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Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Owner’s equity in a corporation is called stockholders’ equity. A merchandiser’s income statement has a Cost of Merchandise Sold section, and a corporation’s income statement shows income tax expense. Additionally, a corporation prepares the statement of retained earnings, the balance sheet, and the statement of cash flows.
Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Explain how to record ownership of a corporation.
Explain the relationship between the work sheet and the financial statements for a merchandising corporation.
Explain how a corporation’s financial statements differ from a sole proprietorship.
Analyze the financial data contained on the statements.
Prepare an income statement, statement of retained earnings, and balance sheet.
Describe the statement of cash flows for a merchandising corporation.
Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
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Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Key Terms
Capital Stock
stockholder’s equity
retained earnings
compatibility
The Ownership of a Corporation
Section 19.1
reliability
relevance
full disclosure
materiality
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Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Accounting for a Corporation
The Ownership of a Corporation
Section 19.1
A corporation may be owned by one person or
thousands.
The ownership of a corporation is
represented by shares of stock.
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Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Accounting for a Corporation
The Ownership of a Corporation
Section 19.1
Corporations have a Capital Stock account
instead of the sole proprietorship’s owner’s capital
account.
This is a stockholders’ equity account that is the
value of the stockholders’ claims to the corporation.
Capital StockThe account that represents the total amount of investment in the
corporation by its stockholders (owners).
stockholders’ equityThe value of the stockholders’ claims to the corporation.
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Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Accounting for a Corporation
The Ownership of a Corporation
Section 19.1
Stockholders’ equity must be reported
in two parts:
Equity contributed by the stockholders
Equity earned through business profits
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Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Accounting for a Corporation
The Ownership of a Corporation
Section 19.1
Stockholders
contribute to equity
by purchasing
shares of stock.
This amount is
recorded in the
Capital Stock
account.
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Accounting for a Corporation
The Ownership of a Corporation
Section 19.1
The net income earned and retained by a corporation is recorded in the retained earnings account.
retained earningsA corporation’s accumulated net income
that is not distributed to stockholders.
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Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Accounting for a Corporation
The Ownership of a Corporation
Section 19.1
Business Transaction
On January 1 stockholders invested $25,000 in exchange for shares of stock of the corporation.
See page 556Home
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Accounting for a Corporation
The Ownership of a Corporation
Section 19.1
Compare the Balance Sheet for a Sole Proprietorship and a Corporation
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Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Characteristics of Financial Information
The Ownership of a Corporation
Section 19.1
Who Uses Financial Information?
Managers
Creditors
Stockholders
Government Agencies
Employees
Consumers
General Public
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Characteristics of Financial Information
The Ownership of a Corporation
Section 19.1
ComparabilityAllows
information to be compared from one period to another
the comparison of information between businesses
comparabilityAccounting characteristic that allows the financial information to be compared from one period to another period; also allows the
comparison of financial information between businesses.Home
Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.
Characteristics of Financial Information
The Ownership of a Corporation
Section 19.1
What Is
Reliability?
reliabilityA characteristic requiring that accounting information be
reasonably free of bias and error.
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Characteristics of Financial Information
The Ownership of a Corporation
Section 19.1
What Is
Relevance?
relevanceAn accounting characteristic requiring that all information that
would affect the decisions of financial statement users be disclosed in the financial reports.
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Characteristics of Financial Information
The Ownership of a Corporation
Section 19.1
What Is
Full Disclosure?
full disclosureAccounting principle requiring a financial report to include
enough information so that it is complete.
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Characteristics of Financial Information
The Ownership of a Corporation
Section 19.1
What Is
Materiality?
materialityAn accounting guideline stating that information
considered important (relative to the other information) should be included in financial reports.
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A Corporation’s Financial Statements
The Ownership of a Corporation
Section 19.1
A merchandising corporation can prepare four financial statements:
The Income Statement
The Statement of Returned Earnings
The Balance Sheet
The Statement of Cash Flows
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Key Terms
net sales
net purchases
gross profit on sales
operating expenses
The Income StatementSection 19.2
selling expenses
administrative expenses
operating income
vertical analysis
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The Income Statement
The Income StatementSection 19.2
Five Sections of the Income Statement
Revenue
Cost of Merchandise Sold
Gross Profit on Sales
Operating Expenses
Net Income (or Loss)
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The Income Statement
The Income StatementSection 19.2
The Revenue Section Reports the Net Sales for the Period
See page 561
net salesThe amount of sales for the period less any sales
discounts, returns, and allowances.
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The Income Statement
The Income StatementSection 19.2
Calculating the Cost of Merchandise Sold.
Computing the cost of merchandise sold requires two steps:
Determine the cost of all merchandise available for sale
Calculate the cost of merchandise sold
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The Income Statement
The Income StatementSection 19.2
Calculating the Cost of Merchandise Available for Sale
Add Net Purchases to the Beginning Inventory Amount.
net purchasesThe total cost of all merchandise purchased during a period,
less any purchases, discounts, returns, and allowances.Home
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The Income Statement
The Income StatementSection 19.2
See page 563
Calculating the Cost of Merchandise Sold
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The Income Statement
The Income StatementSection 19.2
The gross profit on sales is the profit made before operating expenses are
deducted.
gross profit on salesThe amount of profit made during the fiscal period
before expenses are deducted; it is found by subtracting the cost of merchandise sold from net sales.
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The Income Statement
The Income StatementSection 19.2
operating expensesThe cash spent or assets consumed to earn a revenue
for a business; operating expenses do not include federal income tax expense.
Operating Expenses
Selling Expenses
Administrative Expenses
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The Income Statement
The Income StatementSection 19.2
selling expensesExpenses a business incurs to sell or market its
merchandise or services.
