Subtotal” on the next line, at the left side of the form. Add the amounts for beginning capital and total increase in capital. Enter the result in the second amount column. </li></ul>
    • 23. Completing the Statement of Changes (cont.) <ul><li>The next section of the statement lists the decreases to the capital account: withdrawals and net loss. Write the words “Less: Withdrawals by Owner” at the left side of the form. Find the withdrawal amount on the worksheet. Enter the amount in the second amount column. Draw a single rule under the withdrawal amount. </li></ul><ul><li>On the next line, at the left side of the form, write the words “Ending Capital” followed by a comma and the last day of the period. </li></ul><ul><li>Subtract the withdrawal amount to determine the ending balance of the capital account. Draw a double rule below the ending amount. </li></ul>
    • 24. Statement of Changes in the Owner’s Equity for an Ongoing Business <ul><li>To prepare the statement of changes in owners equity for an ongoing business you would need to go to the account ledger to obtain the beginning balance for the period. </li></ul>
    • 25. Statement of Changes in Owners Equity Showing a Net Loss <ul><li>Since there are two items that decrease capital, withdrawal and net loss, the amounts of the individual items are entered in the first amount column. </li></ul><ul><li>The total decrease in capital is entered in the second amount column </li></ul>
    • 26. Key Points <ul><li>Owner Investments and Withdrawals </li></ul><ul><ul><li>Investments by the owner and net income increase capital. </li></ul></ul><ul><ul><li>Withdrawals by the owner and net loss decrease capital. </li></ul></ul>
    • 27. A Matter of Ethics <ul><li>Financial Report or Repair? </li></ul><ul><li>Your favorite uncle, who owns a restaurant, has asked you to help with this bookkeeping. He desperately needs a bank loan and wants you to prepare the financial statements. After going over his accounting records, you don’t believe a bank will give him a loan; but you notice that by leaving out an expense or two, your uncle’s business could look more promising. After all, he does have some good ideas for improving the business. </li></ul><ul><li>Ethical Decision Making : </li></ul><ul><ul><li>What are the ethical issues? </li></ul></ul><ul><ul><li>What are the alternatives? </li></ul></ul><ul><ul><li>Who are the effected people? </li></ul></ul><ul><ul><li>How do the alternative effect the parties? </li></ul></ul><ul><ul><li>What would you do? </li></ul></ul>
    • 28. Section 2 Check Your Understanding <ul><li>Thinking Critically </li></ul><ul><li>Analyzing Accounting </li></ul><ul><li>Problem 9-2 Determining the Ending Capital Balances </li></ul>
    • 29. The Balance Sheet Section 3
    • 30. What You’ll Learn <ul><li>The purpose of the balance sheet </li></ul><ul><li>How to prepare a balance sheet </li></ul><ul><li>How to analyze information on financial reports </li></ul>
    • 31. Key Terms <ul><li>Balance sheet </li></ul><ul><li>Report form </li></ul><ul><li>Ratio analysis </li></ul><ul><li>Sales profitability ratio </li></ul><ul><li>Return on sales </li></ul><ul><li>Liquidity ratio </li></ul><ul><li>Current ratio </li></ul><ul><li>Current assets </li></ul><ul><li>Current liabilities </li></ul><ul><li>Quick ratio </li></ul>
    • 32. Sections of the Balance Sheet <ul><li>The heading </li></ul><ul><li>The assets section </li></ul><ul><li>The liability and owners equity section </li></ul>
    • 33. The Heading <ul><li>The name of the business ( Who?) </li></ul><ul><li>The name of the financial statement (What?) </li></ul><ul><li>The date of the balance sheet (When?) </li></ul>
    • 34. The Asset Section <ul><li>Write the word “Assets” on the first line in the center of the column containing the account names. </li></ul><ul><li>On the following line, enter asset account names and their balances. List them in the same order as they appear in the balance sheet section of the work sheet. Enter the account balances in the first amount column. Draw a single rule under the last account balance </li></ul><ul><li>On the next line write the words “Total Assets” indented about half an inch. Add the asset balances and enter total in the second amount column. </li></ul>
    • 35. The Liabilities and Owner’s Equity Sections <ul><li>On the line after “Total Assets” enter the heading :Liabilities” in the column containing the account names. </li></ul><ul><li>List the liability account names and their balances in the same order as the work sheet. Draw a single rule under the last account balance. </li></ul><ul><li>On the next </li></ul>
    • 36. Ratio Analysis <ul><li>Ratio analysis </li></ul><ul><ul><li>The comparison of two amounts on a financial statement </li></ul></ul><ul><ul><li>The evaluation of the relationship between those amounts </li></ul></ul><ul><li>Profitability ratios </li></ul><ul><ul><li>Used to evaluate the earning performance of business during the accounting period </li></ul></ul><ul><ul><li>Measure of its ability to grow and continue to earn revenue </li></ul></ul>
    • 37. Return on Sales <ul><li>Sales is a revenue account representing the sale of merchandise. </li></ul><ul><li>Return on sales examine the portion of each sales dollar that represent profit </li></ul><ul><ul><li>To calculate this ratio: </li></ul></ul><ul><ul><ul><li>Divide net income by sales </li></ul></ul></ul>
    • 38. Liquidity Ratios <ul><li>A liquidity ratio measures the ability of a business to pay its current debts. </li></ul><ul><li>Two common ratios are </li></ul><ul><ul><li>Current ratio </li></ul></ul><ul><ul><li>Quick ratio </li></ul></ul>
    • 39. Section 3 Check Your Understanding <ul><li>Thinking Critically </li></ul><ul><li>Communicating Accounting </li></ul><ul><li>Problem 9-3 Calculating Return on Sales </li></ul>
    • 40. Key Concepts <ul><li>Preparing financial reports is the seventh step in the accounting cycle. The primary reports are the income statement and the balance sheet. The statement of changes in owner’s equity is often prepared. </li></ul><ul><li>The income statement reports the net income or net loss for the period </li></ul><ul><li>The statement of changes in owner’s equity summarizes the impact the periods business had on the capital account </li></ul><ul><li>The balance sheet reports the balances of assets, liability and owner’s equity at the end of the period. </li></ul>
    • 41. Key Concepts (cont.) <ul><li>Financial reports may be handwritten, typewritten, or prepared using a computer. </li></ul><ul><li>The chart on page 223 list the source of information for each financial report. </li></ul><ul><li>Ratio analysis is used to determine the financial strength, activity, or debt-paying ability of a business. </li></ul><ul><li>Liquidity ratios measure the ability of a business to pay its current debts as they become due. </li></ul>
    • 42. Chapter 9 Review and Activities <ul><li>Conducting an Audit with Alex </li></ul><ul><li>Problem 9-6 </li></ul><ul><li>Project: Case Study 3 </li></ul>

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