Lesson 9 of 9Partnerships and Corporations

Unit 3 · Lesson 9 of 9

Financial Statements for a Corporation

A corporation's income statement includes income tax expense, its statement of retained earnings links net income and dividends to closing retained earnings, and its balance sheet reports share capital by class, contributed surplus and retained earnings.

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Key things to remember

1Corporate income statement: income before income tax minus income tax expense equals net income.
2Closing retained earnings = opening retained earnings + net income (or − net loss) − dividends declared.
3Equity section: share capital by class (with authorized and issued numbers), contributed surplus, then retained earnings.
4Dividends appear on the statement of retained earnings, never on the income statement.
5EPS $= \frac{Net income - Preferred dividends}{Weighted average common shares}$
6Book value per common share $= \frac{Total equity - Preferred equity}{Common shares outstanding}$

Once you can record share issues, repurchases and dividends, you can build a corporation's year-end statements. They look a lot like a proprietorship's, with three important differences. The corporation pays its own income tax, so tax appears as an expense. Owners' money and earned profit are kept apart, so instead of a statement of owner's equity there is a statement of retained earnings. And the balance sheet's equity section shows each class of shares, with the number authorized and issued, so readers can see exactly who has a claim on the business. This lesson completes Maple Ridge Outfitters Ltd.'s statements for 2026, and every one of them foots.

The corporate income statement

Fig 1The same multi-step layout as a merchandising business, with interest and income tax expense near the bottom.

Maple Ridge Outfitters Ltd.
Sales		$1,250,000
Cost of goods sold		700,000
Gross profit		550,000
Operating expenses: Selling	$180,000
Operating expenses: Administrative	150,000
Total operating expenses		330,000
Income from operations		220,000
Other expenses: Interest expense		12,000
Income before income tax		208,000
Income tax expense (25%)		52,000
Net income		$156,000

Income Statement, Year Ended December 31, 2026. A 25% tax rate is assumed for simplicity.

Why only corporations show income tax expense

A proprietorship or partnership pays no income tax itself; the owners report their share of the profit on their personal tax returns. A corporation is a separate taxpayer, so its tax is a real cost of doing business, shown just before net income. A related difference: an owner-manager's salary is an expense in a corporation (the owner is an employee), but a proprietor's withdrawals are Drawings, not an expense. Public companies also report earnings per share (EPS) on the face of the income statement under IFRS; ASPE does not require it.

The statement of retained earnings

Closing RE = Opening RE + Net income - Dividends

Maple Ridge Outfitters Ltd.
Retained earnings, January 1, 2026		$185,000
Add: Net income for the year		156,000
		341,000
Less: Dividends declared, preferred ($4 per share)	$8,000
Less: Dividends declared, common ($0.25 per share)	11,750	19,750
Retained earnings, December 31, 2026		$321,250

Statement of Retained Earnings, Year Ended December 31, 2026. A net loss would be subtracted instead of added.

Retained earnings is the total profit earned since the corporation began, minus all dividends ever declared (and minus any amounts charged to it on share repurchases, as in the last lesson). It is not a pile of cash: the profit has long since been spent on inventory, equipment and other assets. If losses and dividends exceed profits, the balance goes negative and is called a deficit, shown as a deduction in the equity section.

The shareholders' equity section

Fig 2Contributed capital (share capital plus contributed surplus) first, then retained earnings.

Shareholders' equity
Share capital
Preferred shares, $4 cumulative, 10,000 authorized, 2,000 issued and outstanding	$100,000
Common shares, unlimited authorized, 47,000 issued and outstanding	507,600
Total share capital		$607,600
Contributed surplus: reacquisition of shares		1,400
Total contributed capital		609,000
Retained earnings		321,250
Total shareholders' equity		$930,250

Maple Ridge Outfitters Ltd. Shareholders' equity section of the balance sheet, December 31, 2026.

VideoReads the shareholders' equity section of a balance sheet: share capital, retained earnings and the other items, and what each one tells an investor.Watch on YouTube

Putting it together, and comparing business forms

Fig 3The classified balance sheet: current and capital assets, current and long-term liabilities, then equity.

