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Chapter TitlePowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2012 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
Basic Financial Statements
2-2
Balance Sheet
Presentation Notes
There are three fundamental financial statements used in
accounting. The income statement shows revenues and expenses. The
balance sheet is a listing of all asset, liability, and equity
account balances that do not appear on the income statement. The
statement of cash flows shows how the company receives and spends
its cash. This chapter will look at the financial statements of a
corporation.
2-3
specific date.
Income Statement
Balance Sheet
Presentation Notes
The balance sheet (also referred to as the statement of position)
describes the financial position of a company at a specific point
in time. A balance sheet may be prepared monthly, quarterly, or
annually depending on the needs of management and external users.
The balance sheet is sometimes referred to as the statement of
financial position.
2-4
Presentation Notes
Net income is defined as the excess of revenues over expenses.
Financial statements begin with a three-line title comprised of the
company name, the name of the statement, and the period covered by
the report. The income statement lists revenues and expenses that
were incurred over a period of time. Most companies prepare monthly
income statements. In the long-run, revenues will generate positive
cash inflows to the company and expenses will result in negative
cash flows to the company. Just remember, revenues and expenses
that appear on the income statement may not always produce cash
flows in the current accounting period. Net income (or net loss) is
simply the difference between revenues and expenses. When revenues
exceed expenses, the result is net income. When expenses exceed
revenues, the result is a net loss.
2-5
a designated period of time.
Income Statement
Balance Sheet
Presentation Notes
The statement of cash flows will be covered in detail in a later
chapter. The statement of cash flows is divided into three major
sections: (1) cash flows from operating activities; (2) cash flows
from investing activities, and (3) cash flows from financing
activities. The statement describes cash inflows and outflows over
a period of time.
2-6
December 31, 2011 Assets Liabilities & Owners' Equity
Cash 22,500$ Liabilities: Notes receivable 10,000 Notes payable
41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies
2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$
Building 90,000 Owners' Equity: Office equipment 15,000 Capital
stock 150,000
Retained earnings 70,000 Total 300,000$ Total 300,000$
A Starting Point: Statement of Financial Position
Presenter
Presentation Notes
The statement of financial position, commonly referred to as the
balance sheet, is an inventory of assets, liabilities, and equity
at the end of the month. Our total assets are equal to $300,000.
This includes cash of $22,500, notes receivable of $10,000,
supplies of $2,000, and the balances in the remaining asset
accounts. Liabilities include notes payable of $41,000, accounts
payable of $36,000 and salaries payable of $3,000. The accounts in
the owners’ equity section of the balance sheet are capital stock
of $150,000 and retained earnings of $70,000. Notice that the total
assets are equal to the total liabilities plus owners’
equity.
Sheet1
Vagabond Travel
owner.
Presenter
Presentation Notes
The business entity principle states that the transactions of
individual owners of a business and those of the business must be
separate.
2-8
December 31, 2011 Assets Liabilities & Owners' Equity
Cash 22,500$ Liabilities: Notes receivable 10,000 Notes payable
41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies
2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$
Building 90,000 Owners' Equity: Office equipment 15,000 Capital
stock 150,000
Retained earnings 70,000 Total 300,000$ Total 300,000$
Assets
business and are expected to benefit future operations.
Presenter
Presentation Notes
Assets are resources owned or controlled by an entity. They include
such items as cash, accounts receivable (amounts owed to the
company by customers), land, building and equipment, and
supplies.
Sheet1
Stable-Dollar Assumption
These accounting principles support cost as the basis for asset
valuation.
Presenter
Presentation Notes
The cost principle tells us that accounting information is based
upon actual cost incurred. We refer to this as historical cost. The
going-concern assumption states that in the absence of information
to the contrary, the business entity is assumed to continue
operations into the foreseeable future. The objectivity principle
states that accounting information must be unbiased and based upon
independent evidence. The stable-dollar assumption tells us that we
will only record accounting information that can be expressed in
monetary units, usually dollars in the United States.
2-10
December 31, 2011 Assets Liabilities & Owners' Equity
Cash 22,500$ Liabilities: Notes receivable 10,000 Notes payable
41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies
2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$
Building 90,000 Owners' Equity: Office equipment 15,000 Capital
stock 150,000
Retained earnings 70,000 Total 300,000$ Total 300,000$
Liabilities
negative future cash flows for the enterprise.
