0 glencoe accounting unit 4 chapter 19 copyright © by the mcgraw-hill companies, inc. all rights...

1Glencoe Accounting Unit 4 Chapter 19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for a CorporationA corporation may be owned by one person or thousands. The ownership of a corporation is represented by shares of stock.

The Ownership of a CorporationSECTION 19.1


Recording the Ownership of a CorporationCorporations have a Capital Stock account instead of the sole proprietorship’s owner’s capital account. This is a stockholders’ equity account that is the value of the stockholders’ claims to the corporation.



Reporting Stockholders’ Equity in a CorporationThe owner’s equity section is called stockholders’ equity and must be reported in two parts:

equity contributed by the stockholders equity earned through business profits



Equity Contributed by StockholdersStockholders contribute to equity by purchasing shares of stock. This amount is recorded in the Capital Stock account.



Equity Earned Through Business ProfitsThe net income earned and retained by a corporation is called retained earnings. This amount is recorded in the Retained Earnings account.



Balance Sheet PresentationCompare the capital section of the balance sheet to a sole proprietorship and a corporation.



Characteristics of Financial InformationFinancial statements are used by many groups:

managers stockholders creditors government agencies, employees, consumers,

and the general public



ComparabilityFor accounting information to be useful, it must be comparable. Comparability allows

information to be compared from one period to another, and

the comparison of information between businesses.



ReliabilityReliability refers to the confidence users have that financial information is reasonably free from bias and error.



RelevanceRelevance is the requirement that all information that would affect decisions of financial statement users be disclosed in the financial reports.



Full DisclosureFull disclosure means that financial reports include enough information to be complete.



MaterialityMateriality means that relevant information should be included in financial reports.



A Corporation’s Financial StatementsA merchandising corporation can prepare four financial statements:

the income statement the statement of retained earnings the balance sheet the statement of cash flows

Many of today’s businesses depend on computers to maintain the general ledger and subsidiary ledgers and to prepare the end-of-period financial statements.



The Income StatementWhen preparing the income statement, the revenue realization and the matching principles are applied.

Merchandising businesses have the cost of merchandise purchased and resold to customers, so the income statement has five sections instead of the service business’s three sections:

Revenue Cost of Merchandise Sold Gross Profit on Sales Operating Expenses Net Income (or Loss)

The Income StatementSECTION 19.2


The Revenue SectionThis section reports the net sales for the period. To complete the revenue section:

Enter Revenue: at the left edge on the first line. On the second line, enter Sales (indented). Enter deductions from Sales on the next lines. Add the balances of the contra revenue accounts

and enter the total below Sales in the third amount column.

Enter the words Net Sales (indented) on the next line. Subtract the total of the contra revenue accounts from the Sales account and enter the amount in the fourth amount column.



The Revenue Section



The Cost of Merchandise Sold SectionThe cost of merchandise sold is calculated as follows:

Computing the cost of merchandise sold requires two steps:

Determine the cost of all merchandise available for sale.

Calculate the cost of merchandise sold.



Calculating Cost of Merchandise Available for Sale

Add net purchases to the beginning inventory amount. Use the following to calculate net purchases:



Calculating Cost of Merchandise SoldSubtract the ending merchandise inventory amount from the cost of merchandise available for sale to calculate the cost of merchandise sold. The following is an example of the Income Statement completed through Gross Profit on Sales.



Calculating Cost of Merchandise Sold



The Gross Profit on Sales SectionThe gross profit on sales is the profit made before operating expenses are deducted. Subtracting the cost of merchandise sold from net sales will give the gross profit on sales.



The Operating Expenses SectionThe operating expenses are the costs of goods and services used in the process of earning revenue. Operating expenses can be further classified into selling expenses (incurred to sell or market the merchandise sold) and administrative expenses (related to the management of the business).



The Net Income SectionThe federal corporate income tax amount is presented separately on the income statement so the income statement shows the amount of operating income. Operating income is the amount of income earned before deducting federal corporate income taxes.

An example follows of the completed Income Statement.



Analyzing Amounts on the Income StatementThe information reported on financial statements is expressed in dollars. Vertical analysis reports each dollar amount as a percentage of a base amount, which enables users to more easily view the relationships among the items on the financial statements.

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The Statement of Retained EarningsA statement of retained earnings reports the changes in the Retained Earnings account during the period. The changes result from business operations and dividends.

The statement is prepared from information on the work sheet and is used when preparing the balance sheet.

The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows

SECTION 19.3


The Balance SheetThe balance sheet reports the balances of all asset, liability, and stockholders’ equity accounts for a specific date. The assets are listed first, followed by the Liabilities section and the Stockholders’ Equity section.


SECTION 19.3


SECTION 19.3 The Balance Sheet


Analyzing Amounts on the Balance SheetHorizontal analysis uses dollar amounts expressed as percentages to compare the same items on financial statements for two or more accounting periods or dates.

A base period, usually a year, is used for comparison.


SECTION 19.3


SECTION 19.3 Analyzing Amounts on the Balance Sheet


The Statement of Cash FlowsThe information on the statement of cash flows is vital for decision making. The statement shows a company’s cash flow, which indicates the ability of the company to pay its debts and pay dividends. Cash inflows come into and cash outflows go out of a business.


SECTION 19.3


SECTION 19.3 The Statement of Cash Flows


Cash Flows from Operating ActivitiesOperating activities include all transactions that occurred during the accounting period as part of normal business operations.

To determine operating cash inflows and outflows, the income statement and balance sheet amounts are converted to the cash basis of accounting.


SECTION 19.3


Cash Flows from Investing ActivitiesInvesting activities include

loans the business makes, payments received for those loans, purchase and sale of plant assets, and Investments.


SECTION 19.3


Cash Flows from Financing ActivitiesFinancing activities are the borrowing activities needed to finance the company operations and the repayment of these debts.

The following table shows typical cash inflows and outflows for operating, investing, and financing activities.


SECTION 19.3


Cash Flows from Financing Activities


SECTION 19.3

0 glencoe accounting unit 4 chapter 19 copyright © by the mcgraw-hill companies, inc. all rights...

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