Operating Expenses
Selling Expenses
Administrative Expenses
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The Income Statement
The Income StatementSection 19.2
administrative expensesCosts related to the management of a business
(for example, office expenses).
Operating Expenses
Selling Expenses
Administrative Expenses
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The Income Statement
The Income StatementSection 19.2
operating incomeThe excess of gross profit over operating expenses;
taxable income.
The federal corporate income tax amount is presented separately on the
income statement so the income statement shows the amount of
operating income.
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Analyzing Amounts on the Income Statement
The Income StatementSection 19.2
vertical analysisA method of analysis that expresses financial statement
items as percentages of a base amount.
Vertical analysis enables users to more easily view relationships.
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Key Terms
statement of retainedearnings
horizontal analysis
base period
cash inflows
The Statement of RetainedEarnings, Balance Sheet, and
Statement of Cash FlowsSection 19.3
cash outflows
operating activities
investing activities
financing activities
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The Statement of Retained Earnings
The Statement of RetainedEarnings, Balance Sheet, and
Statement of Cash FlowsSection 19.3
Statement of Retained Earnings
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The Statement of Retained Earnings
The Statement of RetainedEarnings, Balance Sheet, and
Statement of Cash FlowsSection 19.3
Statement of Retained Earnings
statement of retained earningsA financial statement that reports the changes in the Retained Earnings account during the period.
See page 569
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The Balance Sheet
The Statement of RetainedEarnings, Balance Sheet, and
Statement of Cash FlowsSection 19.3
The balance sheet reports the balances of all
asset, liability, and stockholders’ equity
accounts for a specific date. The assets are
listed first, followed by the Liabilities section
and the Stockholders’ Equity section.
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The Balance Sheet
The Statement of RetainedEarnings, Balance Sheet, and
Statement of Cash FlowsSection 19.3
The Starting Line’s Balance Sheet
See page 570Home
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Analyzing Amounts on the Balance Sheet
The Statement of RetainedEarnings, Balance Sheet, and
Statement of Cash FlowsSection 19.3
Horizontal analysis uses dollar amounts expressed as
percentages to compare the same items on financial
statements for two or more accounting periods or dates.
A base period is usually used for comparison.
horizontal analysisThe comparison of the same item(s) on financial statements for two
or more accounting periods or dates; used to determine changes from one period to another.
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Analyzing Amounts on the Balance Sheet
The Statement of RetainedEarnings, Balance Sheet, and
Statement of Cash FlowsSection 19.3
Horizontal analysis uses dollar amounts expressed as
percentages to compare the same items on financial
statements for two or more accounting periods or dates.
A base period is usually used for comparison.
base periodA period, usually a year, that is used for
comparison.
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The Statement of Cash Flows
The Statement of RetainedEarnings, Balance Sheet, and
Statement of Cash FlowsSection 19.3
cash inflowReceipts of cash.
See page 573
The Statement of Cash FlowsShows Cash Inflows and Cash Outflows
cash outflowPayments of cash.
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The Statement of Cash Flows
The Statement of RetainedEarnings, Balance Sheet, and
Statement of Cash FlowsSection 19.3
Cash Flows from Operating Activities
operating activitiesBusiness activities involving normal
business operations.
To determine operating cash inflows and outflows, the income statement
and balance sheet amounts are converted to the cash basis of
accounting.
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The Statement of Cash Flows
The Statement of RetainedEarnings, Balance Sheet, and
Statement of Cash FlowsSection 19.3
investing activitiesBusiness activities involving investments
and plant assets.
Investing Activities
Loans the business makes
Payments received for loans
Purchase and sale of plant assets
Investments
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The Statement of Cash Flows
The Statement of RetainedEarnings, Balance Sheet, and
Statement of Cash FlowsSection 19.3
What AreFinancing Activities?
financing activitiesBusiness activities involving debt and
equity transactions.
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The Statement of Cash Flows
The Statement of RetainedEarnings, Balance Sheet, and
Statement of Cash FlowsSection 19.3
Typical Cash Inflows and Outflowsfor the Three Activities of a Business
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Question 1
Match the characteristic of financial information to its definition.
A. The information in the financial reports is complete.
B. The information is relatively free of errors and bias.
C. All information that would affect decision making is included.
D. Information from one period can be used to evaluate the information for a different but similar period.
E. All important and relevant information should be included.
1. comparability________
2. reliability ________
3. relevance________
4. full disclosure________
5. materiality________
DB
C
A
EHome
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Question 2
List the steps necessary to determine the amount to report in the Cost of Merchandise Sold section of the income statement.
Step 1: List the amount of beginning merchandise inventory.
Step 2: Calculate the Cost of Delivered Merchandise by adding amounts in the Purchases and Transportation In accounts.
Step 3: Calculate the amount of Net Purchases by subtracting the Purchases Discounts
and Purchases Returns and Allowances from the Cost of Delivered Merchandise.
Step 4: Add Net Purchases to beginning merchandise inventory to determine the Cost of Merchandise Available for sale during the period.
Step 5: Subtract the amount of ending merchandise inventory from the Cost of Merchandise Available for sale. The result is the Cost of Merchandise Sold.
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Question 3
“The wide use of computer accounting software makes the understanding of accounting less important.” Do you agree or disagree with that statement, and why?
Answers will vary. While computerized accounting programs make the posting and entry of accounting transactions faster and eliminate errors in transferring data from the journal to the ledger, this does not mean that an understanding of accounting is less important. It can be argued that it is more important in this case to have a sound understanding of accounting principles to be able to follow what is happening in the business transaction so a person can determine whether it has been entered correctly.
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