LESSON 7-1

LESSON 7-1Preparing an

Income Statement

ACCOUNTING January 30, 2014

http://www.youtube.com/watch?v=Z7C4cz2HkeY

Welcome to Chapter 7 Chapter 7 Covers the preparation of an

income statement and a balance sheet for a proprietorship.

Not only is statement preparation covered but also the financial statement analysis of these statements (in simplest form).

American Eagle OutfittersAccounting in the Real World

Answer the critical Thinking questions that follow.

Warm Up

Internet Activity Chose two companies in the same

industry. Go to the homepage for each company and search for its most current financial statements.

Answer the questions that follow. HINT: Total expenses / Total Revenue

Net Income (loss) / total revenue

Chapter 7-1Reporting Financial Information

Adequate Disclosure› Applied when financial statements contain all information necessary to understand a business’s financial condition

› Without it, financial information would be incomplete.

Objectives Define Accounting Terms related to

financial statements for a service business organized as a proprietorship.

Identify accounting concepts and practices related to preparation of an income statement.

Prepare an income statement and analyze an income statement using component percentages.

Question for YOU? How many of you would work for a year,

not knowing how much you were going to make during that year?

Compare this with a company that waits until the end of the year to determine how much the company “made” during the year. This helps explain why a business would prepare an income statement every month-even if it is not required to do so.

Terminology 7-1 Component percentage: the

percentage relationship between one financial statement item and the total that includes that item. (p. 184)

Stakeholders: any persons or groups who will be affected by an action (p. 181)

Important!!! Income Statement reports information

over a specific period of time. The date used to prepare the income

statement is obtained from the Income statement columns of a work sheet.

Remember that the heading of most financial statements answers the questions: WHO? WHAT? And WHEN?

LESSON 7-1 10

INCOME STATEMENT INFORMATION ON A WORK SHEETpage 182

LESSON 7-1 11

HEADING OF AN INCOME STATEMENT

1

2

3

page 182

1. Center the name of the company on the first line.2. Center the name of the report on the second line.3. Center the date of the report on the third line.

Remember Revenue and Expenses?

Revenue an increase in owner’s equity resulting from the operation of a business. (p. 14)

Expense a decrease in owner’s equity resulting from the operation of a business. (p. 15)

Income Statement has 4 sections….

Heading Revenue Expenses Net Income or Loss

NOTE: the two columns on the income statement are not debit and credit columns.

Before we look…. The account titles are indented under

section titles to make the sections titles easier to read

The account balances are listed in the first column, totals in the second column.

LESSON 7-1 15

REVENUE, EXPENSES, AND NET INCOME SECTIONS OF AN INCOME STATEMENT

page 183

1Revenue3 Revenue amount4Expenses

5Account titles 6 Expense amount

8Total expenses 9 Total of expenses

12 Net Income

7 Single line

11 Single line

10 Calculate net income

14 Double lines

13 Record net income

2 Account title

LESSON 7-1 16

COMPONENT PERCENTAGE ANALYSIS OF AN INCOME STATEMENT page 184

Character Counts Try Aplia(Work Together and On Your

Own)

Character CountsKey Term-Stakeholders……

Question for you…. Can you name a business that might

have more than one source of revenue from services?

Example: A music store might offer lessons and repairs on instruments.

REMINDER! The data for the income statement is

found on the work sheet.

Today, we will focus on how two sources of revenue can be documented on an income statement but it must be listed separately, similar to the way that each expense is listed.

What Happens when Total Expenses Exceed Total Revenue?

There is a NET LOSS.

Let’s take a look!!!!!

LESSON 7-1 21

INCOME STATEMENT WITH TWO SOURCES OF REVENUE AND A NET LOSS page 185

1Revenue

3 Revenue amounts2Account titles

6Net Loss

7 Record Net Loss

5 Total Revenue

4 Total of revenue

LESSON 7-1 22

TERMS REVIEW stakeholders component percentage

Component percentage: the percentage relationship between one financial statement item and the total that includes that item. (p. 184)

Stakeholders: any persons or groups who will be affected by an action (p. 181)

page 186

Your Assignment Aplia Application Problem 7-1 Math Work Sheet

Part A & Part B. On the bottom of the worksheet

answer the following questions

LESSON 7-2Balance Sheet Information

on a Work Sheet

Objective Identify accounting concept and

practices related to the preparation of a balance sheet for a service business organized as a proprietorship.

Prepare a Balance Sheet for a service business organized as a proprietorship.

Do you Remember the Accounting Equation?

Do you Remember the Accounting Equation?

ASSETS = LIABILITIES + OWNERS EQUITY

The Balance Sheet uses the same format as the accounting equation.

This part of the chapter will discuss preparing a balance sheet using data on the work sheet.

Before we look at a Balance Sheet…

Balance Sheet Reports information for a SPECIFIC date.

The data used to prepare the balance sheet can be obtained from the balance sheet columns of the worksheet.

The heading of most financial statements answers the questions: WHO? WHAT & WHEN?

LESSON 7-2 29

HEADING OF A BALANCE SHEET page 187

1

2

3

1. Center the name of the company on the first line.2. Center the name of the report on the second line.3. Center the date of the report on the third line.

What’s on a Balance Sheet? Assets Liabilities Owner’s Equity

LESSON 7-2 31

BALANCE SHEET page 187

The Information needed to prepare the assets section is obtained from the Balance Sheet Debit Column.

LESSON 7-2 32

BALANCE SHEET page 187

The Information needed to prepare the liabilities section is obtained from the Balance Sheet Credit Column.

LESSON 7-2 33

ASSETS AND LIABILITIES SECTIONS OF A BALANCE SHEETpage 188

4 Liabilities1 Assets

Total Liabilities8

2 Account titles 3 Asset amounts

Single line 7

6Liability amounts

5Account titles

Total of liabilities 9

Lets Stop Here a Moment. Read “Case for Critical Thinking”

on page 197 and answer the question that follow. You can use the back of the work sheet provided to you.

Then Try Applied Communication on the same page and write down your advice to your new assistant.

Owner’s Equity Owners Equity-the amount remaining

after the value of all liabilities is subtracted from the value of all assets

The information needed to prepare the owner’s equity section of a balance sheet is obtained from the Balance Sheet columns of the work sheet

How to calculate the new capital balance…

Capital Account Balance-Net Loss-Drawing Account Balance=Current Capital (Page 189)

Lets look at the ten steps for preparing the owner’s equity section of a balance sheet.

LESSON 7-2 37

OWNER’S EQUITY SECTION OF A BALANCE SHEET page 189

7 Total Liab. and Owner’s Eq.

5 Total Assets

1 Owner’s Equity

2 Account title 3Capital amount

4 Single line

6Total of assets

8Total of Liabilities and Owner’s Equity

9Compare totals 10 Double lines

Let’s look deeper… The Owner’s Equity section of a

balance sheet can show more detail than that shown on a balance sheet.

A business may choose to show more details in the owner’s equity section.

There are 9 steps used to prepare the owner’s equity section reported in detail on a balance sheet.

LESSON 7-2 39

OWNER’S EQUITY REPORTED IN DETAIL ON A BALANCE SHEET page 190

2Beginning capital amount

6Difference

8Current capital amount

1 Beginning capital

3 Net Income

4 Drawing

Ending capital7

9 Total Liabilities and Owner’s Equity

5 Single line

Today… Aplia 7-2 Work Together and On Your

Own. Chapter 7 Study Guide Extra Study Tools AND Take Online Tutorial Quiz

› www.c21accounting.com

Exit Ticket List the four sections on a balance

sheet.

What is the formula for calculating current capital?