(Financial Statements) Accounting Principles, Eighth Edition CHAPTER 2 ACCOUNTING IN ACTION (Financial Statements) Accounting Principles, Eighth Edition

What is a Financial Statement? A financial statement is simply a report prepared to summarize the changes resulting from business activities. A period of time that financial statements cover is called a fiscal period. This time period can be a month, quarter of a year, or an entire year. Annual statement—covers 1 year Interim statement—covers periods of time less than one year Companies will have both Interim and Annual Statements

Financial Statements Companies prepare four financial statements from the summarized accounting data: Income Statement Owners’ Equity Statement Balance Sheet Statement of Cash Flows LO 8 Understand the four financial statements and how they are prepared.

Financial Statements Income Statement Reports the revenues and expenses for a specific period of time. Net income – revenues exceed expenses. Net loss – expenses exceed revenues. LO 8 Understand the four financial statements and how they are prepared.

Review Question Financial Statements Net income will result during a time period when: assets exceed liabilities. assets exceed revenues. expenses exceed revenues. revenues exceed expenses. LO 8 Understand the four financial statements and how they are prepared.

Owners’ Equity Statement Financial Statements Owners’ Equity Statement Statement indicates the reasons why owner’s equity has increased or decreased during the period. Increases (Add) result from: Investments Net Income Decreases (Less) result from: Drawings Net Loss LO 8 Understand the four financial statements and how they are prepared.

Owners’ Equity Statement Financial Statements Owners’ Equity Statement Income Statement Net income is needed to determine the ending balance in owner’s equity. LO 8 Understand the four financial statements and how they are prepared.

Financial Statements Balance Sheet Reports the assets, liabilities, and owner’s equity at a specific date. Assets listed at the top, followed by liabilities and owner’s equity. Total assets must equal total liabilities and owner’s equity. LO 8 Understand the four financial statements and how they are prepared.

Owners’ Equity Statement Financial Statements Owners’ Equity Statement Balance Sheet The ending balance in owner’s equity is needed in preparing the balance sheet LO 8 Understand the four financial statements and how they are prepared.

Ticket Out The Door What is the purpose of a balance sheet? What statement does the capital amount come from?

Statement of Cash Flows Financial Statements Statement of Cash Flows Information for a specific period of time. Answers the following: Where did cash come from? What was cash used for? What was the change in the cash balance? LO 8 Understand the four financial statements and how they are prepared.

Statement of Cash Flows Financial Statements Statement of Cash Flows Balance Sheet LO 8 Understand the four financial statements and how they are prepared.

For the year ended December 31, 2009 REMEMBER It is important to know how to correctly title each statement: The first two lines are always the same: Company Name Name of the statement The third line is where most mistakes take place. For the balance sheet we state the date we are making the statement IE: December 31, 2009 For all other statements it is for a period of time IE: For the year ended December 31, 2009

Review Question Financial Statements Which of the following financial statements is prepared as of a specific date? Balance sheet. Income statement. Owner's equity statement. Statement of cash flows. LO 8 Understand the four financial statements and how they are prepared.

Reporting Ownership Equity in the Statement of Financial Position (Not in the Notes) Sole Proprietorships Partnerships The owners’ equity section of the balance sheet will look different for each type of business entity. For a sole proprietorship, there will be a capital account for the owner, and a drawing account to record payments to the owner. For a partnership, each partner has a separate account, where changes are tracked over time. There’s also a separate drawing account for payments made to each partner. To review, a corporation will show owners’ contributions in the capital stock account and accumulated earnings of the company in the retained earnings account. You should be able to tell the form of business by looking at the equity section of a balance sheet. Corporations