Chapter 9 financial statements for a sole proprietorship

1. Financial Statements for a Sole
Proprietorship
Chapter 9

2. Exploring the World of Business
New England Aquarium funds its operations in
several different ways. Sources of funds includes
Memberships sold to the public
Admissions fees
Sale of Aquarium-sponsored books and films
Grants from corporate sponsors
What do you think?
Why is it important for New England Aquarium to prepare
financial statements even though their purpose is not to
earn a profit.

3. The Income Statement
Section 1

4. What You’ll Learn
Why financial statements are important for
business decisions.
The purpose of the income statement.
How to prepare an income statement.

5. Key Terms
Financial Statement
Income Statement

7. Financial Statements
The primary statements prepared for a sole
proprietorship is
Income statement
Balance Sheet
Statement of changes in Owner Equity

8. Income Statement
The income statement contained the
following section:
The heading
The revenue for the period
The expenses for the period
The net income or net loss for the period

9. The Heading
•The name of the business (Who?)
•The name of the report (What?)
•The period covered (When?)

10. The Heading (Cont.)
For the Year Ended June 30, 20--One year
For the Quarter Ended March 30,
20--
One quarter
For the Month Ended October 31,
20--
One month
Wording of Date LineReporting Period

11. The Revenue Section
1.Write “Revenue” on the first line at the left side of
the form
2.Enter the revenue account names beginning on
the second line, indented about half an inch from
the left edge of the form.
3.Enter the balance of the revenue account
** If the business has more than one revenue account
the balances are entered in the first column. Total
revenues is then written in the second amount
column.
** The words “Total Revenue is indented approx 1 inch
from the left edge of the form

12. The Expenses Section
1.On the line following the revenue section
write “Expenses” at the left side of the form.
2.On the following line, write the names of the
expense accounts, indented half an inch, in
order that they appear on the work sheet.
•Since there are several expense accounts enter
the individual balances in the first amount
column.

13. Expense Section (Cont)
1.Draw a single rule under the last expense
account balance.
2.Write the words “Total Expenses” on the
line following the last expense account
name, indent 1 inch
3.Add the balances for all the expense
accounts write the total in the second
amount column, one line below the last
expense account balance.

14. The Net Income Section
1.Draw a single rule under the total expenses
amount
2.Subtract the total expenses from total revenue to
find net income. Enter the net income in the
second amount column under the total expense
amount.
3.On the same line write the words ”Net Income” at
the left side of the form.
4.If the amount of net income matches the amount
shown on the work sheet, draw a double rule
under the net income amount.

15. Showing a Net Loss
If total expenses are greater than total revenue,
there is a net loss.
Enter the net loss amount in the second
amount column under the total expenses
Write the words “Net Loss” on the same line
at the left side of the form.

16. Section 1 Check your Understanding
Thinking Critically
Communicating Accounting
Problem 9-1 Analyzing a Source Document

17. The Statement of Changes in
Owner’s Equity
Section 2

18. What You’ll Learn
The purpose of the statement of changes in
owner’s equity
How to prepare the statement of changes in
owner’s equity.

19. Key Terms
Statement of changes in owner’s equity

20. The Heading of the Statement of Changes
The first line consists of the name of the
business (Who?)
The second line indicates the name of the
statement (What?)
The third line indicates the period covered
(When?)

21. Completing the Statement of Changes in
Owner’s Equity
1.On the first line, write “Beginning Capital” followed
by a comma and then by the first day of the period.
2.In the second amount column, enter the balance of
the capital account at the beginning of the period.
The source of the information is the capital
account
3.Next enter the increases to the capital account.
Investments made by the owner during the period.
On the next line write the words “Net Income”
indent so the word line up with Investment by
Owner”. Enter the amount in the first amount
column, enter the net income amount.

22. Completing the Statement of Changes
(cont.)
1.Write the words “Total Increase in Capital” on the
next line at the left side of the form. Add the
investments by owner and net income amount and
enter total in the second amount column. Draw a
single rule under the amount.
2.Write “Subtotal” on the next line, at the left side of
the form. Add the amounts for beginning capital
and total increase in capital. Enter the result in the
second amount column.

