chapter 9 • planning guide -...

CHAPTER 9 • PLANNING GUIDE

SECTION RESOURCESSection College & Career Readiness Professional Development

SECTION 9.1 THE INCOME STATEMENT Reading Strategy, pp. 223, 225Critical Thinking, pp. 223, 224, 225, 226Math Skill Practice, p. 224Writing Support, pp. 225, 226

Teacher to Teacher, p. 225Extended Skill Practice, p. 225The income statement reports the net loss

for an accounting period.

SECTION 9.2 THE STATEMENT OF CHANGES IN OWNER’S EQUITY Critical Thinking, pp. 228, 229, 230, 231

Reading Strategy, pp. 228, 229, 230Writing Support, pp. 229, 230Math Skill Practice, p. 231

Extended Skill Practice, p. 231

The statement of changes in owner’s equity shows how the owner’s fi nancial interest changed during the accounting period.

SECTION 9.3 THE BALANCE SHEET AND THE STATEMENT OF CASH FLOWS Critical Thinking, pp. 233, 234, 235, 236,

237, 238Reading Strategy, pp. 233, 237Writing Support, pp. 234, 236, 238 Differentiated Instruction, pp. 234, 235Math Skill Practice, pp. 236, 237, 238

Common Mistakes, p. 236Connect to History, p. 238Extending the Content, p. 238Global Accounting, p. 24821st Century Skills, p. 247College and Career Readiness, p. 247Robert Half Corner, p. 247Career Wise, p. 248 Analyzing Financial Reports, p. 249H.O.T. Audit, p. 249

The statement of changes in owner’s equity shows how the owner’s fi nancial interest changed during the accounting period.

PACING YOUR LESSONS

Chapter Introduction Section 1 Section 2 Section 3 Chapter Assessment

1 period 1 period 2 periods 2 periods 1 period

P

*This pacing guide is based on a traditional 36-week course. See pp. TM38–TM39 for complete pacing guide information.

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STANDARDS AND SKILLS • CHAPTER 9

STANDARDS-BASED LESSON PLANNational Standards for Business Education

Standards1.C.1 Deliver a speech and make a presentation

II.A.7 Describe the information provided in each fi nancial statement and how the statements articulate with each other

III.A.4 Assess profi tability by calculating and interpreting fi nancial ratios

V.A.10 Prepare the fi nancial statements for the different types of business operations and ownership structures

PROFESSIONALDEVELOPMENT

Targeted professional development is correlated throughout Glencoe Accounting. The McGraw-Hill Professional Development Mini Clip Video Library provides teaching strategies to strengthen academic and learning skills. Log on to glencoe.com.

In this Chapter, you will fi nd these Mini Clips:• ELL: Low-Risk Environment, p. 224• Math: Unknowns in Equations, p. 229• Reading: Preparing to Read, p. 234• Math: Cooperative Groups in Mathematics, p. 237

*Highlighted blocks indicate areas covered in the chapter. Additional skills are also covered throughout the Teacher Edition.

Resources: Allocating Time Allocating Money Allocating Material and Facility Resources

Allocating Human Resources

Information:Acquiring and

Evaluating Information

Organizing and Maintaining Information

Interpreting and Communicating

Information

Using Computers to Process Information

Interpersonal Skills: Participating as a Member of a Team Teaching Others Serving Clients/

Customers Exercising Leadership Negotiating to Arrive at a Decision

Working With Cultural Diversity

Systems: Understanding Systems

Monitoring and Correcting Performance

Improving and Designing Systems

Technology: Selecting Technology Applying Technology to Task

Maintainingand Troubleshooting

Technology

21st Century Skills Correlations

*See pp. TM33–TM35 for detailed NBEA standards and correlations.

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CORRELATIONS TO NATIONAL STANDARDS FOR BUSINESS EDUCATION

See p. TM33 for a detailed correlation chart.Standards: I.A.2, I.B.2, I.B.3, I.C.1, I.C.3, I.C.4, I.C.5, II.A.7, II.A.8, II.A.10, II.A.11, II.A.12, II.A.15, II.A.17, III.A.1, III.A.2, III.A.4, III.A.5, III.A.7, IV.A.2, IV.D.3, IV.G.3, V.A.10, VI.A.2

FOCUS

The success of 5boronyc is due in part to the company’s deep commitment to the art and sport of skateboarding. They company sponsors riders, not just in the United States, but in countries around the globe, including New Zealand, Japan, Brazil, Poland, Austria, and Greece.

Analyze Possible answer: When 5boronyc was founded in 1996, most of the accounts were probably related to start-up expenses and investments. As the company has grown since then, it has likely added other accounts related to its newer sources of revenues and expenses.

FOCUS ON THE PHOTO Visual LiteracyPossible answer: Preferences will vary. Those who work in large organizations often have more opportunities to advance in their careers and may earn higher pay. Those who work in a small organization may learn more diverse skills because work is less specialized. Ask: How do you think 5boronyc knows whether business is good or not? Possible answer: The business owner and/or accountant (if another employee) keep up-to-date financial statements with accurate information regarding income and expenses to know whether assets have increased or decreased.

Th f b i d i

REAL-WORLD Business Connection

CHAPTER

glencoe.com Get podcasts, videos, and accounting forms.

REAL-WORLD Business Connection

FOCUS ON THE PHOTOA sole proprietorship can be a small business like 5boronyc with few employees or a large business with many employees. Large and small businesses must prepare fi nancial statements. Would you prefer working as an accountant for a large or small company? Why?

5boronycSkateboarding and New York City are in Steve Rodriguez’s blood. The owner of 5boronyc founded his business in 1996, but his passion for skateboarding goes back more than 25 years to the long days he and his friends spent traveling through New York’s fi ve boroughs, seeking out the best spots for riding and practicing tricks. Rodriguez’s passion for urban skateboarding culture is refl ected in the creative decks, wheels, and apparel 5boronyc sells.

Connect to the BusinessOne step of the accounting cycle is to determine whether a business is making or losing money during a certain period of time. Financial statements gather information from diff erent accounts and documents so that a sole proprietorship such as 5boronyc knows whether the owner’s claims to business assets have increased or decreased.

AnalyzeWhat types of accounts do you think 5boronyc used in 1996? What accounts do you think have been added?

BIG IDEAFinancial statements provide

essential information for making sound decisions.

FINANCIAL STATEMENTS FOR A SOLE PROPRIETORSHIP

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INTRODUCING CHAPTER 9

Good decisions are based on facts, not impressions. The financial statements of a business summarize the facts that can be used as the basis of good business decisions. Ask students to suggest various decisions that might be based on the facts in financial statements.

BIG IDEA

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TEACH Previewing the Main IdeasUse these questions and activities at the beginning of the sections to focus on the Main Ideas.

SECTION 9.1 THE INCOME STATEMENTRemind students that accounting is a means of communicating financial information. Ask: What financial information would owners, managers, and investors want to know about a business? what types of transactions the business has, what monetary changes occurred for the period, whether there was a profit or a loss, etc.

SECTION 9.2 THE STATEMENT OF CHANGES IN OWNER’S EQUITYRefer to the accounting equation. Ask: Which section would owners be most interested in? owner’s equity Ask: What specifically would an owner want to know? by how much owner’s equity increased or decreased and what caused it to do so

SECTION 9.3 THE BALANCE SHEET AND THE STATEMENT OF CASH FLOWSAsk: In what way do you think a balance sheet relates to the accounting equation? The balance sheet shows that the accounting equation balances, that is, that assets equal liabilities plus owner’s equity. Ask: Why is it important for owners and managers to know how much cash flows through the business? So they can make informed decisions: the amounts of cash receipts and disbursements, the source of cash, and how it was used.

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The interactive student text and working papers can be found on McGraw-Hill Connect.

Online Learning CenterGet activity and game ideas, reproducible forms, and links to additional accounting resources.

Glencoe Technology Solutions

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Before You Read

READING GUIDE STANDARDS

1. CCR stand text

2. CCR stand text

ACADEMIC

English Language ArtsNCTE 8 Use information resources to gather information and create and communicate knowledge. (p. 241)

MathematicsNCTM Problem Solving Solve problems that arise in mathematics and in other contexts. (p. 241)

NCTE National Council of Teachers of EnglishNCTM National Council of Teachers of Mathematics

Chapter Objectives

Concepts

C1 Explain the purpose of the income statement. (p. 224)

C2 Prepare an income statement. (p. 224)

C3 Explain the purpose of the statement of changes in owner’s equity. (p. 228)

Analysis

A1 Prepare a statement of changes in owner’s equity. (p. 228)

A2 Explain the purpose of the balance sheet. (p. 233)

Procedures

P1 Prepare a balance sheet. (p. 233)

P2 Explain the purpose of the statement of cash flows. (p. 236)

P3 Explain ratio analysis and compute ratios. (p. 237)

Main IdeaThe income statement reports the net income or net loss for an accounting period. The statement of changes in owner’s equity shows how the owner’s fi nancial interest changes during the accounting period. The balance sheet reports the fi nancial position at a specifi c point in time. The statement of cash fl ows reports the sources and uses of cash during the accounting period.

CHAPTER 9

The Essential Question What is the basis for making good fi nancial decisions?

Common Core

Speaking and Listening Make strategic use of multimedia elements and visual displays of data to gain audience attention and enhance understanding. (p. 247)

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FOCUS READING GUIDE

Before You ReadThe Essential Question The essential question encourages students to inquire about the underlying purpose of accounting. Use the essential question as a discussion starter, emphasizing to students that there are no right or wrong answers.

Main IdeaHave students review The Essential Question and Main Idea. Ask: How to people who read fi nancial statements use the information? Answers will vary. Owners assess operations; outsiders such as bankers use it to determine whether to loan money to the business.

Chapter Objectives Have students review the objectives to set expectations for what they’ll learn in Chapter 9.

Academic StandardsHelp students see cross-curricular connections whenever possible.

College and Career Readiness standards emphasize skills and concepts students will need beyond high school.

Connect to the Reading Guide Use these questions to help students connect to the reading.1. What does the chapter title tell you?

Predict2. What do you already know about this

subject from personal experience? Activate Prior Knowledge

3. What have you learned about this in the earlier chapters? Make Connections

4. What gaps exist in your knowledge of this subject? Set a Purpose for Reading

Print• Chapter Study Guides and

Working Papers pp. 163–182 • Fast File Chapter 9 ResourcesDigital Transparencies(TeacherWorks Plus)• Section 9.1: Transparencies 9-1

to 9-6

• Section 9.2: Transparencies 9-7 to 9-10

• Section 9.3: Transparencies 9-11 to 9-13

Technology• Presentation Plus! • TeacherWorks Plus

• Peachtree Accounting Software and Applications

• Using QuickBooks® with Glencoe Accounting

Online• McGraw-Hill Connect• Glencoe Accounting Online

Learning Center

CHAPTER 9 RESOURCES MANAGER

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Content VocabularyGuide students in reading and discussing the defi nitions of the two content vocabulary terms. Then have each student draw a tree diagram with four lower boxes connected to the central box. Ask them to label the

central box and one lower box with the vocabulary terms for this section, and have them note the defi nition of each term in its box. Instruct students to save these diagrams; they will complete them in the next sections of Chapter 9.