Presenter
Presentation Notes
Liabilities represent the claims of creditors on an entity’s
assets. Liabilities include accounts payable (amounts owed to
creditors for assets purchased on account), taxes payable, and
wages payable (amounts owed to our employees at the end of the
accounting period).
Sheet1
December 31, 2011 Assets Liabilities & Owners' Equity
Cash 22,500$ Liabilities: Notes receivable 10,000 Notes payable
41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies
2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$
Building 90,000 Owners' Equity: Office equipment 15,000 Capital
stock 150,000
Retained earnings 70,000 Total 300,000$ Total 300,000$
Owners’ equity represents the owners’ claims on the assets of
the business.
Presentation Notes
The equities of an entity include investments by owners,
withdrawals by owners, and earnings retained by the business.
Investments by owners and net income increase owners’ equity.
Payments to owners and net losses decrease owners’ equity.
Sheet1
December 31, 2011 Assets Liabilities & Owners' Equity
Cash 22,500$ Liabilities: Notes receivable 10,000 Notes payable
41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies
2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$
Building 90,000 Owners' Equity Office equipment 15,000 Capital
stock 150,000
Retained earnings 70,000 Total 300,000$ Total 300,000$
The Accounting Equation Assets = Liabilities + Owners’ Equity
$300,000 = $80,000 + $220,000
Presenter
Presentation Notes
The basic accounting equation states that assets are equal to
liabilities plus equity of a company. The equation makes sense
because it states that assets must be equal to the claims against
those assets. There are two broad categories of claims against an
asset: Claims by creditors (called liabilities), or after all
creditor claims are satisfied, the residual owners (the
stockholders) have a claim on those assets.
Sheet1
Let’s analyze transactions for JJ’s Lawn Care Service.
Presenter
Presentation Notes
Let’s look at how specific business transactions impact the basic
financial statement.
2-14
May 1, 2011 Assets
Total 8,000$ Total 8,000$
Owners' Equity
On May 1, Jill Jones and her family invested $8,000 in JJ’s Lawn
Care Service
and received 800 shares of stock.
Presenter
Presentation Notes
On May 1st, Jill Jones and her family invested $8,000 in JJ’s Lawn
Care Service and received 800 shares of stock in return. Let’s see
how the balance sheet would look immediately after this
transaction. The cash account of JJ’s Lawn Care increased by eight
thousand dollars and the capital stock of the company also
increased by eight thousand dollars. Notice that the basic
accounting equation is in balance. Total assets are equal to total
liabilities plus owners’ equity.
Sheet1
May 2, 2011 Assets
Total 8,000$ Total 8,000$
Owners' Equity
On May 2, JJ’s purchased a riding lawn mower for $2,500 cash.
Presenter
Presentation Notes
On the 2nd of May, JJ’s Lawn Care purchased a riding lawn mower for
$2,500 cash. Let’s see how the balance sheet looks now.The cash
account has been reduced by the $2,500 spent and the tools and
equipment account has been increased by the same amount. One asset,
cash, was merely traded for another, the riding lawn mower. Owners’
equity is not changed by the transaction and the basic accounting
equation is still in balance.
Sheet1
2-16
On May 8, JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in
cash and issued a
note payable for the remaining $13,000.
JJ's Lawn Care Service Balance Sheet
May 8, 2011 Assets
Cash 3,500$ Liabilities: Tools & Equipment 2,500 Notes Payable
13,000$ Truck 15,000 Owners' Equity:
Capital Stock 8,000
Presentation Notes
In the next transaction JJ’s Lawn Care purchases a truck for
$15,000, paying $2,000 cash and signing a note payable for $13,000.
Let’s update the balance sheet.The cash account decreased by $2,000
and the truck account increased by $15,000. There was a net
increase in the asset side of the equation of $13,000. The
liability account, notes payable, increased by $13,000. Total
assets are now equal to $21,000. Total liabilities are equal to
$13,000 and owners’ equity is equal to $8,000. The accounting
equation is still in balance.
Sheet1
Assets Cash 3,500$ Liabilities: Tools & Equipment 2,800 Notes
Payable 13,000$ Truck 15,000 Accounts Payable 300
Total Liabilities 13,300$ Owners' Equity: Capital Stock 8,000
Total 21,300$ Total 21,300$
Liabilities and Owners' Equity
On May 11, JJ’s purchased some repair parts for $300 on
account.
