1. © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 2
Financial Statements and Accounting Concepts/Principles
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights Reserved.

2. Transactions are economic
Financial Statements
L O 1
Transactions are economic
interchanges between entities that are accounted for and reflected in financial statements.

3. Accounts Transactions are summarized in accounts.
L O 1
Transactions are summarized in accounts.
Cash
Accounts are used to organize like-kind transactions.
Accounts Receivable
Account balances are then used in the preparation of financial statements.
Accounts Payable

4. Financial Statements
L O 2
In addition to the financial statements, the annual report will probably include several accompanying notes or explanations of the accounting policies used and detailed information about many of the amounts and captions shown in the financial statements.

5. Balance Sheet-Elements
L O 3
Assets represent the amount of resources owned by the entity.
Liabilities are amounts owed to other entities.
Equity is the ownership right of the owner(s) of the entity in the assets that remain after deducting the liabilities.

6. Balance Sheet
L O 3
Current assets are those assets that are likely to be converted into
cash or used to benefit the entity within one year.
Current
liabilities
are those
that are to
be paid
within
one year.

7. Balance Sheet
L O 3
Liabilities
Equity
Assets = +

8. are incurred in generating revenues and operating the entity.
L O 4
Income Statement
The income statement shows the profit (or loss) for the period of time under consideration.
Revenues result from the entity’s operating activities (e.g., selling merchandise).
Costs and expenses
are incurred in generating revenues and operating the entity.
Gains and losses are also reported on the income statement and result from non-operating activities, rather than from the day-to-day operating activities that generate revenues and expenses. 3

9. Statement of Changes in Owners’ Equity
L O 4
This financial statement shows the detail of owners’ equity and explains the changes that occurred in the components of owners’ equity during the year. 6

10. Statement of Cash Flows
The purpose of this financial statement is to identify the sources and uses of cash during the year. 6

11. Financial Statement Relationships and the Accounting Equation
L O 4
If assets equal $300,000 and liabilities equal $125,000, what is owners’ equity?
Owners’ equity equals $175,000 ($300,000 - $125,000)
Now, suppose that total assets increase $12,000 during the year and total liabilities decrease $3,000 during the year.
Owners’ equity must have increased by $15,000. Since owners’ equity was $175,000 at the beginning of the year, it must be $190,000 at the end of the year. 6

12. Balance Sheet
L O 4

13. Income Statement
L O 4 3

14. Statement of Changes in Owners’ Equity
L O 4 6

15. Statement of Cash Flows6

16. Accrual Accounting Vs. Cash Flows
Revenue Recognition -Timing is the Key
Accrual accounting
recognizes:
Cash flow
recognizes:
Revenue
when revenue is earned,
at the point of sale of
services or products.
Revenue
when payment is received
for services rendered
or products sold.
Expenses
when they are incurred.
Expenses
when they are paid.