PRETEACHING SECTION VOCABULARYAcademic VocabularyAsk students to choose the best synonym for each academic vocabulary word:1. evaluate a. increase b. criticize c. reduce d. judge judge2. illustrates a. diagrams b. shows c. shrinks d. supports shows

SECTION VOCABULARY

Content Vocabulary• financial statements

• income statement

Academic Vocabulary• evaluate

• illustrates

THE INCOME STATEMENT SECTION 9.1

To operate a business profitably, the owner needs to have current financial information. Businesses ranging from an oil company to a dairy farm must organize financial information to evaluate profits or losses.Financial statements summarize the changes resulting from business transactions that occur during an accounting period. As you can see in Figure 9–1, preparing financial statements is the seventh step in the accounting cycle.

22 3344

55667788

99

11

Collect and verify source documents

Analyze eachtransaction

Journalizeeach transaction

Post to the ledger

Prepare a trial balance

Prepare a work sheet

Prepare financialstatements

Journalize and postclosing entries

Prepare apost-closingtrial balance

INVOICE

RECEIPT

MEMORANDUM

LEDGER

GENERAL JOURNAL

TRIAL BALANCE

WORK SHEETINCOME

STATEMENTSTATEMENT OF

CHANGES INOWNER'S EQUITY

BALANCESHEET

POST-CLOSINGTRIAL BALANCE

GENERAL JOURNAL

LEDGER

ACCOUNT

DEBIT CREDIT

ACCOUNT

DEBIT CREDIT

Financial StatementsWhat Are the Four Financial Statements?

The primary financial statements prepared for a sole proprietorship are the income statement and the balance sheet. Two other statements, the statement of changes in owner’s equity and the statement of cash flows, are also often prepared. The finan cial statements may be handwritten or typed but most often are prepared on a computer. With a computerized accounting system, the business owner can generate financial statements without first preparing a work sheet. Let’s learn how to prepare financial statements for a service business such as Zip Delivery Service.

Figure 9 –1 The Accounting Cycle with the Seventh Step Highlighted

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• Show Me tutorials • Let Me Try interactive

activities.

Section 9.1 The Income Statement 223

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SECTION 9.1

FOCUSBell Ringer • Comparing and Contrasting:

Write the questions Who?, What?, and When? on the board. Have students tell you what information on the headings of a work sheet and an income statement answer each question.

• Digital Transparency 9-1 focuses students’ attention on the topics covered in Section 9.1.

Bell Ringer

TEACHR Reading Strategy

Activating Prior Knowledge Ask: How is information about fi nancial changes helpful? Owners can fi nd out which practices are effective, if expenses are increasing or decreasing, etc. OL

C Critical ThinkingActivating Prior Knowledge Refer students to Figure 9-1 (Digital Transparency 9-2). Ask: Why is the work sheet prepared before the fi nancial statements? It organizes information and summarizes necessary totals that will be needed to prepare the fi nancial statements. OL

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ELL: Low-Risk Environment Author Josefi na Tinajero discusses the importance of creating a low-risk environment for English language learners.

Zip Delivery ServiceIncome Statement

For the Month Ended October 31, 20--

The Income StatementWhat Is the Purpose of the Income Statement?

The income statement reports the net income or net loss for a specific period of time. As you recall from Chapter 8, net income or net loss is the difference between total revenue and total expenses. For this reason the income statement is sometimes called a profit-and-loss statement or anearnings statement.

Income Statement SectionsThe income statement contains the following sections:

• the heading• the revenue for the period• the expenses for the period • the net income or net loss for the period

Heading. Like the work sheet heading, the heading of an income statement has three parts:

1. The name of the business (Who?) 2. The name of the report (What?) 3. The period covered (When?)

The heading for Zip’s income statement is shown in Figure 9–2. Each line of the heading is centered on the width of the statement.

When preparing an income statement heading, be sure to follow the wording and capitalization shown in Figure 9–2. The date line is especially important because the reporting period varies from business to business.

Revenue Section. After the heading has been completed, enter the revenue earned for the period. Look at Figure 9–3 on page 225. The information used to prepare the income statement comes from the Income Statement section of the work sheet.

Zip’s income statement is prepared on standard accounting stationery, which has a column for account names and two amount columns. The first amount column is used to enter the balances of the individual revenue and expense accounts. The second amount column is used to enter totals: total revenue, total expenses, and net income (or net loss).

Figure 9–3 shows the procedures to prepare an income statement:

1. Write Revenue: on the first line at the left side of the form. A 2. Enter the revenue account names beginning on the second line,

indented about a half inch from the left edge of the form. B 3. Enter the balance of each revenue account. Since Zip has only one

revenue account, Delivery Revenue, total reve nue is the same as the balance of the one revenue account. The balance is thus written in the second, or totals, column. C

Figure 9–2 The Heading for an Income Statement

❶ (Who?)

➋ (What?)

➌ (When?)


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SECTION 9.1

TEACHM Math Skill PracticeThinking Algebraically Refer students to the sections of the income statement. Ask: How would you state net income and net loss in terms of revenue and expenses algebraically? Revenue � Expenses � Net Income; Revenue � Expenses � Net Loss OL

C Critical ThinkingMaking Inferences Refer students to Figure 9-2 (Digital Transparency 9-3). Ask: Why is the date line especially important? Reporting periods vary. The date line identifi es whether the information is for a month, quarter, or year. OL

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16 0 8 0 00

11 2 3 0 004 8 5 0 00

Revenue:Rental RevenueRepair Revenue

Total Revenue

Figure 9–4 Income Statement with More Than One Revenue Account

Many businesses have more than one source of revenue and thus have a separate revenue account for each source. For example, a swim club might have accounts such as Membership Fees and Pool Rental. Figure 9–4illustrates the Revenue section of the income statement for a business with more than one revenue account. Notice that the words Total Revenue are indented about one inch from the left edge of the form.

TRIAL BALANCE

DEBIT CREDIT

INCOME STATEMENT

DEBIT CREDIT

BALANCE SHEET

DEBIT CREDITACCOUNT NAME

ACCT.NO.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

1

2

3

4

5

6

7

8

9

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20

21 125 001 450 00

3 000 00200 00

12 000 00

500 00

75 00600 00700 00125 00

39 775 00

75 0011 650 0025 400 00

37 125 001 150 00

38 275 00

21 125 001 450 00

3 000 00200 00

12 000 00

500 00

38 275 00

38 275 00

2 650 00

2 650 00

2 650 00

75 00600 00700 00125 00

1 500 001 150 002 650 00

75 0011 650 0025 400 00

2 650 00

39 775 00

101105110115120125201205301302303401501505510515

Cash in BankAccts. Rec.—City NewsAccts. Rec.—Green CompanyComputer EquipmentOffice EquipmentDelivery EquipmentAccts. Pay.—Rockport AdvertisingAccts. Pay.—Coast to Coast AutoCrista Vargas, CapitalCrista Vargas, WithdrawalsIncome SummaryDelivery RevenueAdvertising ExpenseMaintenance ExpenseRent ExpenseUtilities Expense

Net Income

Zip Delivery ServiceWork Sheet


AB C

IF

LJH

D

E

GK



2 6 5 0 00

1 5 0 0 001 1 5 0 00

7 5 006 0 0 007 0 0 001 2 5 00

Revenue:Delivery Revenue

Expenses:Advertising ExpenseMaintenance ExpenseRent ExpenseUtilities Expense

Total ExpensesNet Income

E

Figure 9–3 Preparing an Income Statement


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Financial Statement Elements To help students understand the elements of fi nancial statements, create index cards with the following labels: Beginning capital balance; Total assets; Rent Expense; Delivery Revenue; Withdrawals by owner; Accounts Receivable; Total increase in capital; Total liabilities; Total expenses; Computer Equipment. (You may wish to make additional cards.) Tack three headings on a bulletin board for Income Statement, Balance Sheet, and Statement of Changes in Owner’s Equity. Ask volunteers to quickly tack the index cards under the appropriate statement title. Time students for fastest completion.

Edward Schencks, Jr.Sacopee Valley High School, Hiram, Maine

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C

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TEACHERTEACHER

TEACHERTEACHER

TOTO

SECTION 9.1

TEACHR Reading Strategy

Comparing Documents Have students examine Figure 9-3 (Digital Transparency 9-4). Ask: What is the source of the Income Statement information? the Income Statement section of the work sheet Ask: How is this information grouped in the Income Statement? The Debit column lists the expenses and the Credit column lists the revenue. Expenses and revenue are grouped under a Revenue heading and an Expenses heading. OL

C Critical ThinkingSynthesizing Refer students to Figure 9-3. Ask: Why does Roadrunner report only one revenue account? Because it has only one source of revenue–fees from providing delivery services. OL

W Writing SupportWriting Clearly Have students list the various sources of revenue that The Walt Disney Company might report. movie admissions; theme park admissions; sale of consumer products (toys, clothes, movies); advertising; etc. BL

Extended Skill PracticeChecking AccountsThe Math Review in Chapter 9 Fast File has a reproducible master titled “Checking Accounts.” You can also fi nd this reproducible master on the TeacherWorks Plus.

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3 1 7 0 00

3 5 2 0 00

3 5 0 00

2 7 5 007 5 0 002 7 0 00

1 9 0 0 003 2 5 00

Revenue: Delivery Revenue

Expenses: Advertising Expense Maintenance Expense Miscellaneous Expense Rent Expense Utilities Expense Total Expenses

Net Loss

Expenses Section. The expenses incurred during the period are reported next. The expense account names and the balances in the Income Statement section of the work sheet are used to prepare the Expenses sec-tion of the income statement. Refer to Figure 9–3 as you read the following instructions:

1. On the line following the revenue section, write Expenses: at the left side of the form. D

2. On the following lines, write the names of the expense accounts, indented half an inch, in the order that they appear on the work sheet. Since there are several expense accounts, enter the individual balances in the first amount column. E

3. Draw a single rule under the last expense account balance. F 4. Write the words Total Expenses on the line following the last

expense account name, indented about one inch. G 5. Add the balances for all expense accounts. Write the total expenses

amount in the second amount column, one line below the last expense account balance. H

Net Income Section. The next step is to enter net income. Net income, remember, occurs when total revenue is more than total expenses. Refer to Figure 9–3 as you read the following instructions for the preparation of the Net Income section.

1. Draw a single rule under the total expenses amount. I 2. Subtract the total expenses from the total revenue to find net

income. Enter the net income in the second amount column under the total expenses amount. J

3. On the same line, write Net Income at the left side of the form. K 4. If the amount of net income matches the amount on the work

sheet, draw a double rule under the net income amount. L

Reading Check Identify What are the four sections of the Income Statement?

