Patchogue-Medford High School
Accounting I – Chapter 9 Notes
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.
- 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
- 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
Assets (listed individually)
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
Do problem 9-3, Calculate the return on sales, page 239, WB page 164
Terms Page 241
Questions Page 242
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