Presenter
Presentation Notes
On May 11th, JJ’s Lawn Care purchases repair parts for the riding
lawn mower for $300. The parts are purchased on account. JJ’s will
pay the balance on the account at some point in the future. Let’s
update the balance sheet. The tools and equipment account increased
by $300 and the liability account, accounts payable, increased by
the same amount. The balance sheet is getting progressively more
complicated.
Sheet1
Assets Cash 3,500$ Liabilities: Accounts Receivable 150 Notes
Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 300
Truck 15,000 Total Liabilities 13,300$
Owners' Equity: Capital Stock 8,000
Total 21,300$ Total 21,300$
Liabilities and Owners' Equity
Jill realized she had purchased more repair parts than
needed.
On May 18, JJ’s was able to sell half of the repair parts to ABC
Lawns for $150, a price equal to JJ’s cost. JJ’s will
receive the cash within 30 days.
Presenter
Presentation Notes
On May 18th, JJ’s Lawn Care sells one-half of its repair parts at
cost to ABC Lawns. ABC agrees to pay for the parts in thirty days.
One-half of the cost of the parts is $150. Can you update the
balance sheet? Try before proceeding to the next slide. The asset
account, Tools and Equipment, decreased by $150 and the asset
account, accounts receivable, increased by the same amount. Once
again, one asset, repair parts, has been exchanged for another
asset, accounts receivable. How did you do?
Sheet1
Assets Cash 3,575$ Liabilities: Accounts Receivable 75 Notes
Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 300
Truck 15,000 Total Liabilities 13,300$
Owners' Equity: Capital Stock 8,000
Total 21,300$ Total 21,300$
Liabilities and Owners' Equity
On May 25, ABC Lawns pays JJ’s $75 as a partial settlement of its
accounts
receivable.
Presenter
Presentation Notes
On May 25th, ABC Lawns makes a partial payment on account for $75
cash. Let’s prepare the updated balance sheet on May 25th.The cash
account increases by $75 and accounts receivable decreases by the
same amount. Notice that total assets are still equal to total
liabilities plus owners’ equity.
Sheet1
Assets Cash 3,425$ Liabilities: Accounts Receivable 75 Notes
Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 150
Truck 15,000 Total Liabilities 13,150
Owners' Equity: Capital Stock 8,000
Total 21,150$ Total 21,150$
Liabilities and Owners' Equity
On May 28, JJ’s pays $150 of its accounts payable.
Presenter
Presentation Notes
On May 28th, JJ’s Lawn Care makes a partial payment on its accounts
payable of $150. Its time to update the balance sheet.The cash
account decreases by $150 and accounts payable also decreases by
$150. The total assets are now recorded at $21,150. Total
liabilities plus owners’ equity is equal to the same amount.
Sheet1
Assets Cash 4,175$ Liabilities: Accounts Receivable 75 Notes
Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 150
Truck 15,000 Total Liabilities 13,150
Owners' Equity: Capital Stock 8,000 Retained Earnings 750
Total 21,900$ Total 21,900$
Liabilities and Owners' Equity
On May 29, JJ’s recorded lawn care services provided during May of
$750. All
clients were paid in cash.
Presenter
Presentation Notes
On May 29th, JJ’s Lawn Care begins providing services to customers.
On this date the company did work that totaled $750. All of the
customers paid cash for the services rendered. Try updating the
balance sheet before moving to the next slide. Be careful with this
one. The cash account increases by $750 and retained earnings
increases by the same amount. The monies received represent
earnings of the company that have been retained. The $750
represents revenue earned by the business. How did you do?
Sheet1
Assets Cash 4,125$ Liabilities: Accounts Receivable 75 Notes
Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 150
Truck 15,000 Total Liabilities 13,150
Owners' Equity: Capital Stock 8,000 Retained Earnings 700
Total 21,850$ Total 21,850$
Liabilities and Owners' Equity
On May 31, JJ’s purchased gasoline for the lawn mower and the truck
for $50 cash.
Presenter
Presentation Notes
In the final transaction for May, JJ’s Lawn Care purchased $50
worth of gasoline for its riding mower and truck. Let’s make the
final update to the balance sheet on May 31st.The cash account
decreased by $50 and so did the retained earnings of the company.
JJ’s Lawn Care used $50 of its earnings to pay for the gasoline.