Reporting a Net LossIf total expenses are more than total revenue, a net loss exists. To

determine the amount of net loss, subtract total revenue from total expenses. Enter the net loss in the second amount column under the total expenses amount. Write the words Net Loss on the same line at the left side of the form. Figure 9–5 illustrates how to report a net loss.

Figure 9–5 Income Statement Showing a Net Loss


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TEACHW Writing SupportWriting Clearly Refer students to Figure 9-5 (Digital Transparency 9-6). Ask students to make a list of source documents that would support Miscellaneous Expenses. Answers will vary and may include receipts of purchases, check stubs, and memos that are not includable in other expense categories. OL

C Critical ThinkingSynthesizing Ask: Is the income statement the fi rst time you calculated net loss? no Ask: When did you fi rst calculate it? on the work sheet Ask: Is the work sheet a fi nancial statement? no OL

Reading Checkheading, revenue section, expenses section, and net income section

SECTION 9.1

WC

226 Chapter 9

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ASSESSSECTION 9.1 ASSESSMENT RESOURCESUse these resources to assess mastery of section content.• Chapter Study Guides and Working

Papers (Problem 9-1)• Presentation Plus!

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Online Learning Center: Click on Student Center. Click on Self-Assessment Quizzes and select Chapter 9.

SECTION 9.1 ASSESSMENT ANSWERS

Reinforce the Main Idea Step 1: Enter the heading at the top of the income statement. Include the business name, the type of fi nancial statement, and date.Step 2: Enter the revenue for the period in the Revenue section.Step 3: Enter the expenses for the period in the Expenses section.Step 4: Enter the net income or net loss for the period. Verify it is the same amount reported on the work sheet. The statement is double-ruled.

Math for AccountingNet loss of $605.00

PROBLEM 9–11. Stratford Learning Center2. $8323. Sandra Miller4. Payment on account5. August 216. Rose Hughes7. Roxbury, New York

CLOSESynthesizing Write the following sentence on the board: The income statement follows the matching principle. Ask: How does the matching principle apply to the income statement? Revenue must be matched with expenses for the same period. Only the revenue earned and expenses incurred for the period shown in the heading should be listed. OL

SEC TION 9.1

1. What are the primary fi nancial statements for a sole proprietorship? income statement, balance sheet

2. What are the income statement sections? heading, revenue, expenses, net income or net loss3. What information is included in the heading? who: business name; what: name of report;

when: period covered by report4. What are other names for the income statement? profi t-and-loss statement, earnings

statement5. What period other than a month does the income statement cover? quarter, yearQUIZ

SEC TION 9 1

Creating an Income Statementg

After You Read

PROBLEM 9–1 Analyzing a Source Document INSTRUCTIONS Based on the receipt shown here, answer the following questions in your working papers.

1. What is the name of the business that received the money?2. How much money was received?3. Who paid the money?4. Why was the money paid?5. When was the payment made?6. Who received the money and made out the receipt?7. Where is the business that received the money located?

Math for AccountingEarth-Friendly Cleaning Service prepares monthly financial statements. The two revenue accounts show ending balances of $8,740.00 and $2,080.00. The following expense account balances also appear in the Income Statement section of this month’s work sheet.

AdvertisingExpense $3,690.00MaintenanceExpense 2,745.00MiscellaneousExpense 605.00RentExpense 3,400.00UtilityExpense 985.00

Calculate the amount of net income or net loss for the month.

SECTION 9.1 • ASSESSMENT

Reinforce the Main IdeaUsing a diagram like this one, summarize the steps for creating an income statement. Add answer boxes for steps as needed.

DOLLARS

FOR

RECEIPT

RECEIVED BY

20 --

RECEIVED FROM $

Eight hundred thirty-two and no/100

On account

Rose Hughes

Aug. 21

No. 1834

Stratford Learning Center243 Eastern Road

Roxbury, NY 14752

Sandra Miller 832.00


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SECTION 9.1

Chapter 9 227

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PRETEACHING SECTION VOCABULARY

SECTION OBJECTIVES

Content Vocabulary• statement of changes

in owner’s equity

SECTION 9.2

THE STATEMENT OF CHANGES IN OWNER’S EQUITY

An important concern of a business owner is whether the owner’s equity has increased or decreased during the period. An increase in owner’s equity means the owner’s claims to the assets of the business have grown. A decrease means the owner’s claims to the assets of the business have been reduced.

The Statement of Changesin Owner’s EquityWhere Do You Find the Information Needed to Prepare This Financial Statement?

The statement of changes in owner’s equity summarizes changes in the owner’s capital account as a result of business transactions that occur during the period. Eventually, the balances of revenues, expenses, and the owner’s withdrawal account will be transferred to the owner’s capital account. This statement is prepared at the end of the accounting period.

The heading of the statement of changes in owner’s equity is set up in the same manner as the heading for the income statement.

1. The first line consists of the name of the business. (Who?) 2. The second line indicates the name of the statement. (What?) 3. The third line indicates the period covered. (When?)

Because the statement of changes in owner’s equity and the income statement cover the same period, the third line of the heading of both statements will include the same wording and date.

The information to prepare this statement is found in three places:

• the work sheet• the income statement• the owner’s capital account in the general ledger

Completing the Statement of Changes in Owner’s EquityHow Do You Prepare This Financial Statement?

Look at Figure 9–6 on page 229. It is the statement of changes in owner’s equity for Zip Delivery Service for the month ended October 31. The illustration shows the steps needed to complete this financial statement.

1. On the first line, write the words Beginning Capital followed by a comma and then by the first day of the period. For Zip that date is October 1, 20--. A

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activities.


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Content VocabularyHave students meet in small groups to read and discuss the defi nition of the content vocabulary term. Then have students add the term and its defi nition to the tree diagram saved from Section 9.1.

SECTION 9.2

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228 Chapter 9

FOCUSBell Ringer • Observing and Analyzing: Have

students list the businesses in your local area that are sole proprietorships. Then discuss how the owners know how their capital accounts have changed each fi scal period as a result of business operations.


Bell Ringer

TEACHC Critical Thinking

Drawing Conclusions Ask: Why is the owner concerned about whether owner’s equity increased or decreased? It refl ects whether the investment is providing an adequate return, and how the business is performing. OL

R Reading StrategyActivating Prior Knowledge Ask: What does the word capital refer to in fi nancial terms? money supplied by the owner(s), lending institutions, and other investors OL

223_239_C09_SEC_895867.indd 228 11/24/10 2:49 PM

Zip Delivery ServiceStatement of Changes in Owner’s EquityFor the Month Ended October 31, 20--

26 5 5 0 0026 5 5 0 00

5 0 0 0026 0 5 0 00

25 4 0 0 001 1 5 0 00

Beginning Capital, October 1, 20--Add: Investments by Owner Net IncomeTotal Increase in CapitalSubtotalLess: Withdrawals by OwnerEnding Capital, October 31, 20--

ADE

B

FGHJ

C

I

2. In the second amount column, enter the balance of the capital account at the beginning of the period. The source of this information is the capital account in the general ledger. Since Zip was formed after the beginning of the period, there is no beginning capital balance. Place a line in the second amount column. B

3. Next, enter the increases to the capital account:

• investments by the owner • net income

Investments made by the owner during the period are recorded in the capital account. Crista Vargas, the owner of Zip, invested a total of $25,400 during October. This includes $25,000 cash and two phones valued at $400. Write Add: Investments by Owner. C Enter the total investment in the first amount column. D

On the next line, write the words Net Income. Indent so that Net Income aligns on the left with Investments by Owner in the line above. In the first amount column, enter the net income amount from the income statement. Draw a single rule under the net income amount. E

4. 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 amounts and enter the total in the second amount column. Draw a single rule under the amount. F

5. 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. G

6. The next section of the statement lists the decreases to the capital account:

• withdrawals • net loss

Since Zip did not have a net loss for the period, write the words Less: Withdrawals by Owner at the left side of the form. Find the withdrawals amount on the work sheet. Enter the withdrawals amount in the second amount column. Draw a single rule under the withdrawals amount. H

7. 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. I

Figure 9–6 Statement of Changes in Owner’s Equity

Section 9.2 The Statement of Changes in Owner’s Equity 229

223_239_C09_SEC_893567.indd 229 8/31/10 2:07 PM


Math: Unknowns in Equations A teacher uses a warm-up activity to check students’ knowledge of equations.


Applying Accounting Knowledge Refer students to Figure 9-6 (Digital Transparency 9-8). Ask: What is the source of the amount for Beginning Capital, October 1, 20--? September 30 owner’s capital account balance in the general ledger OL

W Writing SupportWriting Clearly Have students write a sentence explaining why investments by the owner and net income amounts are added. They increase the owner’s capital account balance. OL

R Reading StrategyReading Accounting Forms Refer students to Figure 9-6. Ask: What is the source of the withdrawals account? work sheet OL

SECTION 9.2

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Chapter 9 229

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8. Subtract the withdrawals amount from the subtotal to determine the ending balance of the capital account. Finally, draw a double rule below the ending capital amount. J

Reading Check Compare and Contrast In what ways are the income statement and statement of changes in owner’s equity similar? How are they different?

Statement of Changes in Owner’s Equity for an Ongoing Business

To prepare the statement of changes in owner’s equity, you need to know the beginning balance of the owner’s capital account. For an ongoing business, the balance entered on the work sheet for the capital account may not be the balance at the beginning of the period. If the owner made additional investments during the period, the investments would be recorded in the general journal, posted to the general ledger, and included in the amount shown on the work sheet.

For example, suppose the owner of Garo’s Tree Service, James Garo, invested an additional $1,000 during the period. Look at Figure 9–7. The ledgeraccount reflects the additional capital investment. The amount entered on the work sheet for James Garo, Capital includes the balance at the beginning of the period ($23,800) and the investment made during the period ($1,000).

TRIAL BALANCE

DEBIT CREDIT

INCOME STATEMENT

DEBIT CREDIT

BALANCE SHEET


ACCT.NO.

12

13

20

21

22

23

24

12

13

20

21

22

23

24

DEBIT CREDIT

BALANCEDEBIT CREDITDESCRIPTIONDATE

POST. REF.

ACCOUNT NO.ACCOUNT

700 00

620 0021 924 00

24 800 00

26 601 003 276 00

29 877 00

700 00

29 877 00

29 877 00

9 309 00

9 309 00

620 006 033 003 276 009 309 00

24 800 00

21 924 00

301302

525

James Garo, CapitalJames Garo, Withdrawals

Utilities Expense

Net Income

Garo’s Tree ServiceWork Sheet

For the Month Ended April 30, 20--

20--Apr. 23 8 0 0 00

24 8 0 0 001 0 0 0 00Balance1

15✓

James Garo, Capital 301

G1

Figure 9–7 Statement of Changes in Owner’s Equity for an Ongoing Business


223_239_C09_SEC_893567.indd 230 8/31/10 2:07 PM

TEACHW Writing SupportWriting Clearly Ask students to write a short paragraph explaining the accounting assumption that the phrase “an ongoing business” refers to. Going concern assumption—the business is expected to continue to operate indefi nitely. OL

C Critical ThinkingMaking Inferences Tell students to look at the Balance line in the James Garo, Capital account in Figure 9-7 (Digital Transparency 9-9). Ask: What does the $23,800 amount tell you? The business was in operation prior to this period and this amount represents the owner’s previous investments and refl ects operations since the business’ inception. AL

R Reading StrategyReading Accounting Forms Refer students to Figure 9-7. Have students locate the letter G and the number 1 in Account No. 301. Ask: What does this abbreviation refer to? general journal, page 1 OL

Reading CheckSimilar: They both report the effects of business transactions over the entire accounting period.

