Preparing an Income StatementChapter 7

Objectives

Covers the Preparation of an Income Statement and Balance Sheet for a proprietorship.

Financial Statement Analysis of these statements.

Terms

Stakeholders Any persons or groups who will be affected by an

action

Component Percentage The percentage relationship between one

financial statement item and the total that includes that item.

Adequate Disclosure Accounting Concept is applied when financial

statements contain all information necessary to understand a business’s financial condition.

Reporting Financial Information We take information from our general ledger

and help summarize, organize, and report it to the owners and managers.

Accounting Concept – Adequate Disclosure TechKnow prepares two financial statements

Income Statement and Balance Sheet

Accounting Concept Going Concern When financial statements are prepared with the

expectation that a business will remain in operation indefinitely.

Income Statement Information on a Work Sheet

Income Statement

1Revenue3 Revenue amount

4Expenses

5Account titles 6 Expense amount

8Total expenses 9 Total of expenses

12 Net Income

7 Single line

11 Single line

10 Calculate net income

14 Double lines

13 Record net income

2 Account title

Component Percentage Analysis

Revenue reported on an income statement is compared to two components:1. Total Expenses

2. Net Income

In making decisions a manager analyzes relationships between these two components.

The percentage relationship between one financial statement item and the total that includes that item is called a component percentages.

Acceptable Component Percentages

How do you know what is acceptable? Various industry organizations public average

percentages for similar businesses. In the future, TechKnow will also utilize previous

fiscal periods as comparisons.

Total Expenses Component Percentages

An acceptable total expenses component percentage is not more than 55%

TechKnow’s is 41.1% Is it acceptable?

Yes because it is less than 55%

Total Expenses

Total Sales

= Total Expenses Component Percentages

$1,466 $3,565 = 41.1%

Net Income Component Percentage

Acceptable Net Income CP is not less than 45%

TechKnow’s is 58.9% Is it acceptable?

Yes, it is greater than 45% and is acceptable. Net Income Total Sales

= Total Expenses Component Percentages

$2,099 $3,565 = 58.9%

Component Percentage Analysis

Multiple Revenue

TechKnow receives revenue from only on source

HighNote receives revenue from two sources, the sale of services for music lessons and services to repair musical instruments.

Business owner wants to know revenue from each source.

Two revenue accounts are used. Sales-Lessons and Sales-Repairs.

Company Ex. Of Two Revenue Sources

1Revenue

3 Revenue amounts2Account titles

6Net Loss

7 Record Net Loss

5 Total Revenue

4 Total of revenue

Audit Your Understanding List the four sections of an income

statement.1. Heading

2. Revenue

3. Expenses

4. Net income or net loss

What is the formula for calculating the total expenses component percentage? Total Expenses Total Sales = Total Expenses

What is the formula for calculating the net income component percentage? Net Income Total Sales = Net Income

7.2 Balance Sheet information on a

Work Sheet

LESSON 7-2Balance Sheet Information on a Work Sheet

Objectives

How to prepare a balance sheet using data from the work sheet

Balance Sheet

Reports financial information on a specific date, indicating the financial condition of a business. Financial condition = Financial Strength

What makes a company strong?Fewer liabilities and adequate assetsYou want your assets to be greater than your

liabilities

Balance Sheet

Information about assets, liabilities, and owner’s equity is in the general ledger accounts or from a work sheet.

The information is easier to use if reported in an organized manner like a balance sheet.

Found in two places on the work sheet Account Titles are obtained from the work sheet’s Account

Title Column’s

Account balances are obtained from the work sheet’s Balance Sheet columns.

Balance Sheet

1. Heading Answer’s the questions Who? What? and When?

2. Assets

3. Liabilities

4. Owner’s Equity

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BALANCE SHEET

HEADING OF A BALANCE SHEET

1

2

3

1. Center the name of the company on the first line.

2. Center the name of the report on the second line.

3. Center the date of the report on the third line.

ASSETS AND LIABILITIES SECTIONS OF A BALANCE SHEET

Calculating Capital

Capital Account Balance + Net Income - Drawing = Current Capital

Capital Account Balance – Net Loss – Drawing Account Balance = Current Capital

OR use your formula! Assets = Liab. – OE Just subtract your Liab. From Assets

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OWNER’S EQUITY SECTION OF A BALANCE SHEET

OWNER’S EQUITY REPORTED IN DETAIL ON A BALANCE SHEET

Audit Your Understanding

List the four sections on a balance sheet.

What is the formula for calculating current capital?