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

2-2 Forms of Business Organization Sole Proprietorships Sole Proprietorships Partnerships Corporations The form of business impacts the format of the financial statements.

2-3 Income Statement Balance Sheet Statement of Cash Flows Financial Statements Assets, Liabilities & Equity as of a specific date Revenues & Expenses for a period of time Sources and Uses of cash for a period of time There is a fourth statement, the STATEMENT OF STOCKHOLDERS’ EQUITY, which we will get to later. Apple's Financial Statements

2-4 Fundamental Accounting Principles Note: not all of these are covered in chapter 2. Accounting Coach

2-5 Cost Principle Amounts in the accounts and financial statements will be actual cost rather than the current value. Certain investments will be shown at fair value. Source: principle.html principle.html

2-6 Going Concern Assumption Readers of financial statements to assume that the company will continue on long enough to carry out its objectives and commitments. Source: concern-assumption.html concern-assumption.html

2-7 Stable Dollar/Monetary Unit Assumption The monetary unit assumption is that in the long run, the dollar is stable—it does not lose its purchasing power. Is this true? Source: assumption/ assumption/

2-8 Objectivity Principle Accounting information is fair, unbiased, and objective; not subjective. Asset valuations are factual and can be verified

2-9 The Accounting Equation Commit this to memory! ASSETS = LIABILITIES + EQUITY What you own What you owe + What’s left over We will focus on companies, not individuals.

2-10 Let’s start a business called Louie’s Lids and see the impact of a few TRANSACTIONS on the financial statements.

2-11 Definition of 'Transaction‘ 1. An agreement between a buyer and a seller to exchange goods, services or financial instruments. 2. In accounting, the events that affect the finances of a business and must be recorded on the books. Transactions are recorded in what are known as "journal entries." Each entry describes a single transaction and states its date and amount. More: zz24J8AKpgXhttp:// zz24J8AKpgX

2-12 On May 1, Louie invested $20,000 of his own money in Louie’s Lids The accounting equation works: ASSETS = LIABILITIES + EQUITY Louie the person Is separate from Louie’s Lids the business.

2-13 On May 2, Louie purchased a used cash register from Goodwill for $500. The accounting equation works: ASSETS = LIABILITIES + EQUITY

2-14 On May 10, Louie bought a cool mini truck to deliver his hats. He paid $14,000 for the mini, with a down-payment of $2,000 and a $12,000 loan. The accounting equation works: ASSETS = LIABILITIES + EQUITY

2-15 On May 18, Louie purchased 100 hats for resale from Fanny’s Fedora Company. Each Fedora cost Louie $6. After reviewing Louie’s credit record, Fanny agreed to extend Louie 30 day credit. The accounting equation works: ASSETS = LIABILITIES + EQUITY

2-16 On May 23, a customer purchases 25 hats for $15 each, and promises to pay by the end of the month. After reviewing the customer’s credit report, Louie agrees to extend the customer 30 day credit. The accounting equation works: ASSETS = LIABILITIES + EQUITY

2-17 On May 28, Louie pays half of what he owes to Fanny’s Fedoras. The accounting equation works: ASSETS = LIABILITIES + EQUITY

2-18 On May 31, Louie’s sole customer pays the entire amount due. The accounting equation works: ASSETS = LIABILITIES + EQUITY

2-19 The spreadsheet format is simply a way to visualize the impact of transactions on the accounting records. Financial statements can be prepared from here. We always prepare the INCOME STATEMENT first.

2-20 The INCOME STATEMENT reflects revenues and Expenses from the company’s business operations.

2-21 The STATEMENT OF CASH FLOWS can be prepared by examining the transactions in the cash column.

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2-23 The BALANCE SHEET summarizes the totals in each column, and categorizes them as assets, liabilities or equity.

2-24 The BALANCE SHEET is a formal, point in time summary of what the business owns (assets), owes (liabilities) and the owners’ residual interest in the assets (equity).

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2-26 Financial Statement Disclosure Income Statement Balance Sheet Statement of Cash Flows Notes to the financial statements often provide facts necessary for the proper interpretation of the statements.

2-27 End of Chapter 2 Have you seen this site?