Different: The income statement reports the profit or loss of the business, affecting all of its accounts, whereas the statement of owner’s equity reports the changes in only one account, owner’s capital.

SECTION 9.2

CHAPTER 9 ENRICHMENT RESOURCES

Fast File Chapter 9 Resources• Concept Assessment• Chapter Quiz• Chapter Test

Presentation Plus!PowerPoint® Presentations

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Online Learning Center• Info Trek• Show Me• Let Me Try• Interactive Glossary (English and Spanish)

• Connect to Careers• Extend—A Matter of Ethics• Personal Finance Online• Self-Assessment Section Quizzes• Self-Assessment Chapter Quiz

230 Chapter 9

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Garo’s Tree ServiceStatement of Changes in Owner’s Equity


23 8 0 0 00

4 2 7 6 0028 0 7 6 00

7 0 0 0027 3 7 6 00

1 0 0 0 003 2 7 6 00

Beginning Capital, April 1, 20--Add: Investments by Owner Net IncomeTotal Increase in CapitalSubtotalLess: Withdrawals by OwnerEnding Capital, April 30, 20--

There are two ways to determine the owner’s capital account balance at the beginning of the period:

• Look at the ledger.• Subtract the additional investments from the account balance shown

on the work sheet.

For James Garo, Capital, the $1,000 additional investment in Garo’s Tree Service is subtracted from the $24,800 account balance shown on the work sheet to arrive at the beginning account balance of $23,800.

Figure 9–7 shows the statement of changes in owner’s equity for an ongoing business.

Statement of Changes in Owner’s Equity Showing a Net Loss

Figure 9–8 shows a statement of changes in owner’s equity for an ongoing business with a net loss. Notice that since there is only one item that increases capital—investments by owner—the amount of the individual item is entered in the second amount column. Since there are two items that decrease capital—withdrawals by owner and net loss—the amounts of the indi vidual items are entered in the first amount column. The total decrease in capital is entered in the second amount column.

13 8 4 8 001 5 0 0 00

15 3 4 8 00

1 7 3 5 0013 6 1 3 00

9 0 0 008 3 5 00

Beginning Capital, April 1, 20--Add: Investments by OwnerSubtotalLess: Withdrawals by Owner Net LossTotal Decrease in CapitalEnding Capital, April 30, 20--

Island BurgersStatement of Changes in Owner’s Equity


Figure 9–8 Statement of Changes in Owner’s Equity Showing a Net Loss

Figure 9–7 Statement of Changes in Owner’s Equity for an Ongoing Business (continued)

Section 9.2 The Statement of Changes in Owner’s Equity 231

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TEACHM Math Skill PracticeThinking Algebraically Refer students to the statement of changes in owner’s equity for Garo’s Tree Service in Figure 9-7 (Digital Transparency 9-9). Ask: How would you express information on the statement of changes in owner’s equity in equation form? Beginning Capital � Investments � Net Income � Withdrawals � Ending Capital OL

C1 Critical ThinkingApplying Procedures Tell students to look at the section “Less: Withdrawals by Owner” in Figure 9-8 (Digital Transparency 9-10). Ask: Why is net loss added to owner’s withdrawals? Both decrease owner’s equity. They are added to determine the total amount by which the capital account decreased. OL

C2 Critical ThinkingApplying Prior Knowledge Refer students to the right-hand column of fi gures in Figure 9-8. Ask: What increased owner’s equity? owner’s investment Ask: What decreased owner’s equity? owner’s withdrawals and net loss OL

Extended Skill PracticePreparing a Statement of Changes in Owner’s Equity Use Demonstration Problem 9-4 in Chapter 9 Fast File for step-by-step practice preparing a statement of changes in owner’s equity. The problem also appears on TeacherWorks Plus.

SECTION 9.2

Chapter 9 231

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OVERSET




Reinforce the Main Idea Step 1: Enter the heading at the top of the statement. Include the business name, the type of fi nancial statement, and period.Step 2: Enter the period’s increases to capital including additional owner investments and net income.Step 3: Enter the period’s decreases to capital including owner withdrawals and net loss.Step 4: Enter the capital account’s ending balance. Add double rules.

Math for AccountingAnswers will vary; revenues from Feb. 1 to Oct. 1 were $140,500, a $60,400 return on total investments. The investments were made between Jan. 1 and March 10. Revenues exceeded total investments sometime during July.

PROBLEM 9–21. $62,500 4. $10,630

2. $29,915 5. $7,060

3. $29,470 6. $25,010

CLOSESynthesizing Write this on the board: The statement of changes in owner’s equity shows whether revenue or additional owner’s investment caused the increase. Ask: In your own words, what does this mean? Answers will vary. The statement shows specifi cally where increases/decreases come from. That is, it shows whether the increase is from revenue or an additional owner’s investment, or both. OL

After You ReadAfter You ReadCreating a Statement of Changes in Owner’s Equityg g q y

Math for AccountingTracy Murphy is a fashion designer who works from her home. She contributed her own funds and equipment to the business. She also continues to add new clients and increase her revenue. Tracy’s investments in her business and the revenue she has earned over the past 10 months are shown below. Create a line graph, by date, comparing Tracy’s investments to her revenue. What can you determine from this chart?

Investments Revenue1/01/20-- Cash $20,000 2/01/20-- $ 5,0001/01/20-- Sewing machines 6,000 3/01/20-- 6,0001/01/20-- Mannequins 3,500 4/01/20-- 12,0001/01/20-- Material 25,000 5/01/20-- 15,0001/01/20-- Computer equipment 5,600 6/01/20-- 17,5001/01/20-- Business cards 500 7/01/20-- 19,0002/15/20-- Cash 12,000 8/01/20-- 20,0003/10/20-- Material 7,500 9/01/20-- 26,000

Total Investments $80,100 10/01/20-- 20,000

PROBLEM 9–2 Determining Ending Capital BalancesThe financial transactions affecting the capital accounts of several different businesses are summarized below. INSTRUCTIONS Use the form in your working papers. Determine the ending capital balance for each business.

Beginning Capital Investments Revenue Expenses Withdrawals

1. $60,000 $ 500 $ 5,100 $2,400 $ 7002. 24,075 0 13,880 7,240 8003. 28,800 1,000 6,450 6,780 04. 0 10,500 5,320 4,990 2005. 6,415 0 4,520 3,175 7006. 20,870 1,300 13,980 9,440 1,700

Reinforce the Main IdeaUsing a diagram like this one, summarize the steps for creating a statement of changes in owner’s equity. Add answer boxes for steps as needed.



223_239_C09_SEC_893567.indd 232 11/11/10 1:56 PM

QUIZ 1. What is in the heading of a statement of changes in owner’s equity? business and

form name, period2. What are the sources of information used to prepare the statement of changes in owner’s

equity? work sheet, income statement, owner’s capital3. Where can you fi nd the owner’s capital balance at the beginning of a period? the ledger4. What elements cause increases to the capital account? investment by owner, net income5. What elements cause decreases to the capital account? withdrawals by owner, net loss

SEC TION 9.2

SECTION 9.2

232 Chapter 9

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Content VocabularyHave students add the two appropriate content vocabulary terms, balance sheet and statement of cash fl ows, to the tree diagram saved from Sections 1 and 2.

Have pairs of students work together

to create sets of vocabulary cards, writing each vocabulary term on one card and its defi nition on another card. Then have each pair of students place all 24 cards facedown on a desk and take turns looking at two cards, trying to match each term with its defi nition.

Academic VocabularyGuide the class in discussing the defi nitions of the two academic vocabulary words. Then have students write sentences illustrating the meaning of each word. Have volunteers read their sentences

aloud, saying “blank” in place of the vocabulary word. Ask the other students to identify the word that belongs in the blank.

PRETEACHING SECTION VOCABULARY

SECTION VOCABULARY

Content Vocabulary• balance sheet

• report form

• statement of cash flows

• ratio analysis

• profitability ratio

• return on sales

• current assets

• current liabilities

• working capital

• liquidity ratio

• current ratio

• quick ratio

Academic Vocabulary• available

• converted

The third and fourth financial statements prepared at the end of the period are the balance sheet and the statement of cash flows. The balance sheet reflects the accounting equation at the end of the period. The statement of cash flows shows how the business acquired and spent cash during the period.

The Balance SheetWhat Is the Purpose of the Balance Sheet?

The balance sheet is a report of the balances in the permanent accounts at the end of the period. The main purpose of the balance sheet is to report the assets of the business and the claims against those assets on a specific date. In other words, the balance sheet states the financial position of a business at a specific point in time. The balance sheet summarizes the following information:

• what a business owns• what a business owes• what a business is worth

For this reason the balance sheet is sometimes called a statement of financial position.

The balance sheet is prepared from information in the Balance Sheet section of the work sheet and from the statement of changes in owner’s equity. The balance sheet may be handwritten, typed, or, as in most cases, prepared by computer.

The Sections of the Balance SheetThe balance sheet contains the following sections:

• the heading • the assets section• the liabilities and owner’s equity sections

Heading. Like the heading of the income statement, the heading of the balance sheet answers the questions who? what? when? The balance sheet heading includes:

1. The name of the business (Who?) 2. The name of the financial statement (What?) 3. The date of the balance sheet (When?)

THE BALANCE SHEET AND THE STATEMENT OF CASH FLOWS

SECTION 9.3

glencoe.com


activities.

Section 9.3 The Balance Sheet and the Statement of Cash Flows 233

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SECTION 9.3

FOCUSBell Ringer • Thinking Critically: Tell students

that they have just won the $1,000 grand prize in a local contest and have decided to invest the money in the stock market. Would they invest all the money in one stock or buy several different ones? How would they decide which stocks to buy? What fi nancial information would they want to know?


Bell Ringer


Comparing Ask: How are the balance sheet and a photograph similar? They both show something at one moment in time. OL

R Reading StrategyActivating Prior Knowledge Ask: What information would you need to determine your fi nancial position—that is, how much money you have—at the end of a period? how much money you started with, earned, and spent during the period BL

Chapter 9 233

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Unlike the income statement, which covers the entire period, the bal-ance sheet relates to a specific point in time. The amounts shown on the balance sheet are the general ledger balances in the accounts on the last day of the period. Notice the difference between the date lines on the balance sheet and on the income statement in Figure 9–9.

