McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Basic Financial Statements Chapter 2

2-2 What About Bookkeeping? Bookkeeping is the clerical side of accounting— the recording of routine transactions and day-to- day record keeping. Professional accountants are involved more with the interpretation and use of accounting information than with its actual preparation.

2 - 3 – are the final product of the accounting process. – are the final product of the accounting process. – tell how the business is performing and where it stands. – tell how the business is performing and where it stands. FINANCIAL STATEMENTS

2-4 Income Statement Balance Sheet Statement of Cash Flows Introduction to Financial Statements Three primary financial statements. We will use a corporation to describe these statements.

2-5 Describes where the enterprise stands at a specific date. Income Statement Balance Sheet Statement of Cash Flows Introduction to Financial Statements

2-6 Depicts the revenue and expenses for a designated period of time. Income Statement Balance Sheet Statement of Cash Flows Introduction to Financial Statements

2-7 Depicts the ways cash has changed during a designated period of time. Income Statement Balance Sheet Statement of Cash Flows Introduction to Financial Statements

2-8 1) BALANCE SHEET (A Statement of Financial Position) Shows the financial position of a company at a specific date. A balance sheet may be prepared monthly, quarterly, or annually depending on the needs of management and external users.

2-9 a) Assets It is something a company owns which has future economic value. Current Assets: Cash Accounts Receivable Notes Receivable Office Supplies Inventories Fixed Assets: Equipment Buildings Land

2-10 Assets Assets are resources that are controlled by the business and are expected to have future economic benefits flowed to the business.

2-11 Assets Cost Principle Going-ConcernAssumptionGoing-ConcernAssumption ObjectivityPrincipleObjectivityPrinciple These accounting principles support cost as the basis for asset valuation. Assets and services acquired should be recorded at their actual cost The entity will continue to operate in the future. Information must be reasonably accurate, free from bias and shoul report what actually happened.

2-12 b) Liabilities It is something a company owes. Short-Term Liabilities: Notes Payable Accounts Payable Unearned Revenue Salaries Payable Interest Payable Taxes Payable Long-Term Liabilities: mortgages payable bonds payable long-term notes.

2-13 Liabilities Liabilities are debts that represent negative future cash flows for the enterprise.

2-14 c) Owner’s Equity It is what’s left of the assets after liabilities have been deducted. It is owners’ ownership in the business, or the amount of the business assests owned by the business owners. - Share Capital - Withdrawals by owners - Revenues - Expenses

Transactions that Affect Owner’s Equity OWNER’S EQUITY INCREASES OWNER’S EQUITY DECREASES Owner Investments in the Business Revenues Expenses Owner Withdrawals from the Business Owner’s Equity

2-16 Owners’ Equity Equity represents the owners’ claims on the assets of the business.

2-17 Forms of Business Organization Sole Proprietorships Partnerships Corporations

2-18 Reporting Ownership Equity in the Statement of Financial Position Sole Proprietorships Partnerships Corporations

2-19 THE ACCOUNTING EQUATION Assets = Liabilities + Equity $300,000 = $80,000 + $220,000 Assets = Liabilities + Equity $300,000 = $80,000 + $220,000

2-20 Let’s analyze transactions for JJ’s Lawn Care Service.

2-21 On 1 May, Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of the company.

2-22 On 2 May, JJ’s purchased a riding lawn mower for $2,500 cash.

2-23 On 8 May, JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a note payable for the remaining $13,000.

2-24 On 11 May, JJ’s purchased some repair parts for $300 on account.

2-25 Jill realized she had purchased more repair parts than needed. On 18 May, JJ’s was able to sell half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. JJ’s will receive the cash within 30 days.

2-26 On 25 May, ABC Lawns pays JJ’s $75 as a partial settlement of its accounts receivable.

2-27 On 28 May, JJ’s pays $150 of its accounts payable.

2-28 On 29 May, JJ’s recorded lawn care services provided during May of $750. All clients were paid in cash.

2-29 Now, let’s review how JJ’s transactions affected the accounting equation. On 31 May, JJ’s purchased gasoline for the lawn mower and the truck for $50 cash.

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2-31 These transactions impact the Statement of Cash Flows. These transactions impact the Income Statement. Let’s prepare the Income Statement and Statement of Cash Flows for JJ’s Lawn Care Service for the month ending 31 May 2009.

2-32 2) INCOME STATEMENT A financial statement that measures a company’s financial performance over a specific accounting period. Lists revenues and expenses that were incurred over a period of time. Summarizes company’s revenue and expense transactions for a period of time. Revenues – Expenses = (+)NET INCOME (-)NTE LOSS

2-33 a) Revenues Revenues are amounts received or to be received from customers for sales of products or services. – sales – performance of services – rent – interest

2-34 b) Expenses Expenses are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. – salaries and wages – utilities expense – supplies expense – advertising expense

2-35 Investments by and payments to the owners are not included on the Income Statement.

2-36 3) STATEMENT of CASH FLOWS The cash flow statement is concerned with the flow of cash in and out of the business. The statement of cash flows is divided into three major sections: (a) cash flows from operating activities (b) cash flows from investing activities (c) cash flows from financing activities

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2-38 Operating activities include the cash effects of revenue and expense transactions.

2-39 Investing activities include the cash effects of purchasing and selling assets.

2-40 Financing activities include the cash effects of transactions with the owners and creditors.

2-41 Now, let’s prepare the Balance Sheet for JJ’s Lawn Care Service for May 31, These balances will appear on the Balance Sheet.

2-42 Assets = Liabilities + Equity $21,850 = $13,150 + $8,700 Assets = Liabilities + Equity $21,850 = $13,150 + $8,700

2-43 Relationships Among Financial Statements Date at beginning of period Date at end of period Balance Sheet Time Income Statement Statement of Cash Flows

2-44 Financial Statement Articulation

2-45 End of Chapter 2