The $50 spent is an expense of the business. Now, let’s review how
JJ’s transactions affected the accounting equation.
Sheet1
May 2 (2,500) 2,500$ Balances 5,500$ 2,500$ 8,000$
May 8 (2,000) 15,000$ 13,000$ Balances 3,500$ 2,500$ 15,000$
13,000$ 8,000$
May 11 300 300$ Balances 3,500$ 2,800$ 15,000$ 13,000$ 300$
8,000$
May 18 150$ (150) Balances 3,500$ 150$ 2,650$ 15,000$ 13,000$ 300$
8,000$
May 25 75 (75) Balances 3,575$ 75$ 2,650$ 15,000$ 13,000$ 300$
8,000$
May 28 (150) (150) Balances 3,425$ 75$ 2,650$ 15,000$ 13,000$ 150$
8,000$
May 29 750 750 Balances 4,175$ 75$ 2,650$ 15,000$ 13,000$ 150$
8,000$ 750$
May 31 (50) (50) Balances 4,125$ 75$ 2,650$ 15,000$ 13,000$ 150$
8,000$ 700$
Owners' Equity
Presentation Notes
All of these transactions have been placed on this slide, in the
appropriate columns for the accounts they’ve impacted. Let’s verify
the balance in each account and get ready to prepare the financial
statements for JJ’s Lawn Care.
Sheet1
Assets
May 2 (2,500) 2,500$ Balances 5,500$ 2,500$ 8,000$
May 8 (2,000) 15,000$ 13,000$ Balances 3,500$ 2,500$ 15,000$
13,000$ 8,000$
May 11 300 300$ Balances 3,500$ 2,800$ 15,000$ 13,000$ 300$
8,000$
May 18 150$ (150) Balances 3,500$ 150$ 2,650$ 15,000$ 13,000$ 300$
8,000$
May 25 75 (75) Balances 3,575$ 75$ 2,650$ 15,000$ 13,000$ 300$
8,000$
May 28 (150) (150) Balances 3,425$ 75$ 2,650$ 15,000$ 13,000$ 150$
8,000$
May 29 750 750 Balances 4,175$ 75$ 2,650$ 15,000$ 13,000$ 150$
8,000$ 750$
May 31 (50) (50) Balances 4,125$ 75$ 2,650$ 15,000$ 13,000$ 150$
8,000$ 700$
Owners' Equity
Statement.
Let’s prepare the Income Statement and Statement of Cash Flows for
JJ’s Lawn Care Service for the month ending May 31, 2011.
Presenter
Presentation Notes
All of the transactions that impacted the cash account will appear
on the statement of cash flows.The revenues and expenses that
caused the change in retained earnings will appear on the income
statement of the company.Let’s begin by preparing the income
statement and statement of cash flows for JJ’s Lawn Care for the
period ended May 31, 2011.
Sheet1
Assets
For the Month Ended May 31, 2011
Sales Revenue 750$ Operating Expense: Gasoline Expense 50 Net
Income 700$
Investments by and payments to the owners are not included on the
Income Statement.
Presenter
Presentation Notes
JJ’s Lawn care has one revenue for services for $750, and one
expense for gasoline of $50. So the net income for the month of May
is $700. Remember, net income is the excess of revenues over
expenses incurred during the accounting period.Investments by
owners and payments to owners do not appear on the income
statement. These amounts appear on the company’s balance
sheet.
Sheet1
Sales Revenue
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash flows from operating
activities: Cash received from revenue transactions 750$ Cash paid
for expenses (50) Net cash provided by operating activities 700$
Cash flows from investing activities: Purchase of lawn mower
(2,500)$ Purchase of truck (2,000) Collection for sale of repair
parts 75 Payment for repair parts (150) Net cash used by investing
activities (4,575) Cash flows from financing activities: Investment
by owners 8,000 Increase in cash for month 4,125$ Cash balance, May
1, 2011 - Cash balance, May 31, 2011 4,125$
Presenter
Presentation Notes
Here is the statement of cash flows for JJ’s Lawn Care for the
month ended May 31, 2011. Notice the three sections of the
statement: Cash flows from operating activities, investing
activities and financing activities.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash flows from operating
activities: Cash received from revenue transactions 750$ Cash paid
for expenses (50) Net cash provided by operating activities 700$
Cash flows from investing activities: Purchase of lawn mower
(2,500)$ Purchase of truck (2,000) Collection for sale of repair
parts 75 Payment for repair parts (150) Net cash used by investing
activities (4,575) Cash flows from financing activities: Investment
by owners 8,000 Increase in cash for month 4,125$ Cash balance, May
1, 2011 - Cash balance, May 31, 2011 4,125$
Operating activities include the cash effects of revenue and
expense
transactions.
