Chapter Outline
Teaching Notes
III. Evaluate the Results
LO 3-5 Evaluate net profit margin, but beware of income statement limitations.
A. Net Profit Margin
The “Spotlight on Financial
1. Net Profit Margin = Net Income ÷ Total Revenues
Reporting” feature addresses
2. Indicates how much profit is earned from each dollar of
revenue.
The net profit margin for
video game and social media
B. Income Statement Limitations
companies
1. The income statement indicates whether the company is
profitable, but this might not explain whether cash
increased or decreased.
2. The income statement does not directly measure the
change in value of a company during the period.
3. Estimation plays a key role when measuring income.
Supplemental Enrichment Activities
Note: These activities would be suitable for individual or group activities.
1. Handout 3–1
Use this handout for an in-class activity designed to review transaction analysis (preparation of
journal entries and impact on the accounting equation) and the posting to T-accounts. The solution
follows the handout master.
2. Handout 3–1
If you used Handout 3–1, then use Handout 3–2 for an in-class activity designed to review the
preparation of an unadjusted trial balance. The solution follows the handout master.
HANDOUT 3–1
TRANSACTION ANALYSIS AND POSTING TO T-ACCOUNTS
The following activities occurred during January 2016. Prepare a journal entry for ensure that the basic
accounting equation balances for each transaction. Then, summarize the effects of each transaction in the
appropriate T-account. (See the last page for T-accounts.)
(a) Provide website design services for $40,000.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
=
Liabilities
+
Stockholders’ Equity
(b) Provide website design services to Acme Company, for $20,000 on account.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
=
Liabilities
+
Stockholders’ Equity
(c) Collect $18,000 from Acme Company on account.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
=
Liabilities
+
Stockholders’ Equity
HANDOUT 3–1, continued
(d) Sell a $1,000 gift certificate.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
=
Liabilities
+
Stockholders’ Equity
(e) Customer redeems $1,000 gift certificate for website design services.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
=
Liabilities
+
Stockholders’ Equity
(f) Paid employees $16,000 earned.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
=
Liabilities
+
Stockholders’ Equity
HANDOUT 3–1, continued
(g) Paid $3,000 insurance for next year in advance.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
=
Liabilities
+
Stockholders’ Equity
(h) Paid $9,000 rent for next six months in advance.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
=
Liabilities
+
Stockholders’ Equity
(i) Received $250 telephone bill for previous month, to be paid next month.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
=
Liabilities
+
Stockholders’ Equity
HANDOUT 3–1, continued
(j) Received $500 utility bill for this month, to be paid immediately.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
=
Liabilities
+
Stockholders’ Equity
HANDOUT 3–1, continued
Assets
Liabilities
Stockholders’ Equity
+ Cash –
BegBal
3,100
+ Supplies –
BegBal
900
+ Accounts Receivable –
BegBal
0
+ Prepaid Rent –
BegBal
0
+ Prepaid Insurance –
BegBal
0
+ Property, Plant & Equipment –
BegBal
21,000
− Accounts Payable +
0
BegBal
− Notes Payable +
15,000
BegBal
+ Unearned Revenue –
0
BegBal
+ Common Stock –
10,000
BegBal
− Retained Earnings +
0
BegBal
− Revenue +
0
BegBal
+ Wage Expense –
BegBal
0
+ Utilities Expense –
BegBal
0
+ Telephone Expense –
BegBal
0