23. Completing the Statement of Changes
(cont.)
1.The next section of the statement lists the
decreases to the capital account: withdrawals and
net loss. Write the words “Less: Withdrawals by
Owner” at the left side of the form. Find the
withdrawal amount on the worksheet. Enter the
amount in the second amount column. Draw a
single rule under the withdrawal amount.
2.On the next line, at the left side of the form, write
the words “Ending Capital” followed by a comma
and the last day of the period.
3.Subtract the withdrawal amount to determine the
ending balance of the capital account. Draw a
double rule below the ending amount.

24. Statement of Changes in the Owner’s
Equity for an Ongoing Business
To prepare the statement of changes in
owners equity for an ongoing business you
would need to go to the account ledger to
obtain the beginning balance for the period.

25. Statement of Changes in Owners Equity
Showing a Net Loss
Since there are two items that decrease
capital, withdrawal and net loss, the amounts
of the individual items are entered in the first
amount column.
The total decrease in capital is entered in the
second amount column

26. Key Points
Owner Investments and Withdrawals
Investments by the owner and net income
increase capital.
Withdrawals by the owner and net loss decrease
capital.

27. A Matter of Ethics
Financial Report or
Repair?
Your favorite uncle, who owns
a restaurant, has asked you to
help with this bookkeeping. He
desperately needs a bank loan
and wants you to prepare the
financial statements. After
going over his accounting
records, you don’t believe a
bank will give him a loan; but
you notice that by leaving out
an expense or two, your
uncle’s business could look
more promising. After all, he
does have some good ideas
for improving the business.
Ethical Decision
Making:
What are the ethical issues?
What are the alternatives?
Who are the effected
people?
How do the alternative effect
the parties?
What would you do?

28. Section 2 Check Your Understanding
Thinking Critically
Analyzing Accounting
Problem 9-2 Determining the Ending Capital
Balances

29. The Balance Sheet
Section 3

30. What You’ll Learn
The purpose of the balance sheet
How to prepare a balance sheet
How to analyze information on financial
reports

31. Key Terms
Balance sheet
Report form
Ratio analysis
Sales profitability ratio
Return on sales
Liquidity ratio
Current ratio
Current assets
Current liabilities
Quick ratio

32. Sections of the Balance Sheet
The heading
The assets section
The liability and owners equity section

33. The Heading
The name of the business (Who?)
The name of the financial statement (What?)
The date of the balance sheet (When?)

34. The Asset Section
1.Write the word “Assets” on the first line in the
center of the column containing the account
names.
2.On the following line, enter asset account names
and their balances. List them in the same order as
they appear in the balance sheet section of the
work sheet. Enter the account balances in the first
amount column. Draw a single rule under the last
account balance
3.On the next line write the words “Total Assets”
indented about half an inch. Add the asset
balances and enter total in the second amount
column.

35. The Liabilities and Owner’s Equity
Sections
1.On the line after “Total Assets” enter the
heading :Liabilities” in the column containing
the account names.
2.List the liability account names and their
balances in the same order as the work
sheet. Draw a single rule under the last
account balance.
3.On the next

36. Ratio Analysis
Ratio analysis
The comparison of two amounts on a financial
statement
The evaluation of the relationship between those
amounts
Profitability ratios
Used to evaluate the earning performance of
business during the accounting period
Measure of its ability to grow and continue to earn
revenue

37. Return on Sales
Sales is a revenue account representing the
sale of merchandise.
Return on sales examine the portion of each
sales dollar that represent profit
To calculate this ratio:
Divide net income by sales

38. Liquidity Ratios
A liquidity ratio measures the ability of a
business to pay its current debts.
Two common ratios are
Current ratio
Quick ratio

39. Section 3 Check Your Understanding
Thinking Critically
Communicating Accounting
Problem 9-3 Calculating Return on Sales

40. Key Concepts
Preparing financial reports is the seventh step in the
accounting cycle. The primary reports are the
income statement and the balance sheet. The
statement of changes in owner’s equity is often
prepared.
The income statement reports the net income or net
loss for the period
The statement of changes in owner’s equity
summarizes the impact the periods business had on
the capital account
The balance sheet reports the balances of assets,
liability and owner’s equity at the end of the period.

41. Key Concepts (cont.)
Financial reports may be handwritten,
typewritten, or prepared using a computer.
The chart on page 223 list the source of
information for each financial report.
Ratio analysis is used to determine the
financial strength, activity, or debt-paying
ability of a business.
Liquidity ratios measure the ability of a
business to pay its current debts as they
become due.

42. Chapter 9 Review and Activities
Conducting an Audit with Alex
 Problem 9-6
Project: Case Study 3