Assets Section. Refer to Zip’s balance sheet in Figure 9–10 as you read how to prepare the balance sheet. Zip’s work sheet and statement of changes in owner’s equity are also included to show the information sources used to prepare the balance sheet. Zip’s balance sheet is prepared in report form, listing the balance sheet sections one under the other.

The Assets section of the balance sheet is prepared as follows:

1. Write the word Assets on the first line in the center of the column containing the account names. A

2. On the following lines, list each asset account name and its balance 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. B

3. On the next line, write the words Total Assets, indented about half an inch. Add the individual asset balances and enter the total in the second amount column. C

Do not draw a double rule under the total yet. Enter it when the Liabilities and Owner’s Equity sections are complete and equal to total assets.

Liabilities and Owner’s Equity Sections. The information for the Liabilities and Owner’s Equity sections is taken from the work sheet and from the statement of changes in owner’s equity. Use the following steps to complete the Liabilities and Owner’s Equity sections. 1. On the line after Total Assets, write the heading Liabilities in the

center of the column containing the account names. D 2. On the following lines, list the liability account names and their

balances in the same order as on 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. E

Figure 9–9 Headings of Financial Statements

Zip Delivery ServiceBalance Sheet

October 31, 20-- Point in Time


For the Month Ended October 31, 20-- Period of Time


223_239_C09_SEC_893567.indd 234 8/31/10 2:09 PM

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Reading: Preparing To Read A teacher uses multiple instructional strategies to prepare students to read a persuasive essay.

Students with Orthopaedic Impairments: Students with orthopaedic impairments are often slow and/or awkward writers. For

these students, do not place a great deal of emphasis on preparing accounting records and reports that are neatly handwritten. If computers are

available, consider having these students prepare their accounting assignments electronically.

Differentiated Instruction

TEACHC1 Critical ThinkingComparing-Contrasting Refer students to Figure 9-9 (Digital Transparency 9-12). Ask: How do the dates on the balance sheet and the income statement differ? The balance sheet shows information for one specifi c date. The income statement shows information for a period of time, such as the month of October. OL

C2 Critical ThinkingConnecting to Financial Literacy Ask: What points in time are important to you as a student? test dates, assignment due dates, report card dates, pay date, a bill’s due date, etc. Ask: What periods of time are important to you as a student? grading period, work week, vacation, pay period, etc. OL

W Writing SupportWriting Clearly Have students list explanations for the separation of the balance sheet into asset, liability, and owner’s equity sections. Answers will vary. Each section reports individual balances in its permanent accounts; makes it easier to prove the equality of debits and credits; relates to the accounting equation, Assets � Liabilities � Owner’s Equity. OL

SECTION 9.3

234 Chapter 9

223_239_C09_SEC_895867.indd 234 11/24/10 2:53 PM

TRIAL BALANCE

DEBIT CREDIT

INCOME STATEMENT

DEBIT CREDIT

BALANCE SHEET


ACCT.NO.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

9

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AssetsCash in BankAccounts Receivable—City NewsAccounts Receivable—Green CompanyComputer EquipmentOffice EquipmentDelivery Equipment Total Assets

LiabilitiesAccounts Payable—Rockport AdvertisingAccounts Payable—Coast to Coast Auto Total Liabilities

Owner’s EquityCrista Vargas, Capital Total Liabilities and Owner’s Equity

21 125 001 450 00

3 000 00200 00

12 000 00

500 00

75 00600 007000012500

39 77500

75 0011 650 0025 400 00

37 125 001 150 00

38 275 00

21 125 001 450 00

3 000 00200 00

12 000 00

500 00

38 27500

38 27500

2 650 00

2 65000

2 65000

75 00600 007000012500

1 500001 150002 65000

75 0011 650 0025 400 00

2 650 00

39 77500

101105110115120125201205301302303401501505510515

Cash in BankAccts. Rec.—City NewsAccts. Rec.—Green CompanyComputer EquipmentOffice EquipmentDelivery EquipmentAccts. Pay.—Rockport AdvertisingAccts. Pay.—Coast to Coast AutoCrista Vargas, CapitalCrista Vargas, WithdrawalsIncome SummaryDelivery RevenueAdvertising ExpenseMaintenance ExpenseRent ExpenseUtilities Expense

Net Income

Zip Delivery ServiceWork Sheet


A

B

E

C

I

F

JH

H

D

G

K

K

Zip Delivery ServiceBalance Sheet

October 31, 20--

37 7 7 5 00

11 7 2 5 00

26 0 5 0 0037 7 7 5 00

21 1 2 5 001 4 5 0 00

3 0 0 0 002 0 0 00

12 0 0 0 00

7 5 0011 6 5 0 00

Zip Delivery ServiceStatement of Changes in Owner’s EquityFor the Month Ended October 31, 20--

Beginning Capital, October 1, 20--Add: Investments by Owner

Net IncomeTotal Increase in CapitalSubtotalLess: Withdrawals by OwnerEnding Capital, October 31, 20--

26 5 5 0 0026 5 5 0 00

5 0 0 0026 0 5 0 00

25 4 0 0 001 1 5 0 00

Figure 9–10 Preparing a Balance Sheet


223_239_C09_SEC_893567.indd 235 9/10/10 10:14 AM

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TEACHU1 Universal AccessVisual Learning Give students a copy of Figure 9-10 (Digital Transparency 9-13) so that they can use the fi gure to follow the relationship between the work sheet, statement of changes in owner’s equity, and balance sheet. Have them “walk through” the fi gure with you. OL

C Critical ThinkingApplying Procedures Refer students to the red Ks in the balance sheet of Figure 9-10. Ask: Why is a double rule not drawn under the Total Liabilities line? Liabilities represent just one of the components of the right-hand side of the accounting equation. Liabilities should be added to owner’s equity before the double rule is drawn. OL

U2 Universal AccessEnglish Learners Access balance sheets in students’ native language(s) and give them copies. Have them identify the various sections and accounting terms that are similar to the ones shown in the book. EL

Extended Skill PracticePreparing a Balance SheetUse Demonstration Problem 9-5 in Chapter 9 Fast File for step-by-step practice preparing a balance sheet. The problem also appears on the TeacherWorksPlus™.

SECTION 9.3

Chapter 9 235

223_239_C09_SEC_895867.indd 235 11/24/10 2:54 PM

3. On the next line, write the words Total Liabilities, indented about half an inch. Add the individual liability balances and enter the total in the second amount column. F

4. On the next line, enter the heading Owner’s Equity in the center of the column containing the account names. G

5. On the next line, write the name of the capital account. In the second amount column, enter the ending balance of the capital account as shown on the statement of changes in owner’s equity. H

Proving the Equality of the Balance SheetRecall that the basic accounting equation must always be in balance. The

balance sheet represents the basic accounting equation, so the Assets section total must equal the total of the Liabilities and Owner’s Equity sections.

Assets � Liabilities � Owner’s Equity

To prove the equality of the balance sheet, follow these steps:

1. Draw a single rule under the balance of the capital account. On the next line, write the words Total Liabilities and Owner’s Equity, indented about half an inch. I

2. Add the total liabilities amount and the ending capital balance. Enter the total in the second amount column. J This total must equal the total assets amount. If the totals are not equal, there is an error. Most errors occur when transferring amounts from the work sheet or from the statement of changes in owner’s equity. Verify that each account balance has been transferred properly. Find and correct the error and then complete the balance sheet.

3. When total assets equal total liabilities and owner’s equity, draw a double rule under the total assets amount and under the total liabilities and owner’s equity amount. K The balance sheet is now complete.

Refer again to the amounts and their placement in Figure 9–10. As you can see, completion of the work sheet is the basis for preparing the three financial statements studied so far.

The Statement of Cash FlowsWhat Is the Purpose of the Statement of Cash Flows?

Cash flowing through a business is like blood flowing through your body. The flow of cash keeps a business alive. It is essential to have cash available for the daily operations of the business and for unexpected expenses.

The statement of cash flows summarizes the following information:

• the amount of cash the business took in• the sources of cash• the amount of cash the business paid out• the uses of cash

Like the income statement, the statement of cash flows covers a single accounting period.

The Balance Sheet In preparing the balance sheet, you are taking the account balances from the Balance Sheet section of the work sheet. This is true of all accounts except the capital account. The account balance entered on the balance sheet must be the balance at the end of the period which is the ending capital reported on the statement of changes in owner’s equity.

CommonMistakes


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TEACHM Math Skill PracticeThinking Algebraically Have students calculate the balance of the Owner’s Equity account in order to prove the equality of the balance sheet, based on the following: Cash in Bank, $16,642; Offi ce Equipment, $6,389; Accts. Pay.–Rockport Advertising, $1,348; Accts. Pay.–Coast to Coast Auto, $7,775. Owner’s Equity: $13,908 (Assets [$16,642 � $6,389] � Liabilities [$1,348 � $7,775]) OL

C Critical ThinkingMaking Inferences Point out that sometimes accountants want information about the “sources and uses of funds.” Ask: Where would they get this information? the statement of cash fl ows Ask: What information do they want to know about sources and uses? where the infl ows of money came from and where the outfl ows went OL

W Writing SupportWriting Clearly Have students list questions that a statement of cash fl ows would answer about a business. Answers will vary and may include: Did the cash balance increase or decrease? What was the source of cash that came into the business? Where did cash paid out go? Did any one area have an unusually high or low amount of cash infl ows or outfl ows? OL

Common Mistakes Understanding the use of these terms in the context of accounting is critical. Discuss and demonstrate with examples until all students have a clear understanding.

SECTION 9.3

236 Chapter 9

223_239_C09_SEC_895867.indd 236 11/24/10 2:55 PM

This information is essential for sound management and investment decisions. You will learn more about the statement of cash flows in Chapter 19.

Reading Check In Your Own Words What four pieces of information does the statement of cash flows provide?

Ratio AnalysisWhat Is Ratio Analysis?

Ratio analysis is the process of evaluating the relationship between various amounts in the financial statements. Owners and managers use ratio analysis to determine the financial strength, activity, and debt-paying ability of a business.

Profitability RatiosProfitability ratios are used to evaluate the earnings performance of the

business during the accounting period. The earning power of a business is an important measure of its ability to grow and continue to earn revenue.

One commonly used profitability ratio is return on sales. Business owners use the return on sales ratio to examine the portion of each sales dollar that represents profit. To calculate this ratio, divide net income by sales. For example, the return on sales for Zip Delivery Service is calculated as follows:

$1,150 net income� 0.434 or 43.4%

$2,650 sales

This percentage indicates that each dollar of sales produced 43.4 cents of profit for Zip. It can be compared to other accounting periods, to determine whether it is increasing or decreasing.

For example, if net income next year is $2,750 and sales are $5,000, the return on sales would be computed as follows:

$2,750 net income� 0.550 or 55.0%

$5,000 sales

As you can see, profit per sales dollar would increase by 11.6 cents.

