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Chapter 16

Chapter 16. Financial Statements for a Partnership. OBJECTIVES:. Define accounting terms related to financial statements for a merchandising business organized as a proprietorship.

eric-hensley
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Chapter 16

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  1. Chapter 16 Financial Statements for a Partnership

  2. OBJECTIVES: • Define accounting terms related to financial statements for a merchandising business organized as a proprietorship. • Identify accounting concepts and practices related to financial statements for a merchandising business organized as a proprietorship. • Prepare an income statement for a merchandising business organized as a proprietorship.

  3. OBJECTIVES: • Analyze an income statement using component percentages for a merchandising business organized as a proprietorship. • Prepare a distribution of net income statement and an owner’s equity statement for a merchandising business organized as a proprietorship. • Prepare a balance sheet for a merchandising business organized as a proprietorship.

  4. Financial Statements • Adequate Disclosure • Provide information about: • the business’s financial condition. • changes in financial condition. • The progress of operations. • Consistent Reporting • Financial information must be reported in the same manner each fiscal period.

  5. Four Financial Statements for a Partnership • Income Statement • Distribution of Net Income or Loss • Owner’s Equity Statement • Balance Sheet

  6. Chapter 16-1: Income Statement • Used to report financial PROGRESS • Section 1: • Revenue • Section 2: • Cost of Merchandise Sold • Total original price of all merchandise sold (Historical Price) • AKA: cost of goods sold or cost of sales • Gross Profit on Sales • Section 3: • Expenses • Net Income or Loss • Compare past statements to figure out reasons for increase/decrease in net income

  7. Copy to Income Statement INCOME STATEMENT INFORMATION ON A WORK SHEET

  8. PREPARING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS 1 2 3 1. Write the income statement heading on three lines. 2. Prepare the revenue section. 3. Prepare the Cost of Merchandise Sold section.

  9. Cost of Merchandise Beginning Merchandise Inventory (TRIAL Balance) + Plus Purchases (Income Stmt column) - Minus Ending Merchandise Inventory (Balance Sheet column) = Equals Cost of the Merchandise that was Sold Merchandise can be abbreviated Mdse. or Merch.

  10. COMPLETING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESS 8 4. Calculate the gross profit on sales. = Revenue – Cost of Merchandise 5. Prepare the expenses section. 4 • Calculate the net income. • = Gross Profit on sales – Total Expenses 5 7. Rule double lines. 8. Calculate the component percentages. 6 7

  11. TERMS REVIEW cost of merchandise sold gross profit on sales TO DO: Work Together, pg 409 On your own, pg 409 Application Problem 16-1, pg 422

  12. Chapter 16-2: Component Percentages • Relationship between income statement components and sales • Sales = 100% • Example: • Cost of Merchandise Component Percentage = Cost of Merchandise ÷ Sales • Gross Profit must be large enough to cover total expenses and the desired amount of net income

  13. Acceptable Omni Import Industry Component Standards Percentages ANALYZING AN INCOME STATEMENT SHOWING A NET INCOME Sales 100% 100.0% Cost of merchandise sold not more than 50.0% 48.6% Gross profit on sales not less than 50.0% 51.4% Total expenses not more than 35.0% 34.9% Net income not less than 15.0% 16.5% Each % represents the amount of each sales dollar that is considered acceptable.

  14. ANALYZING AN INCOME STATEMENT SHOWING A NET LOSS • Analyze each • component percentage: • Cost of Merchandise • Gross Profit • Total Expenses • Net Income/Loss

  15. Corrections for Unacceptable Component Percentages Gross Profit on Sales: • Increase sales revenue • Increase mark-up • Decrease cost of merchandise sold • Buy in larger quantities?? • BOTH: Increase sales revenue and decrease cost of sales • Very small increase/decrease if doing both Expenses: • Reduce expenses that are beyond industry standards Net Income: • Once all other components are within acceptable range net income will be acceptable

  16. TO DO: • Work Together, pg 409 • On your own, pg 409 • Application 16-2

  17. Chapter 16-3: Distribution of Net Income and Equity Statements • May be divided in any way agreed upon by partners in partnership agreement • Equal 50% - 50% • Unequal 60% - 40% • ‘Articles of Partnership’ – official business agreement - must state how profit or loss is shared. • Shown on a Distribution of Net Income Statement

  18. PREPARING A DISTRIBUTION OF NET INCOME STATEMENT 1 2 3 4 5 6 7 8 1. Heading 5. Second Partner’s Share of Net Income 2. First Partner’s Name 6. Net Income 3. First Partner’s Share of Net Income 7. Total Net Income 8. Double Lines 4. Second Partner’s Name

  19. DISTRIBUTION OF NET INCOME STATEMENT WITH UNEQUAL DISTRIBUTION OF EARNINGS Same steps, just need a description of how earnings are shared

  20. Owner’s Equity Statement • Same as detailed owner’s equity on balance sheet • Shows each partner’s equity separately • Summarizes changes in OE during fiscal period • 3 factors for change: • Investments • Withdrawals • Net income/ net loss • What you need: • Distribution of net income/loss – Dist. of Net Income • Beginning balance of capital – General ledger • Additional investments – General ledger • Each partner’s withdrawals of asset – General ledger

  21. 3 5 OWNERS’ EQUITY STATEMENT (with net income) 1 2 4 6 7 1. Heading 5. Second Partner’s Ending Capital 2. First Partner’s Name 6. Total Owners’ Equity 3. First Partner’s Ending Capital 7. Double Lines 4. Second Partner’s Name

  22. OWNERS’ EQUITY STATEMENT WITH AN ADDITIONAL INVESTMENT AND A NET LOSS

  23. TERMS REVIEW distribution of net income statement owner’s equity statement TO DO: Work Together, pg 415 On your own, pg 415

  24. Chapter 16-4: Balance Sheet • Reports business’s financial CONDITION on a SPECIFIC DATE • BALANCE SHEET INFORMATION ON A WORK SHEET

  25. FIRST TWO SECTIONS OF A BALANCE SHEET FOR A MERCHANDISING BUSINESS 1 1. Prepare the heading. 2. Prepare the assets section. 2 3. Prepare the liabilities section. 3

  26. 7 6 5 7 COMPLETING A BALANCE SHEET FOR A MERCHANDISING BUSINESS 4. Prepare the owners’ equity section. 5. Total the liabilities and owners’ equity sections. 6. Verify the accuracy by comparing totals. 7. Rule double lines. *Info obtained from Owner’s Equity Statement 4

  27. Supporting Statements • Schedule of Accounts Payable and Receivable. • Provide details for each vendor • AKA supplementary report or exhibit

  28. TERMS REVIEW supporting schedule TO DO: Work Together, pg 420 On your own, pg 420 App. Prob. 16-3, 16-4, 16-5, pg 423

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