Patchogue-Medford High School

Accounting I – Chapter 9 Notes

Mr. Butzke

Chapter 9 – Financial Statements for a Sole Proprietorship                                                                                                                                          Page 220

Objective: Students will be able to demonstrate their knowledge of work sheets by preparing financial statements used by sole proprietorships from them. These F/S include formal Income Statements, Statement of Changes, and the Balance Sheets.

Previous topics covered from the last chapters in the accounting cycle:

      Step 1 – Collect and verify source documents

      Step 2 – Analyze each transaction

      Step 3 – Journalize each transaction

      Step 4 – Posting to the General Ledger

      Step 5 – Preparing a Trial Balance

      Step 6 – Preparing a six-column work sheet

The process covered in this chapter is step 7 in the accounting cycle:

      Step 7 – Preparing the financial statements

                        First prepare the Income Statement  (I/S)– shows profit or loss

                        Second Prepare the Statement of Changes – shows owners claim or value on co.

                        Third prepare the Balance Sheet (B/S)– shows assets, liabilities, & equity of a co.

The Income Statement  (I/S) (page 225)

• Has a heading, who, what, and when (date is for a period of time; for period ending…)
• Starts with a listing of the different types of revenue
• Then lists all of the expenses individually and totals them up
• Net Income is calculated by taking revenues less expenses when revenue is higher.

Or Net Loss if expenses are higher than revenues

• The information comes from the Income Statement section of the Work Sheet. The N/I from the W/S will be the same on the formal I/S.
• The accounts used on the I/S are all temporary accounts.
• The information covers a definite accounting period of time.
• Format:
  • Revenue (from sales or services)
  • Less: Operating Expenses
  •      Net Income

The Statement of Changes in Owners Equity  (SCOE) (page 228)

• This summarizes the changes in the owners capital account
• The same heading as the I/S
• The information comes from the W/S and the I/S.
• Check the capital account for activity during the year
• Format:
  • Beginning Capital (from the first day of the period)
  •           Add: Net Income (if they had it)
  •           Add: Investments by owner (cash and or other assets with value)
  •                                      Total Increases
  •          Less: Withdrawals
  •          Less: Net Loss (if they had this instead of N/I)
  •                                      Total Decreases
  •   Ending Capital (last day of the period)

Do problem 9-2, Determining ending capital balances, page 232, WB 164

The Balance Sheet (B/S) (page 235)

• Provides a record of the assets and a summary of the liabilities or claims against the business’s assets at that particular time.
• The heading is the same except the date is at a period of time (December 31, 2---)
• Shows what a business owns and is worth.
• The information for this report comes from the BS section of the W/S and the SCOE
• Proves the equality of the balance sheet: A= L + O/E, is also the Accounting Equation
• Format:

Assets (listed individually)

Total Assets

Liabilities (listed individually, then totaled)

Owners Equity (capital amount, or from SCOE )

          Total Liabilities & Equity

The total assets must equal the total liabilities & owners equity

Accounting Time terms  - Current is within the next 12 months

• Long Term amounts are after the next 12 months

Ratio Analysis (page 237)

• The process of evaluating the relationship between various amounts in the F/S. They will determine the financial strength, activity, and debt paying ability of a business.

Profitability Ratio’s – Evaluates the earnings performance of the business during a period.

Return on Sales – examines the portion of each sales dollar that represents a profit. (N/I)/Sales

That is profit per sales dollar.

Liquidity Measures – The ease with which an asset can be converted into cash. It is the relationship between current assets and current liabilities. A high ratio is good. The amount by which current assets exceed current liabilities is considered to be working capital.

               Current Assets – Current Liabilities = Working Capital

               Current Assets/Current Liabilities = Current Ration (a ratio of 2:1 or higher is favorable)

Quick Ratio – A measure of the relationship between short-term assets and current liabilities. Can be compared year to year.

               Cash + Receivables

               Current Liabilities

      Do problem 9-3, Calculate the return on sales, page 239, WB page 164

Terms Page 241

Questions Page 242

Problems

Prob.  9-4        Preparing an I/S                     TB pg 244   WB pg 165  PC 175

Prob.  9-5        Preparing a SCOE (use 9-4)     TB pg 244    WB pg 166 PC 175               

Prob.  9-6        Complete a W/S, then F/S        TB pg 244    WB pg 168 PC 177        Q 179

Prob.  9-7        Full process                            TB pg 245    WB pg 171 PC 178        Q181

Prob.  9-8        SCOE                                             TB pg 245     WB pg 174