Liquidity MeasuresLiquidity refers to the ease with which an asset can be converted to cash.

Current assets are those used up or converted to cash during the normal operating cycle of the business. These might include Accounts Receivable, Cash in Bank, and Supplies. Current liabilities are debts of the business that must be paid within the next accounting period. Accounts Payable is an example of a current liability.

The amount by which current assets exceed current liabilities is known as working capital. Because current liabilities are usually paid out of current assets, working capital represents the excess assets available to con-tinue operations.


223_239_C09_SEC_893567.indd 237 8/31/10 2:10 PM

C

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Math: Cooperative Groups in Mathematics Bea Moore-Harris discusses the use of cooperative groups in the mathematics classroom.


Drawing Conclusions Point out that owners, managers, and other interested parties use ratio analysis to identify trends that the business is experiencing. Ask: What types of trends would ratio analysis identify? increasing or decreasing trends in revenue, expenses, salaries, owner investment, owner withdrawals, etc. AL

M Math Skill PracticeCalculating Ratios Present this situation: During March, Snazzy Duds, a clothing store, had net income of $33,750 and sales of $93,600. Ask: What is the return on sales for Snazzy Duds? .361, or 36.1% OL

R Reading StrategyUnderstanding Terminology Ask: What does the statement that Zip’s fi nancial position is liquid mean? It has the cash to pay its current liabilities (debts) as they become due, and that its other assets can be easily converted to cash as needed. OL

Reading Checkthe amount of cash the business took in, the sources of cash, the amount of cash the business paid out, and the uses of cash

SECTION 9.3

Chapter 9 237

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The working capital for Zip is calculated as follows:

Current Assets � Current Liabilities � Working Capital $22,575 � $11,725 � $10,850

A liquidity ratio is a measure of the ability of a business to pay its current debts as they become due and to provide for an unexpected need for cash. Two common ratios that are used to determine liquidity follow.

Current Ratio. The current ratio reflects the relationship between current assets and current liabilities. The current ratio is calculated by dividing the dollar amount of current assets by the dollar amount of current liabilities. The current ratio for Zip based on the balance sheet in Figure 9–10 is:

Current Assets� Current Ratio

$22,575� 1.92 or 1.9:1

Current Liabilities $11,725

The current liabilities of a business must be paid within a year. These lia bilities are paid from current assets.

A ratio of 2:1 or higher is considered favorable by creditors. It indicates that a business is able to pay its debts and that a business has twice as many current assets as current liabilities. A low ratio may indicate that a company could have trouble paying its debts.

Quick Ratio. A quick ratio is a measure of the relationship between short-term assets and current liabilities. Short-term liquid assets—those that can be quickly converted to cash—are cash and net receivables. The quick ratio is computed by dividing the total cash and receivables by total current liabilities.

The quick ratio for Zip based on the Balance Sheet in Figure 9–10 is:

Cash and Receivables� Quick Ratio

$22,575� 1.92:1

Current Liabilities $11,725

In some instances the current ratio and the quick ratio can be the same, as in the case in this example.

A quick ratio of 1:1 is considered adequate. This indicates that a business can pay its current debts with cash from incoming receivables. If a business has a quick ratio of 1:1 or higher, the business has $1.00 in liquid assets for each $1.00 of current liabilities.

Quick ratios may also be compared from one year to the next. For example, suppose that cash and receivables for the previous year were $48,653 and current liabilities were $53,245. That year’s quick ratio would be computed as:

$48,653� 0.91:1

$53,245

As you can see, Zip has improved its liquidity position in the current year. The $1.92 in liquid assets per $1.00 in current liabilities (current year) is stronger than $0.91 in liquid assets per $1.00 in current liabilities (previous year).


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Using Financial Statements on the Job Ask students who work to ask their supervisor or manager about the fi nancial statements that have proven to be most helpful in running the business. How often are these statements prepared? How are they useful? Have students collect samples, if possible, and share their fi ndings with the class. They should identify the fi nancial statements, describe when they are prepared, and explain the reasons the supervisor or manager has found them to be helpful in the operations of the business.

EXTENDING THE CONTENT

TEACHW Writing SupportWriting Clearly Have students fi nd the meaning of solvency in the dictionary. Have them write the defi nition and explain how it is related to the current ratio. Solvency is the ability to pay all legal debts. Current ratio indicates how solvent a business is—its ability to cover its current liabilities with its current assets. AL

M Math Skill PracticeCalculating Ratios Present this situation: Frank’s Frankfurters has cash and receivables of $13,368 and current liabilities of $7,395. Ask: What is its quick ratio? 1.81:1 OL

C Critical ThinkingDrawing Conclusions Give students this scenario: Widget Wonders has a quick ratio of 0.78:1. Ask: Is this ratio good news or bad news? It is bad news. Widget Wonders has more liabilities than it has liquid assets to pay them. AL

SECTION 9.3

Connect to HistoryCCoonnnneeccttt tttoo HHHiiissttoorryyrr

238 Chapter 9

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glencoe.com

Online Learning Center: Click on Student Center. Click on Self-Assessment Quizzes and select Chapter 9.


Reinforce the Main Idea Step 1: Enter the heading: the business name, the fi nancial statement, and date.Step 2: Enter the asset account names and fi nal balances in the order they appear on the work sheet.Step 3: Enter the liability account names and fi nal balances in the order they appear on the work sheet.Step 4: Enter the balance for the capital account as shown on the statement of changes in owner’s equity.Step 5: Total each section, add a total for Total Liabilities and Owner’s Equity, prove, and rule.

Math for AccountingOffice Equipment (asset): $850,000Interest Payable (liability): $1,300Total liabilities: $278,900Total liabilities and owner’s equity:

$2,994,000

PROBLEM 9–3Return on sales = 20.53%

CLOSESynthesizing Write the following sentence on the board: The fl ow of cash keeps a business alive. Ask: What does this mean in your own words? Answers will vary; a business must have enough sources of cash to pay its normal expenses, plus meet any other cash needs. OL

SEC TION 9.3

1. Compare and contrast the heading of an income statement and a balance sheet. Similar: the business name and type of form. Different: date on income statement covers a period; balance sheet is for a specifi c date

2. To what visual item is a balance sheet often compared? snapshot or photograph3. What is the importance of the statement of cash fl ows? indicates whether a business has

suffi cient sources of cash (infl ows) to cover its expenses (outfl ows)4. What are current assets? assets used up during the normal operating cycle of a business5. What is working capital? the amount by which current assets exceed current liabilitiesQUIZ

SEC TION 9 3

Creating a Balance Sheetg

After You Read

Math for AccountingCompute the four amounts that are missing from the balance sheet below. On a separate sheet of paper, write the description and the dollar value of the four missing amounts.

PROBLEM 9–3 Calculating Return on SalesThe Gawle Company is a family-owned and operated appliance rental and repair business. The income statement for the month ended August 31 includes the following:

Rental Revenue $3,256 Rent Expense $2,100Repair Revenue 2,140 Utilities Expense 483Advertising Expense 575 Net Income 1,108Maintenance Expense 1,130

INSTRUCTIONS Calculate the return on sales for the month for The Gawle Company.

Reinforce the Main IdeaUsing a diagram like this one, summarize the steps for creating a balance sheet. Add answer boxes for steps as needed.


Interactive CommunicationBalance Sheet

December 31, 20--

2,994 0 0 0 00

?

2,715 1 0 0 00?

944 0 0 0 00200 0 0 0 00

?1,000 0 0 0 00

275 5 0 0 00?

2 1 0 0 00

AssetsCash in BankAccounts Receivable—Chamber of CommerceOffice EquipmentComputer Equipment

Total AssetsLiabilities

Accounts Payable—Tip Top AdvertisingInterest PayableSalaries Payable

Total LiabilitiesOwner’s Equity

Chuck Thompson, CapitalTotal Liabilities and Owner’s Equity


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SECTION 9.3

Chapter 9 239

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glencoe.com Download the vocabulary review, i-Summary, and i-Quiz for Chapter 9.mm D

Co

nce

pts

An

alys

is

Prepare a statement of changes in owner’s equity.

Prepare an income statement

CHAPTER 9 • VISUAL SUMMARY

Section Information Presented

Heading • Name of the business• Name of the report• Accounting period covered

Revenue Balance of each revenue account for the period.

Expenses Balance of each expense account for the period.

Net income Total expenses subtracted from total revenue. The result is net income or net loss.

Section Information Presented

Heading • Name of the business• Name of the report• Accounting period covered

Beginning Capital This information comes from the owner’s capital account in the general ledger.

Increases in Capital • Investments by Owner• Net Income

Decreases in Capital • Withdrawals by Owner• Net Loss

Ending Capital Beginning Capital + Increases - Decreases

Ratio Analysis

Pro

ced

ure

s Return on Sales Net Income/Sales = Return on Sales

Current Ratio Current Assets/Current Liabilities = Current Ratio

Quick Ratio Cash and Receivables/Current Liabilities = Quick Ratio

240 Chapter 9 Visual Summary

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CHAPTER 9 ASSESSMENT RESOURCES Use these resources to review, assess, or reteach the chapter.

CHAPTER 9

Visual SummaryAfter students have looked at the Visual Summary, challenge them to create their own diagrams of the Concepts, Analysis, and Procedures sections. Tell them these diagrams can be used to help them understand financial statements for a sole proprietorship. Choose several to discuss and share with the class.

English Language LearnersStudents whose primary language is not English might benefit from extra review or tutoring at this point. You might encourage them to print out a blank income statement, statement of changes in owner’s equity, and balance sheet, and then ask students to write detailed descriptions of each statement’s sections and how they should be completed.

Student Edition• Reading Check, pp. 226, 230, 237• Section Assessments 9.1, 9.2, 9.3, pp. 227, 232,

239• Review and Activities, p. 241• Standardized Test Practice, p. 242• Chapter 9 Problems, pp. 244–246

• Real-World Applications and Connections, pp. 248–249

Teacher Edition• Section Quizzes 9.1, 9.2, 9.3: pp. 227, 232, 239

Fast File Chapter 9 Resources (on TeacherWorks Plus)• Concept Assessment

• Quick Quiz• Chapter Quiz• Chapter Test• Performance Task Assessment List• Rubric

ExamView Assessment SuiteConnect Assignment Builder

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Answering the Essential QuestionAfter You Read

Math 13. Burnett just signed a contract at a

dealership to buy a new car. The list price is $19,000. He made a down payment of $1,500. The monthly payments are $602.15 for 36 months. What is the total amount Burnett will pay for the car.

NCTM Problem Solving Solve problems that arise in mathematics and in other contexts.

English Language Arts 14. Perform research online to obtain the

financial statements for a company. Analyze the statements using ratio analysis, and create a presentation on the financial position of the company. Tell whether or not you would advise extending credit this company. Include at least one visual or graphic aid.

NCTE 8 Use information to gather information and create and communicate knowledge.

