1. Introduction to Accounting and Business
Chapter 1

2. Learning Objective 5
Describe the financial statements of a proprietorship and explain how they interrelate.

3. Financial Statements
After transactions have been recorded and summarized, reports are prepared for users. The accounting reports providing this information are called financial statements.

4. Financial Statements

5. Income Statement
The income statement reports the revenues and expenses for a period of time, based on the matching concept.
The matching concept is applied by “matching” the expenses incurred during a period with the revenue that those expenses generated.
The excess of the revenue over the expenses is called net income, net profit, or earnings. If expenses exceed revenue, the excess is a net loss.

6. Financial Statements – Income Statement
Net income is carried to the statement of owner’s equity.

7. Statement of Owner’s Equity
The statement of owner’s equity reports the changes in the owner’s equity for a period of time.
It is prepared after the income statement because the net income or net loss for the period must be reported in this statement.

8. Financial Statements – Statement of Owner’s Equity
From the income statement
To the balance sheet
(continued)

9. Balance Sheet
A balance sheet is a list of the assets, liabilities, and owner’s equity as of a specific date.

10. Account Form
The account form of a balance sheet lists the assets on the left and the liabilities and owner’s equity on the right. It resembles the basic format of the accounting equation.

11. Financial Statements – Balance Sheet
This amount is compared to the net cash flow on the statement of cash flows.
From the statement of owner’s equity
(continued)

12. Statement of Cash Flows
A statement of cash flows is a summary of the cash receipts and cash payments for a specific period of time.
It consists of three sections: (1) operating activities (2) investing activities (3) financing activities

13. Cash Flows from Operating Activities
The cash flows from operating activities section reports a summary of cash receipts and cash payments from operations.

14. Cash Flows from Investing Activities
The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively permanent assets.

15. Cash Flows from Financing Activities
The cash flows from financing activities section reports the cash transactions related to cash investments by the owner, borrowings, and withdrawals by the owner.

16. Financial Statements – Statement of Cash Flows
This amount should match Cash on the balance sheet
(concluded)

17. Interrelationships Among Financial Statements
Income Statement and Statement of Owner’s Equity
Net income or net loss reported on the income statement is also reported on the statement of owner’s equity and any additional investments by the owner during the year.

18. Interrelationships Among Financial Statements
In Exhibit 6, NetSolutions’ net income of $3,050 for November is added to Chris Clark’s investment of $25,000 in the statement of owner’s equity.

19. Interrelationships Among Financial Statements
Statement of Owner’s Equity and Balance Sheet
The owner’s capital at the end of the period is reported on the statement of owner’s equity and is also reported on the balance sheet as owner’s capital.

20. Interrelationships Among Financial Statements
In Exhibit 6, Chris Clark, Capital of $26,050 as of November 30, 2013, on the statement of owner’s equity also appears on the November 30, 2013, balance sheet as Chris Clark, Capital.

21. Interrelationships Among Financial Statements
Balance Sheet and Statement of Cash Flows
The cash reported on the balance sheet is also reported as the end-of-period cash on the statement of cash flows.

22. Interrelationships Among Financial Statements
In Exhibit 6, cash of $5,900 reported on the balance sheet as of November 30, 2013, is also reported on the November statement of cash flows as the end-of-period cash.

23. Exercises to Complete:
Class Exercises: 16, 17, 18, 19, 20
Homework Exercises: 21 & 25

24. Introduction to Accounting and Business
The End