Chapter 16Chapter 16

Financial Statements for a Partnership

OBJECTIVES: 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.

OBJECTIVES: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.

Financial StatementsFinancial 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.

Four Financial Statements for a PartnershipFour Financial Statements for a Partnership

1. Income Statement

2. Distribution of Net Income or Loss

3. Owner’s Equity Statement

4. Balance Sheet

Chapter 16-1: Income StatementChapter 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

INCOME STATEMENT INFORMATION ON A WORK INCOME STATEMENT INFORMATION ON A WORK SHEETSHEET

Copy to Income Statement

PREPARING AN INCOME STATEMENT FOR A PREPARING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESSMERCHANDISING BUSINESS

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3

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3. Prepare the Cost of Merchandise Sold section.

1. Write the income statement heading on three lines.

2. Prepare the revenue section.

Cost of MerchandiseCost 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.

5. Prepare the expenses section.

COMPLETING AN INCOME STATEMENT FOR A COMPLETING AN INCOME STATEMENT FOR A MERCHANDISING BUSINESSMERCHANDISING BUSINESS

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6. Calculate the net income.

= Gross Profit on sales – Total Expenses

4. Calculate the gross profit on sales.

= Revenue – Cost of Merchandise

7. Rule double lines.

8. Calculate the component percentages.

TTERMS REVIEWERMS REVIEWcost of merchandise sold

gross profit on sales

TO DO:

Work Together, pg 409

On your own, pg 409

Application Problem 16-1, pg 422

Chapter 16-2: Component PercentagesChapter 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

ANALYZING AN INCOME STATEMENT SHOWING A ANALYZING AN INCOME STATEMENT SHOWING A NET INCOME NET INCOME

Acceptable Omni ImportIndustry Component

Standards Percentages

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.

ANALYZING AN INCOME STATEMENT SHOWING A ANALYZING AN INCOME STATEMENT SHOWING A NET LOSSNET LOSS

Analyze each component percentage: •Cost of Merchandise•Gross Profit•Total Expenses•Net Income/Loss

Corrections for Unacceptable Component PercentagesCorrections 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

TO DO: TO DO:

Work Together, pg 409 On your own, pg 409 Application 16-2

Chapter 16-3: Distribution of Net Income and Equity Chapter 16-3: Distribution of Net Income and Equity StatementsStatements

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

PREPARING A DISTRIBUTION OF NET INCOME PREPARING A DISTRIBUTION OF NET INCOME STATEMENTSTATEMENT

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3. First Partner’s Share of Net Income

1. Heading

4. Second Partner’s Name

2. First Partner’s Name

5. Second Partner’s Share of Net Income

6. Net Income

7. Total Net Income

8. Double Lines

6 78

DISTRIBUTION OF NET INCOME STATEMENT WITH DISTRIBUTION OF NET INCOME STATEMENT WITH UNEQUAL DISTRIBUTION OF EARNINGSUNEQUAL DISTRIBUTION OF EARNINGS

Same steps, just need a description of how earnings are shared

Owner’s Equity StatementOwner’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

OWNERS’ EQUITY STATEMENT (with net income)OWNERS’ EQUITY STATEMENT (with net income)

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3. First Partner’s Ending Capital

1. Heading

4. Second Partner’s Name

2. First Partner’s Name

5. Second Partner’s Ending Capital

6. Total Owners’ Equity

7. Double Lines

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5

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

TTERMS REVIEWERMS REVIEWdistribution of net income statement

owner’s equity statement

TO DO:

Work Together, pg 415

On your own, pg 415

Chapter 16-4: Balance SheetChapter 16-4: Balance Sheet

Reports business’s financial CONDITION on a SPECIFIC DATE

BALANCE SHEET INFORMATION ON A WORK SHEET

FIRST TWO SECTIONS OF A BALANCE SHEET FOR A FIRST TWO SECTIONS OF A BALANCE SHEET FOR A MERCHANDISING BUSINESSMERCHANDISING BUSINESS

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23. Prepare the

liabilities section.

1. Prepare the heading.

2. Prepare the assets section.

5. Total the liabilities and owners’ equity sections.

COMPLETING A BALANCE SHEET FOR A COMPLETING A BALANCE SHEET FOR A MERCHANDISING BUSINESSMERCHANDISING BUSINESS

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6. Verify the accuracy by comparing totals.

4. Prepare the owners’ equity section.

7. Rule double lines.

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*Info obtained from Owner’s Equity Statement

Supporting StatementsSupporting Statements

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

TTERMS REVIEWERMS REVIEWsupporting schedule

TO DO:

Work Together, pg 420

On your own, pg 420

App. Prob. 16-3, 16-4, 16-5, pg 423