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BUSA 100 ON-LINE COURSE – MR. FARINA LECTURE NOTES Chapter 13: Financia State!

ent" an# C $"in% &r$ce#'re" NOTE: Much thanks to Professor Debra Schmidt, whose chapter summary on the multiple step income statement is incorporated as a si!nificant portion of these notes" #e are almost finished learnin! the accountin! cycle for a merchandisin! enterprise" #e ha$e learned how to record purchasin! and sales transactions in a !eneral %ournal" #e prepared a bank reconciliation, and learned the basics of payroll" #e ha$e re$iewed the ad%ustment process and learned se$eral new ad%ustin! entries" #e then learned prepared a worksheet for a merchandisin! company" This brin!s us to the summari&in! process of the accountin! function" This chapter will introduce you the financial statements for a merchandiser and how to prepare the closin! entries for a merchandiser" 't will also introduce you to re$ersin! entries" The chapter has four ma%or ob%ecti$es: (" )earn to prepare a multiple step income statement* +" )earn to prepare a classified balance sheet" ," )earn to compute and analy&e the current ratio, in$entory turno$er ratio, and !ross profit percenta!e" -" Prepare the four closin! entries for a merchandisin! company" Financia State!ent" The same three financial statements that we learned for a ser$ice oriented company will also be used for a merchandiser" .owe$er, they will look different" The main challen!e will be to prepare a multiple step income statement" See the separate handout of the skeleton based multi step income statement for additional help" To refresh your memory, the three financial statements that you will need to prepare are:
• • •

The 'ncome Statement The Statement of Owner/s E0uity The 1alance Sheet

2s you will recall, they need to be prepared in this prescribed order, because the contents of one follows the ne3t"
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The M' tip e-Step Inc$!e State!ent 4nless !i$en.< Other Inc$!e or Other E*pen"e Net Inc$!e Each ma%or subtotal is arri$ed by addin! or subtractin! $arious !eneral led!er accounts" The accounts added or subtracted are detailed below" + . a $ast ma%ority of merchandisin! companies use the multiple step format of an income statement" The 5ost of 6ood Sold will be the most challen!in! part of this worksheet" 2n e3ample of a completed multiple step income statement is on pa!e -78" There is much more information !i$en on this income statement than on others we prepared in this course" The main difference is the use of many subtotals that are not accounts in the !eneral led!er.: 95ost of 6oods Sold.: 96ross Profit on Sales. the source for the numbers on income statement is from the worksheet columns" 2s discussed pre$iously.: and other" Preparin! the multiple step income statement will be much easier if we can learn the accounts that are added or subtracted to arri$e at these subtotals" The ma%or subtotals on a multiple step income statement are: Net Sa e" )ess: C$"t $( )$$#" S$ # )r$"" &r$(it $n Sa e" )ess: Operatin% E*pen"e" Net Inc$!e (r$! Operati$n" . such as 9Net Sales.

( 5ost of 6oods Sold )r$"" &r$(it = Net Sales 5ost of 6oods Sold Operatin% E*pen"e" = Sellin! E3penses E 6eneral and 2dministrati$e E3penses .Net Sa e" = Sales Sales Discounts Sales >eturns and 2llowances 5ost of 6oods Sold = 1e!innin! 'n$entory . @anuary ( 2dd: Net Purchases: Purchases 2dd: ?rei!ht 'n Deli$ered 5ost of Purchases )ess Purch >etB2llow )ess Purch Discounts AAA A AAA C33D C33) AA AAAA AAA AAA AAA Net Deli$ered 5ost of Purchases Total Merchandise 2$ailable for Sale )ess Merchandise 'n$entory. . Net Purchases . ?rei!ht 'n Endin! 'n$entory C$"t $( )$$#" S$ #+ in #etai : Merchandise 'n$entory. December .

and others" The 6eneral and 2dministrati$e e3penses are all the other day to day operatin! e3penses not related to the sales function and include the salaries of clerical workers. such as e0uipment" Other E*pen"e": These include non operatin! costs.O# TO P>EP2>E this multi step income statement" Hou need to practice. rent. ad$ertisin!. practice. and practice" Hou will also prepare this many times o$er in your ne3t accountin! class. utilities. !eneral office supplies. accountin!Bfinance people. commissions. or any !ains on sale of assets. 14S2 (I(" - .Sellin! E3penses are those directly related to the sales or marketin! functions" They include any sales salaries. and rent" Net Inc$!e (r$! Operati$n": 6ross Profit F Total Operatin! E3penses Other Inc$!e: Other income is any other re$enue besides sales" This will include rental income. Other 'ncome F Other E3penses 2s stated pre$iously. business insurance. depreciation of store e0uipment. such as interest e3pense or losses on sale of assets" Net 'ncome: Net 'ncome from Operations . di$idend income. you M4ST GNO# .

if any Subtotal 2dd: Net 'ncome )ess: #ithdrawals 'ncrease in capital 5apital. December .ner-" E. 7 . @anuary ( 2dd: 2dditional in$estments.State!ent $( O. this is the format: 5apital.'it/ The statement of owner/s e0uity has not chan!ed" 2s a re$iew.( AAA CAAAD AAA AAA AAA AAA AAA &reparin% a c a""i(ie# 0a ance "heet i" #i"c'""e# $n the ne*t pa%e.