Vocabulary Check 2. Content Vocabulary Explain how each of the following terms relates to the chapter title, “Financial

Statements for a Sole Proprietorship.” • financial statements (p. 223)

• income statement (p. 224)• statement of changes in

owner’s equity (p. 228)• balance sheet (p. 233)• report form (p. 234)

• statement of cash flows (p. 236)

• ratio analysis (p. 237)• profitability ratio (p. 237)• return on sales (p. 237)• current assets (p. 237)

• current liabilities (p. 237)• working capital (p. 237)• liquidity ratio (p. 238)• current ratio (p. 238)• quick ratio (p. 238)

3. Academic Vocabulary Use a dictionary to find a synonym for each academic vocabulary term. Write a sentence using and underlining each new term. • evaluate (p. 223) • illustrates (p. 225) • available (p. 236) • converted (p. 237)

Concept Check4. What is the purpose of the income statement? 5. Evaluate Explain how the value of the income statement depends on the accuracy of the work sheet.6. What is the purpose of the statement of changes in owner’s equity?

7. In a statement of changes in owner’s equity, what items are totaled in the “add” section? 8. What is the purpose of the balance sheet? 9. Analyze Why does the date in a balance sheet heading differ from the dates in other statements? 10. What information does the statement of cash flows provide?11. What is the purpose of computing ratios from amounts on financial statement?12. Predict To whom might the various ratios be useful and why?

1. What is the basis for making good financial decisions? Whether you’re talking about a large corporation or yourself, certain information has to be considered.

CHAPTER 9 • REVIEW AND ACTIVITIES

Chapter 9 Review and Activities 241

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CHAPTER 9

Review and Activities

After You ReadAnswering the Essential Question1. The intent of this essential question

is to help the students use inquiry to arrive at an understanding of the importance of making good fi nancial decisions. By connecting the content to their own experiences with decision-making, students can broaden their understanding of fi nancial decision-making.

Vocabulary Check2. See the Glossary for defi nitions of

these terms. Have students share and discuss their defi nitions.

3. See a dictionary for correct synonyms for each Academic Vocabulary term.

Concept Check4. to report revenue earned and

expenses incurred during the period5. The information used to prepare

the income statement comes from the Income Statement section of the work sheets, so the accuracy of the income statement is dependent on the accuracy of the work sheet.

6. to show changes in the owner’s capital account resulting from business transactions

7. investments by owner and net income

8. to report the assets of the business and summarize claims to those assets on a specifi c date

9. The balance sheet date line refers to a specifi c date; the others refer to the entire fi scal period.

10. reports how much cash the business took in and paid out during the period and why the Cash in Bank account increased or decreased during the period.

11. to analyze profi tability, debt-paying ability, and effi ciency in use of resources

12. a company’s managers and its outside investors

Math 13. $23,177.40

English Language Arts14. Responses are presentations. They should

refl ect that the student has obtained fi nancial statements for a company and should include a ratio analysis of the reports. The student should convey an opinion about whether or not he/she would loan to the company, and should include at least one visual aid.

Chapter 9 241

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CHAPTER 9 • STANDARDIZED TEST PRACTICE

Multiple Choice1. The financial statement that reports net income or net loss is the

a. Statement of changes in owner’s equityb. Income statementc. Balance sheetd. Statement of cash flows

2. At the beginning of the accounting period, Frank’s Supply Company had a capital balance of $210,050. During the period, the owner invested $10,500 additional capital, and did not take any withdrawals. The period showed a net loss of $24,850. What was the ending capital for the period? a. $195,700 b. $196,150c. $224,400d. $220,550

3. The balance sheet shows how a business is doinga. for a period of 12 months. b. on a specific date during the year.c. regarding its profit or loss.d. All of the above

4. Financial statements are prepared in the following order:a. income statement, balance sheet, statement of changes in owner’s equity.b. income statement, statement of changes in owner’s equity, balance sheet. c. statement of changes in owner’s equity, balance sheet, income statement.d. balance sheet, income statement, statement of changes in owner’s equity.

5. The purpose of the Income Statement is to reporta. all assets, liabilities, and owner’s equity at a specified time.b. all the accounts used in journalizing a business’s transactions.c. balances in the capital accounts in order to determine the net income or loss.d. the net income or loss for a fiscal period.

True or False6. The information used to prepare the income statement comes from the Income Statement section of the

work sheet.

Extended Response 7. Explain how the balance sheet reports a company’s financial position at a point in time.

242 Chapter 9 Standardized Test Practice

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Standardized Test Practice

Multiple Choice1. b2. a3. c4. b5. d

True or False6. true

Extended Response7. Responses should include that the

balance sheet reports the assets, liabilities and owner’s equity at a given time, so it shows the equality of the accounting equation and what claims can be leveraged against assets.

CHAPTER 9

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CHAPTER 9 • COMPUTERIZED ACCOUNTING

For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.

QuickBooks®

Q How do I prepare fi nancial statements in QuickBooks?

A • From the Reports menu, select Company & Financial.

• Choose the report you wish to print from the list.

• Click Print.

Q How do I prepare fi nancial statements in Peachtree?

A • From the Reports menu, select Financial Statements.

• Choose the statement you wish to print from the Reports list.

• Click Print when the statement appears on the screen.

Preparing Financial StatementsMaking the Transition from a Manual to a Computerized System

MANUAL METHODSMANUAL METHODS COMPUTERIZED METHODS

Preparing an income statement

• Transfer all revenue and expense accounts and their balances from the work sheet.

• Subtract expenses from revenue to determine net income or net loss.

• From the Reports menu, select Income Statement or Profit and Loss, depending on the accounting software.

• Click Print.

Preparing a statement of changes in owner's equity

• Transfer the beginning balance of the capital account from the work sheet.

• Add additional investments and net income or loss.• Subtract withdrawals.• Calculate the ending balance for the capital account.

• Since the software automatically computes the ending balance of the capital account for you, it is not necessary to prepare this statement.

Preparing a balance sheet

• Transfer permanent accounts and their balances from the work sheet.

• Transfer the ending capital account balance from the statement of changes in owner’s equity.

• Total all asset account balances.• Total all liabilities and owner’s equity account

balances.• Verify that assets equal liabilities plus owner’s equity.

• From the Reports menu, select Balance Sheet.• Click Print.

Chapter 9 Computerized Accounting 243

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Computerized Accounting

Peachtree automatically reads through the general ledger accounts, pulling account balances and names into the appropriate preformatted statements.

QuickBooks®

QuickBooks automatically checks general ledger accounts, gathering account data into the appropriate preformatted financial statements.

CHAPTER 9

Chapter 9 243

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CHAPTER 9 • PROBLEMS

PROBLEM 9–4 Preparing an Income StatementThe work sheet for Wilderness Rentals for the month ended September 30, 20-- is in your working papers. INSTRUCTIONS Using the work sheet, prepare an income statement for Wilderness Rentals.

Compute the return on sales for the period.Analyze

PROBLEM 9–5 Preparing a Statement of Changes in Owner’s Equity

INSTRUCTIONS Using the work sheet for Wilderness Rentals in your working papers and the income statement prepared in Problem 9–4, prepare a statement of changes in owner’s equity and a balance sheet. Ronald Hicks made an additional investment in the business of $500 during the period.

Compute the current ratio for Wilderness Rentals as of September 30.

Analyze

PROBLEM 9–6 Preparing Financial StatementsThe trial balance for the Hot Suds Car Wash is listed below and in your working papers. INSTRUCTIONS

1. Complete the work sheet in your working papers.

2. Prepare an income statement for the quarter ended September 30, 20--.

3. Prepare a statement of changes in owner’s equity. Regina Delgado made no additional investments during the period.

4. Prepare a balance sheet in report form.

Calculate the return on sales for the period.Analyze

Step–by–Step Instructions:Problems 9–4, 9–5

1. Select the problem set for Wilderness Rentals (Prob. 9–4, 9–5).

2. Rename the company and set the system date.

3. Print a General Ledger Trial Balance, Income Statement, Statement of Changes in Owner’s Equity, and Balance Sheet.

4. Complete the Analyze activity.

5. End the session.

SMART GUIDE

Step–by–Step Instructions:Problem 9–6

1. Select the problem set for Hot Suds Car Wash (Prob. 9–6).




5. End the session.

SMART GUIDE

PROBLEMS CAN BE SOLVED USING:

Manual Methods• McGraw-Hill Connect• Manual Glencoe

Working Papers

Computerized Methods• Peachtree®• QuickBooks®• Spreadsheet

Hot Suds Car WashTrial Balance

For the Quarter Ended September 30, 20--

3 5 2 8 001 2 1 5 00

23 8 4 5 00

9 6 2 3 008 0 1 9 002 6 2 8 00

48 8 5 8 00

8 4 5 7 005 8 4 00 6 1 9 008 1 0 004 6 0 00

15 2 4 0 002 1 6 0 007 5 2 2 00

1 5 0 0 00

1 9 6 3 004 1 3 7 001 1 8 6 003 5 0 0 00

7 2 0 0048 8 5 8 00

Cash in BankAccts. Rec.—Linda BrownAccts. Rec.—Valley AutoDetailing SuppliesDetergent SuppliesOffice EquipmentOffice FurnitureCar Wash EquipmentAccts. Pay.—Allen Vacuum SystemsAccts. Pay.—O’Brian’s Office SupplyRegina Delgado, CapitalRegina Delgado, WithdrawalsIncome SummaryWash RevenueWax RevenueInterior Detailing RevenueAdvertising ExpenseEquipment Rental ExpenseMaintenance ExpenseRent ExpenseUtilities Expense

101105110115120125130135201205301305310401405410501505510520530

Debit Credit

244 Chapter 9 Problems

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CHAPTER 9

PROBLEM 9–4Preparing an Income StatementNet Income: $1,812

The return on sales for the period is 17.05% (Revenue $10,629 � Expenses $8,817 � Net income $1,812; $1,812 � $10,629 � 17.05%

PROBLEM 9–5Preparing a Statement of Changes in Owner’s EquityEnding capital: $14,372Total assets: $18,699Total liabilities: $4,327

The current ratio as of September 30 is 1.82 or 1.8:1 ($7,880 � $4,327)

PROBLEM 9–6Preparing Financial StatementsNet income: $8,764Ending capital: $31,109Total assets: $35,852Total liabilities: $4,743

The return on sales for the period is 43.24% (Net income $8,764 � Total sales $20,270)

Analyze

Analyze

Analyze

PROBLEMS CAN BE SOLVED USING:

Manual Methods• McGraw-Hill Connect• Manual Glencoe

Working Papers

Computerized Methods• Peachtree®• QuickBooks®• Spreadsheet

244 Chapter 9

244_246_C09_PROB_895867.indd 244 11/24/10 3:09 PM


1. Restore the Problem9–7.QBB file.

2. Print a Trial Balance, Profit & Loss report, and Balance Sheet.


4. Back up your work.

PROBLEM GUIDE

QuickBooks®

PROBLEM 9–7 Preparing Financial StatementsThe general ledger accounts and balances for Kits & Pups Grooming follow.