Maple Ridge Outfitters Ltd.
Current assets: Cash	$120,000
Accounts receivable	95,000
Merchandise inventory	180,000	$395,000
Capital assets: Land	160,000
Building and equipment (net of accumulated amortization)	640,000	800,000
Total assets		$1,195,000
Current liabilities: Accounts payable	$72,000
Dividends payable	19,750
Income tax payable	12,000	$103,750
Long-term liabilities: Bank loan		161,000
Total liabilities		264,750
Total shareholders' equity (from the section above)		930,250
Total liabilities and shareholders' equity		$1,195,000

Condensed Balance Sheet, December 31, 2026. Assets $1,195,000 = liabilities $264,750 + equity $930,250.

Feature	Proprietorship	Partnership	Corporation
Equity statement	Statement of owner's equity	Statement of partners' equity, one column per partner	Statement of retained earnings
Owner investment goes to	Owner's Capital	Each partner's Capital	Share capital (Common or Preferred Shares)
Profit goes to	Owner's Capital	Partners' Capital, by the profit-sharing agreement	Retained Earnings
Distributions to owners	Drawings	Each partner's Drawings	Dividends declared by the board
Income tax on the income statement	No	No	Yes
Equity section shows	One Capital balance	One Capital balance per partner	Share capital by class, contributed surplus, retained earnings

The three equity statements answer the same question (how did owners' equity change?) in different ways.

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1

Prepare Maple Ridge's statement of retained earnings for 2026. Opening retained earnings were $185,000, net income was $156,000, and the board declared $8,000 of preferred dividends and $11,750 of common dividends.

Example 2

Prepare Maple Ridge's shareholders' equity section at Dec. 31, 2026, and check that the balance sheet balances. Data: 2,000 $4 cumulative preferred shares (10,000 authorized) for $100,000; 47,000 common shares (unlimited authorized) for $507,600; contributed surplus $1,400; retained earnings $321,250; total liabilities $264,750; total assets $1,195,000.

Example 3

Lakehead Ltd. earned net income of $240,000. It has 5,000 $3 preferred shares, whose dividend was declared in full, and 75,000 common shares that were outstanding all year. Calculate earnings per share.

Example 4

Calculate the book value per common share for Maple Ridge at Dec. 31, 2026. Total equity is $930,250, preferred share capital is $100,000 with no dividends in arrears, and 47,000 common shares are outstanding.

Where marks get lost

Putting dividends on the income statement as an expense. They are deducted on the statement of retained earnings.
Leaving out income tax expense, or putting it above income from operations, on a corporation's income statement.
Listing all equity as one Capital line. A corporation must show each class of share capital separately, with authorized and issued numbers, then contributed surplus, then retained earnings.
Treating retained earnings as cash available to pay a dividend. Retained earnings is a source of financing already invested in assets; the company may have very little cash.
Using the closing share count in EPS when shares were issued during the year, instead of the weighted average, or forgetting to subtract preferred dividends.

Flashcards 7

Statement of retained earnings formula

Income tax expense

Order of the shareholders' equity section

Contributed capital

+ 3 more

Practice

A corporation's opening retained earnings were $412,000. Net income was $95,000, and the board declared dividends of $30,000. What is closing retained earnings, to the nearest dollar?

Income before income tax is $340,000 and the tax rate is 26%. What is net income, to the nearest dollar?

Opening retained earnings were $60,000, the company had a net loss of $85,000, and no dividends were declared. What is closing retained earnings, to the nearest dollar? Enter a deficit as a negative number.

Put the items of a shareholders' equity section in the order they are listed.

1Retained earnings
2Contributed surplus
3Total shareholders' equity
4Preferred shares
5Common shares
6Total share capital

Where do dividends declared appear in a corporation's financial statements?

Net income is $510,000. Preferred dividends of $30,000 were declared. There were 160,000 common shares outstanding all year. What is EPS, to the nearest cent?

A corporation's equity section shows preferred shares $200,000, common shares (90,000 shares) $720,000, contributed surplus $9,000 and retained earnings $331,000. No preferred dividends are in arrears. What is the book value per common share, to the nearest cent?

Match each business form to the statement that explains the change in owners' equity.

Sole proprietorship

Partnership

Corporation

Which line appears on a corporation's income statement but not on a sole proprietorship's?

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