LESSON 7-1

Preparing an Income Statement

Accounting Concepts

Adequate Disclosure: When financial statements contain all information necessary

to understand a business’s financial situation. Can you make a good decision if you don’t know if you have a

net loss or net income?

Going Concern: When financial statements are prepared with the expectation

that a business will remain in operation indefinitely

Stakeholders: any person or group that will be affected by an action

Activity:

Turn to page 181 and Read Making Ethical Decisions Think about TechKnow Consulting (sells services)

Who are their stakeholders? Enter your answer on the bottom of page 143 of your Workbook

Owners Employees Suppliers (Accounts Payables) Customers Society/Communities

Ex: PG&E – hexavalent chromium to fight corrosion in cooling towers

Reporting Financial Information

Why do companies report financial information? Report the financial condition of the company Needed to make good business decisions Needed to make ethical decisions

What two types of financial statements are used? Income Statements Balance Sheets

When are they prepared? At the end of the fiscal period Either yearly or monthly (our example is using a 1 month)

When does the fiscal period end?

An Income Statement

Reports financial information for a specified period of time Entire Fiscal period (“For Month Ended…”, or “For Year ended..”) Shows how we did as a business for the entire year/month

Reports Financial progress Do we have a Net Income or Net Loss

What two types of accounts are on the Income Statement? Revenue (Sales) Expenses (costs to operate the business)

Completing an Income Statement Form

Information needed to complete the Income Statement: Account titles from the Title column of the Work Sheet Balances from the Income Statement columns of the Worksheet

Three Sections of an Income Statement: Form Heading (Who, What, When) Division Titles

Revenue Expenses Net Income or Net Loss

Percentage of Sales

Income Statement

DATA OBTAINED FROM WORK SHEET

IncomeStatement

1. Create the Heading Section• Who, What, When

2. List Revenue Accounts: • Enter division title• Indent Account Titles• Enter balance in

middle column

3. Prepare Expense Accounts: • Enter division title• Indent Account Titles• Balances in first column• Single Rule after last

expense account

4. Record Total Expenses • Enter “Total Expenses” on

next line below expenses• Sum Total Expenses and

enter value in middle amount column

 

 

 

 

% of Sales

 

                       

                       

                       

                       

                       

                       

                       

                       

                       

                       

                       

                       

                       

                       

5. Report Net Income/Net Loss

• Single rule below Total Expenses balance

• Enter “Net Income” division title on the Next blank line (not indented)

6. Report Net Income/Net Loss

• Subtract total expenses from total revenue.

• Double rule below both amount columns

Lawn Pro Company  Income Statement

 For Month Ended November 30, 2010

 

% of Sales

 

 Revenue:                      

 Sales            3 8 0 0 00  

 Expenses:                      

 Advertising Expense    2 0 0 00            

 Insurance Expense    1 5 0 00            

 Miscellaneous Exp.     5 0 00            

 Rent Expense    6 0 0 00            

 Supplies Expense    5 0 0 00            

 Utilities Expense    3 9 0 00            

 Total Expenses            1 8 9 0 00  

                       

                       

                       

Component Percentages

Component percentage: the percentage relationship between one financial statement item and the total that includes that item Managers analyze relationships between expenses and revenue Assist with making decisions about future operations Two components: total expenses and net income/loss

Tells the percent of revenue that is expenses Tells the percent of revenue that is net income/loss

COMPONENTPERCENTAGE

3. Component % of Net Income • Divide Net Income by Total

Revenue• An acceptable % for Net

Income is not less than 45%• Convert to a Percentage• Round to one decimal place

2. Component % of Expense:• Divide total Expenses by

Total Revenue• An acceptable % for

expenses is not greater than 55%

• Convert to a Percentage• Round to one decimal place

1. Component % of Revenue:• Sales = 100% of

Revenue

• What is the % of Expenses?49.7%

• Is this acceptable?Yes

• What is the % of Net Income? 50.3%

• Is this acceptable?Yes

LawnPro Company  Income Statement

 For Month Ended November 30, 2010

 

% of Sales

 

 Revenue:                      

 Sales            3 8 0 0 00  

 Expenses:                      

 Advertising Expense    2 0 0 00            

 Insurance Expense    1 5 0 00            

 Miscellaneous Exp.     5 0 00            

 Rent Expense    6 0 0 00            

 Supplies Expense    5 0 0 00            

 Utilities Expense    3 9 0 00            

 Total Expenses            1 8 9 0 00  

 Net Income:           1  9 1 0 00  

                       

                       

INCOME STATEMENT WITH TWO SOURCES OF REVENUE AND A NET LOSS

TERMS REVIEW

stakeholders component percentage

Assignment

WTG 7-1 OYO 7-1