1. © 2007 McGraw-Hill Ryerson Ltd.
Electronic Presentations in Microsoft® PowerPoint®
Financial Statements and Accounting Transactions
C H A P T E R 2
Slides Content
1-3 Learning objectives
4-15 Financial statement format
GAAP
Mini-quiz
Transactions and the accounting equation
39 Mini-quiz
Financial statements-link to exercises
Review and end of chapter
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2. Learning Objectives
Identify and explain the content and reporting aims of financial statements.
Identify, explain, and apply accounting principles.
Explain and interpret the accounting equation.
Analyze business transactions using the accounting equation.
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3. Learning Objectives
Prepare financial statements from business transactions.
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4. Communicating Through Financial Statements
Accounting provides useful information that helps users make decisions.
This information is often provided in the form of financial statements.
The major statements are the:
Income statement
Statement of owner’s equity
Balance sheet
Cash flow statement
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5. Income Statement The income statement reports:
Revenues of the organization.
Expenses (costs incurred in earning the revenues).
Net income or loss.
The income statement covers a period of time.
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6. Income Statement Inflows of assets in exchange for
products and services
provided to customers.
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7. or the using up of assets from generating
Income Statement
Costs incurred
or the using up of assets from generating
revenue
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8. Statement of Owner’s Equity
Reports on changes in equity over a period of time.
Equity is affected by:
Owner investments and withdrawals
Net income or net losses
Linked to the income statement
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9. Statement Of Owner’s Equity
Covers a
period
of time.
From the
Income
statement.
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10. Balance Sheet The balance sheet reports the:
Assets
Liabilities
Owner’s equity
of an organization at a point in time.
Linked to the Statement of Owner’s Equity.
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11. Balance Sheet Properties or economic resources owned by a business
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12. Balance Sheet Debts or Obligations of the business
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13. Balance Sheet Owner’s claim on the assets of a business From the
Statement
Of Owner’s
Equity
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14. Cash Flow Statement
Reports the sources and uses of cash for a period of time.
Organized by the company’s major activities:
Operating
Investing
Financing
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15. Cash Flow Statement From the balance sheet
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16. Generally Accepted Accounting Principles (GAAP)
Rules that make up acceptable accounting practices.
GAAP were developed to make information in financial statements:
Relevant
Reliable
Consistent
Comparable
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17. Business Entity Principle
Every business is to be accounted for separately from its owner or owners.
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18. Cost Principle
All transactions are recorded based on the actual cash amount received or paid.
In absence of cash, the cash equivalent amount of the exchange is recorded.
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19. Objectivity Principle
Financial statement information must be supported by independent, unbiased, and verifiable evidence.
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20. Going Concern Principle
Financial statements reflect the assumption that the business will continue operating instead of being closed or sold.
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21. Monetary Unit Principle
Transactions are expressed using units of money as the common denominator.
Adjustments are not made for changes in exchange rates or inflation.
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22. Revenue Recognition Principle
Revenue is recorded at the time it is earned regardless of whether cash or another asset has been exchanged.
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23. Mini-Quiz Generally accepted accounting principles:
Are based on long-used accounting practices.  
Are basic assumptions, concepts, and guidelines for preparing financial statements.  
Are detailed rules used in reporting on business transactions and events.  
All of the above.  
Both A and B.
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24. Mini-Quiz Generally accepted accounting principles:
Are based on long-used accounting practices.  
Are basic assumptions, concepts, and guidelines for preparing financial statements.  
Are detailed rules used in reporting on business transactions and events.  
All of the above.  
Both A and B.
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25. Transactions and the Accounting Equation
Liabilities
Equity
Assets = +
The accounting equation must remain in balance after each transaction.
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26. Transaction Analysis We need to determine:
Which accounts are being affected.
If the accounts are increasing or decreasing.
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27. Transaction Analysis
(1) Carol Finlay invests $10,000 cash in the business.
Analysis: Cash increases by $10,000.
Owner’s capital increases by $10,000.
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28. Transaction Analysis (2) Purchased supplies for $2,500 cash.
Analysis: Supplies increase by $2,500.
Cash decreases by $2,500.
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29. Transaction Analysis (3a) Purchased $1,100 of supplies on credit.
Analysis: Supplies increase by $1,100.
Accounts Payable increases by $1,100
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30. Transaction Analysis
(3b) Purchased $6,000 of furniture on credit A promissory note was signed.
Analysis: Furniture increases by $6,000.
Notes payable increases by $6,000.
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31. Transaction Analysis (4) Services rendered for $2,200 cash.
Analysis: Cash increases $2,200
Owner’s equity increases $2,200
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32. Transaction Analysis (5) Payment of $1,000 rent expense in cash.
Analysis: Cash decreases $1,000
Owner’s equity decreases $1,000
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33. Transaction Analysis (6) Payment of $700 salaries expense in cash.
Analysis: Cash decreases $700
Owner’s equity decreases $700
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34. Transaction Analysis
(7) Service contract signed for February and March.
Analysis: No economic exchange has taken place
All accounts remain unaffected
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35. Transaction Analysis Analysis: Accounts receivable increases $1,900
(8)Services and rental revenues of $1,900 rendered for credit.
Analysis: Accounts receivable increases $1,900
Owner’s capital increases $1,900
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36. Transaction Analysis (9) Receipt of $1,900 cash on account.
Analysis: Cash increases $1,900
Accounts receivable decreases $1,900
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37. Transaction Analysis (10) Payment of $900 accounts payable.
Analysis: Cash decreases $900
Accounts payable decreases $900
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38. Transaction Analysis (11) Withdrawal of $600 cash by owner.
Analysis: Cash decreases $600
Owner’s capital decreases $600
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39. Mini-Quiz
If the assets of a business increased by $50,000 during the year and liabilities decreased by $40,000 during the same period, how much did owner’s equity change?
$90,000
A = L OE
+50,000 = -40,000 + OE
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40. Financial Statements
Financial statements may be prepared to reflect the transactions we have recorded.
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41. Income Statement
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42. Statement of Owner’s Equity
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43. Balance Sheet
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44. Review What information is presented on an income statement?
What transactions change owner’s equity?
What information is presented on a balance sheet?
What is the difference between Owner’s Equity and Capital?
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45. End of chapter
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