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

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

3. 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

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

5. 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: http://www.accountingcoach.com/terms/C/cost- principle.html http://www.accountingcoach.com/terms/C/cost- principle.html

6. 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: http://www.accountingcoach.com/terms/G/going- concern-assumption.html http://www.accountingcoach.com/terms/G/going- concern-assumption.html

7. 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: http://blog.accountingcoach.com/monetary-unit- assumption/http://blog.accountingcoach.com/monetary-unit- assumption/

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

9. 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.

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

11. 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: http://www.investopedia.com/terms/t/transaction.asp#ix zz24J8AKpgXhttp://www.investopedia.com/terms/t/transaction.asp#ix zz24J8AKpgX

12. 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.

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

14. 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

15. 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

16. 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

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

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

19. 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.

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

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

22. 2-22

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

24. 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).

25. 2-25

26. 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.

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