D are used in business operations" 5ash. Merchandise 'n$entory. or otherwise terminated. due after one year" L . Machinery. and Notes PayableKcurrent portion" 5urrent liabilities Lia0i itie" )iabilities that are e3pected to be paid. or Jused up. Prepaid >ent. within one year from the date of the balance sheet" )iabilities that are e3pected to be paid. C+D ha$e lon! useful li$es. 1uildin!. years. 2ccounts >ecei$able. usually e3ceedin! . after one year from the date of the balance sheet" )on! term liabilities Notes Payable. E0uipment. which is not depreciatedD" 2ccounts Payable.J within one year from the date of the balance sheet" 2ssets that C(D are tan!ible. to introduce this new format"D The followin! summari&es the classification criteria in the new balance sheet: E*a!p e" $( Acc$'nt" Inc '#e# Acc$'nt Cate%$r/ C a""i(icati$n" 1e(initi$n A""et" 5urrent 2ssets Property and E0uipment 2ssets that will be con$erted to cash. 4nearned >e$enue. or otherwise terminated. Supplies )and. Prepaid 'nsurance.The Ba ance Sheet The 1alance sheet looks $ery much the same" The only chan!e is now you will be re0uired to classify your balance sheet" C2lmost all companies F e$en ser$ice enterprises F do this" This te3t waited until 5hapter (. ?urniture and ?i3tures" 2lso includes the 2ccumulated Depreciation accounts as contra assets Ce3cept )and. and C. #a!es Payable.

as sales of merchandise in$entory !i$e the company its cash to repay debt" The 'n$entory turno$er ratio is calculated as: 8 . there are se$eral !ood reasons to learn these: (D To pass the ne3t test. "tate!ent ($r!at"3 #ell.ith the"e ne. and compare it to the industry a$era!e" The In8ent$r/ T'rn$8er Rati$ The in$entory turno$er shows the number of times in$entory is replaced durin! the accountin! period" 't is an indicator of how fast the company is sellin! its merchandise in$entory" This is of !reat interest to bankers and other creditors. .D because many common financial ratios and analyses will use components from these statements. and -D because you will ha$e money to in$est someday and need to learn what some key ratios mean so you can make an informed in$estment choice" S$!e c$!!$n (inancia ana /"i" 2$r4in% Capita an# the C'rrent Rati$ #orkin! 5apital is a $ery basic financial statement analysis tool" 2$r4in% Capita 5 C'rrent A""et" – C'rrent Lia0i itie"" This is why analysts need to see a classified balance sheet" The amount of workin! capital is of key concern to mana!ement and to lenders and creditors" 2nother way to $iew the company/s li0uidity is called the current ratio" The current ratio is calculated as follows: C'rrent Rati$ 5 C'rrent A""et" 676 C'rrent Lia0i itie" 1ankers and other creditors will calculate a firm/s current ratio. +D because that/s what financial statements in the real world look like. 5apital" The amount comes from the statement of owner/s e0uity" 2h/ 0$ther . after closin! entries" Owner.'it/ The ownerMs capital balance at the end of the year.No sub classifications" O.ner-" E.

>ent E3pense. Sales DiscountsD 5lose 'ncome Summary NNN 5lose Drawin! 5lose e3penses 5lose 'ncome Summary 5lose Drawin! O . Sales.C$"t $( )$$#" S$ # 676 A8era%e In8ent$r/ 2$era!e in$entory is calculated as: C1e!innin! in$entory . Endin! 'n$entoryDNBN + The )r$"" &r$(it &ercenta%e The !ross profit percenta!e re$eals the amount of !ross profit kept from each sales dollar" 't is calculated as follows: )r$"" &r$(it 676 Net Sa e" C $"in% Entrie" >emember why we need closin! entries: • • To close out nominal accounts in order to be ready for the ne3t new fiscal year To transfer net income and drawin! to the owner/s capital account" The purpose of doin! the closin! entries has not chan!ed" #e %ust need to tweak the process a little" F$r Ser8ice B'"ine"" 5lose re$enues F$r Merchan#i"er" 5lose 'ncome Stmt accounts with credit balances Ci"e". Purchases DiscountsD 5lose 'ncome Stmt accounts with debit balances Ci"e".

NNNDon/t for!et to make a t account because this account has some balances from the in$entory ad%ustments discussed in 5hapter (+" P .