General Ledger 101 Cash in Bank $ 4,296 105 Accts. Rec.—Juan Alvarez 1,528 110 Accts. Rec.—Nathan Carlsbad 904 115 Accts. Rec.—Martha Giles 1,219 120 Grooming Supplies 1,368 125 Office Equipment 8,467 130 Office Furniture 3,396 135 Computer Equipment 2,730 140 Grooming Equipment 1,974 145 Kennel Equipment 7,412 201 Accts. Pay.—Able Store Equipment 3,876 205 Accts. Pay.—Dogs & Cats Inc. 2,746 207 Accts. Pay.—Pet Gourmet 1,281 301 Abe Shultz, Capital 30,928 305 Abe Shultz, Withdrawals 1,900 310 Income Summary — 401 Boarding Revenue 11,989 405 Grooming Revenue 4,420 501 Advertising Expense 3,934 505 Equipment Repair Expense 943 510 Maintenance Expense 2,483 520 Rent Expense 8,850 530 Utilities Expense 3,836

INSTRUCTIONS 1. Prepare a work sheet for the month ended September 30, 20--. 2. Prepare an income statement for the period. 3. Prepare a statement of changes in owner’s equity. Abe Shultz made an

additional investment of $2,500 during the period. 4. Prepare a balance sheet in report form.

Compute the quick ratio as of September 30.Analyze


1. Select the problem set for Kits & Pups Grooming (Prob. 9–7).




5. End the session.

SMART GUIDE

CONTINUE

PROBLEM 9–8 Preparing a Statement of Changes in Owner’s Equity

INSTRUCTIONS Use the balance sheet and income statement shown to prepare a statement of changes in owner’s equity. (The owner made an additional investment of $4,000 and withdrew $1,500 during the period.)

CHALLENGEPROBLEM


1. Restore the Problem9-6.QBB file.

2. Print a Trial Balance, Profit & Loss report, and Balance Sheet.


4. Back up your work.

PROBLEM GUIDE

QuickBooks®

Chapter 9 Problems 245

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CHAPTER 9

PROBLEM 9–7Preparing Financial StatementsTrial balance total: $55,240Net loss: $3,637Ending capital: $25,391Total assets: $33,294Total liabilities: $7,903

The quick ratio for Kits & Pups Grooming is 1:1 (Cash and Receivables $7,947 � Current Liabilities $7,903 � 1.01)

Analyze

Chapter 9 245

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CHAPTER 9 • PROBLEMS

Outback Guide ServiceIncome Statement

For the Month Ended September 30, 20--

8 9 1 3 00

4 4 2 4 004 4 8 9 00

3 7 5 001 3 8 00

1 2 5 0 001 5 0 0 001 1 6 1 00

Revenue: Guide Service RevenueExpenses: Advertising Expense Maintenance Expense Rent Expense Salaries Expense Utilities Expense Total ExpensesNet Income

Outback Guide ServiceBalance Sheet

September 30, 20--

AssetsCash in BankAccounts Receivable—Mary JohnsonAccounts Receivable—Feldman, Jones & RitterAccounts Receivable—Podaski Systems Inc.Hiking SuppliesOffice SuppliesOffice EquipmentOffice FurnitureComputer EquipmentHiking EquipmentRafting Equipment Total Assets

LiabilitiesAccounts Payable—A-1 Adventure WarehouseAccounts Payable—Peak Equipment Inc.Accounts Payable—Premier Processors Total Liabilities

Owner’s EquityJuanita Ortega, Capital Total Liabilities and Owner’s Equity

3 1 1 7 004 2 3 004 4 3 00

1 0 0 8 001 5 3 003 3 8 00

6 4 9 2 003 0 8 4 003 6 2 4 001 0 1 5 009 1 8 6 00

6 5 4 5 001 3 2 5 00

6 4 2 00

28 8 8 3 00

8 5 1 2 00

20 3 7 1 0028 8 8 3 00

Identify the largest expense for this business during the period.

Analyze


1. Select the spreadsheet template for Problem 9–8.

2. Enter your name and the date in the spaces provided on the template.

3. Complete the spread sheet using the instructions in your working papers.

4. Print the spreadsheet and proof your work.


6. Save your work and exit the spreadsheet program.

SPREADSHEETSMART GUIDE

246 Chapter 9 Problems

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CHAPTER 9

PROBLEM 9–8Preparing a Statement of Changes in Owner’s EquityEnding capital: $20,371

Salaries Expense was the largest expense for the business during the period.

Analyze

CHALLENGEPROBLEM

246 Chapter 9

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CHAPTER 9REAL-WORLD Accounting Careers

Use the Bureau of Labor Statistics web site to assess the employment outlook in the field of accounting. Present your findings to the class using a PowerPoint presentation or other multimedia application. Include details such as earnings, projection data, and the job outlook.

When job-hunting, consider your ideal work environment. Do you want to work for a corporation or government or in public accounting? Which is more important to you: a high salary or opportunities for advance-ment? You can learn more about prospective employers by con-ducting research online or at your library or school’s career center.

Tips from . . . Tips from . . .

Career FactsREAL-WORLD SKILLS

Excellent oral and written communication; research and analytical skills; proficiency with technology

TRAINING AND EDUCATION

Bachelor’s degree in accounting or a related field; several years of experience in a single specialty

CAREER SKILLS

Knowledge of U.S. GAAP and foreign currency reporting requirements

CAREER PATH

Start as a general ledger accountant or financial analyst, then positions involving international accounting and finance

Enrico VillanuevaRobert Half International

Q What do you do?A I assist the international reporting manager in ensuring

the timely and accurate consolidation of our company’s international subsidiaries’ fi nancial results. I also provide support on international tax issues, system conversion activities and other international fi nance projects.

Q What are your day-to-day responsibilities?A My duties include ensuring that the monthly fi nancial

reports for our international subsidiaries are properly consolidated into the U.S. parent company’s books in accordance to U.S. GAAP. In addition, I facilitate the billing of charges between the parent company and its international subsidiaries, assist in the settlement of intercompany payables/receivables, and respond to external and internal auditors’ inquiries relating to international entities.

Q What factors have been key to your success?

A My organizational and analytical skills. By being organized, I stay on top of projects. My analytical skills help me understand accounting issues and formulate corrective actions when necessary.

Q What do you like most about your job?A My job is always challenging and never boring, and I get

to put to use the skills I acquired in school and at previous jobs.

Senior International Financial Analyst

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ROBERT HALF

CORNER

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Self-Direction The Partnership for 21st Century Skills defi nes self-direction as “becoming more productive in accomplishing tasks and developing interest in improving own skills.” Ask: Why is self-direction a necessary skill to have for career advancement? Answers will vary; the more an employee can accomplish without having to ask for a manager’s direction means that the employee needs less supervision and has management potential.

Extend Have students consider 5boroNYC on page 220 and compose a short paragraph about the ways in which Steve Rodriguez probably employed self-direction skills in establishing his business.

Global Awareness Ask: What might make a person with multicultural skills, such as speaking multiple languages or understanding foreign customs, attractive to a company? Answers will vary, but a person with multicultural skills will be able to accomodate a wider spectrum of potential clients.

Extend Send students online to research career paths that integrate accounting skills and global awareness. From a list of fi ve, have students choose one that interests them the most and compose a short paragraph about their fi ndings.

College and Career Readiness

Answers will vary depending on the year the information is accessed.

MentoringOne strategy used to pass on wisdom and insight to junior-level employees is mentoring. Mentors provide knowledge and practical skills not learned in school. Mentors may teach the subtleties of business protocol or how to work with a challenging situation.

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CHAPTER 9 H.O.T.

GAccountingLOBAL

Management AccountantManagement accounting can be a great career for those who are more interested the executive side of a business than the accounting side. They use their accounting skills to help develop new products and determine the company’s future plans.EDUCATION REQUIREMENTS Management accountants do not have to be certified and the state boards do not have a minimum education requirement. Most employers will look for management accountants who have a college degree.ROLES Management accountants analyze the company’s financial information in order to help managers make decisions about the company’s future. RESPONSIBILITIES A management accountant is responsible for managing costs and assets, establishing work and production standards and then evaluating work performance. They also help executives plan and develop new products. ACTIVITY A career strategy that can give you an advantage is learning about useful skills for your chosen career and developing those skills early. Research management accounting careers and make a plan of things you could do in high school and college to develop those skills.

WITHHIGHER ORDER THINKINGREAL-WORLD Applications & Connections

The EuroFinancial statements are generally prepared in the currency of the country in which the business operates. Many European countries use a single currency, the euro. Nations in the European Union began using the euro in 2002. Individuals and businesses both benefit by having a single currency. Travelers can use one currency in multiple countries. Businesses have a more stable business environment due to the elimination of exchange rate fluctuations.

INSTRUCTIONS Imagine that you own a business with locations in Italy and France. Describe how the adoption of the euro in both countries has changed your financial statement preparation.

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248 Chapter 9

Management Accountant

Answer: The student’s answer should show that they conducted research on management accounting careers by listing appropriate skills. They should relate activities they can do in high school to the skills they listed. Things they might list include high school math classes, developing computer software and database skills, and practice managing group projects.

The EuroThe use of the euro eliminated the need for exchange rate calculations.

GAccountingLOBAL

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CHAPTER 9

FinancialAnalyzing

ReportsH.O.T. Audit

Return on SalesBusiness owners are especially interested in the return on sales (see page 237). This percentage shows how much of each revenue dollar becomes profit for the business.

INSTRUCTIONS Use Zip’s income statement on page 225 to calculate its return on sales. (Use $1,100 as net income instead of $1,150.) If total sales are about equal from month to month but return on sales decreases each month, what does this say about the business? What suggestions can you offer to improve the return on sales?

HOT Audit Using the amounts that are given below, calculate the missing amounts. Write the missing amounts on a separate sheet of paper.

SweepIt Carpet Cleaning CompanyStatement of Changes in Owner’s Equity

For the Month Ended July 31, 20--

Beginning Capital, July 1, 20--Add. Investments by OwnerSubtotalLess Withdrawals by Owner Net LossTotal Decrease in CapitalEnding Capital, July 31, 20--

1 5 0 0 00?

?

?2 7 5 1 00

1 9 7 2 9 00

1 5 0 0 00

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FinancialAnalyzing

Reports

Return on SalesReturn on sales is 41.5% ($1,100 � $2,650). This is very high, perhaps reflecting lower-than-normal operating costs. A decrease in the return could signal increased competition or a loss of customers because of poor service or high prices. The owner should analyze the cause of the decreases and make changes to be more competitive—such as offering better customer service.

HOT AuditBeginning Capital: $20,980

Subtotal: $22,480

Net Loss: $1,151

H.O.T. Audit

Have students research three other forms of currency besides the U.S. dollar. Have them track the exchange rates for several days. What do their fi ndings show about money’s stability?

FINANCIALLITERACY

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