Presenter
Presentation Notes
Cash flows from operating activities include the cash received from
revenue transactions and the cash paid for expenses.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash flows from operating
activities: Cash received from revenue transactions 750$ Cash paid
for expenses (50) Net cash provided by operating activities 700$
Cash flows from investing activities: Purchase of lawn mower
(2,500)$ Purchase of truck (2,000) Collection for sale of repair
parts 75 Payment for repair parts (150) Net cash used by investing
activities (4,575) Cash flows from financing activities: Investment
by owners 8,000 Increase in cash for month 4,125$ Cash balance, May
1, 2011 - Cash balance, May 31, 2011 4,125$
Investing activities include the cash effects of purchasing and
selling
assets.
Presenter
Presentation Notes
JJ’s had a cash outflow for investing activities. The company
invested in the riding lawn mower, truck, and repair parts;
however, the company recovered some of the cost of repair parts by
selling some excess parts to ABC Lawns.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash flows from operating
activities: Cash received from revenue transactions 750$ Cash paid
for expenses (50) Net cash provided by operating activities 700$
Cash flows from investing activities: Purchase of lawn mower
(2,500)$ Purchase of truck (2,000) Collection for sale of repair
parts 75 Payment for repair parts (150) Net cash used by investing
activities (4,575) Cash flows from financing activities: Investment
by owners 8,000 Increase in cash for month 4,125$ Cash balance, May
1, 2011 - Cash balance, May 31, 2011 4,125$
Financing activities include the cash effects of transactions with
the owners
and creditors.
Presentation Notes
The only financing activity was the original investment by the
owners of JJ’s Lawn Care.The cash inflows and outflows resulted in
an increase in cash of $4,125 during the month. Because the cash
account had a zero balance at the beginning of the month, the
ending balance in the cash account is $4,125.Let’s finish by
preparing the balance sheet for JJ’s Lawn Care.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
May 2 (2,500) 2,500$ Balances 5,500$ 2,500$ 8,000$
May 8 (2,000) 15,000$ 13,000$ Balances 3,500$ 2,500$ 15,000$
13,000$ 8,000$
May 11 300 300$ Balances 3,500$ 2,800$ 15,000$ 13,000$ 300$
8,000$
May 18 150$ (150) Balances 3,500$ 150$ 2,650$ 15,000$ 13,000$ 300$
8,000$
May 25 75 (75) Balances 3,575$ 75$ 2,650$ 15,000$ 13,000$ 300$
8,000$
May 28 (150) (150) Balances 3,425$ 75$ 2,650$ 15,000$ 13,000$ 150$
8,000$
May 29 750 750 Balances 4,175$ 75$ 2,650$ 15,000$ 13,000$ 150$
8,000$ 750$
May 31 (50) (50) Balances 4,125$ 75$ 2,650$ 15,000$ 13,000$ 150$
8,000$ 700$
Owners' Equity
Now, let’s prepare the Balance Sheet for JJ’s Lawn Care Service for
May 31, 2011.
These balances will appear on the
Balance Sheet.
Presentation Notes
Here are the account balances to use when preparing the balance
sheet.
Sheet1
Assets
(50)
(50)
Balances
$ 4,125
$ 75
$ 2,650
$ 15,000
$ 13,000
$ 150
$ 8,000
$ 700
Sheet3
2-31
Cash 4,125$ Notes payable 13,000$ Accounts receivable 75 Accounts
payable 150 Tools & equipment 2,650 Truck 15,000 Capital stock
8,000
Retained earnings 700 Total assets 21,850$ Total liabilities &
equity 21,850$
Assets Liabilities
Owners' Equity
Assets = Liabilities + Owners’ Equity $21,850 = $13,150 +
$8,700
Presenter
Presentation Notes
Asset accounts are listed on the left side of the balance sheet and
the liabilities and owners’ equity accounts on the right.Feel free
to go back to the previous screen and see all the account balances
that appear on the balance sheet.As a final check, make sure that
the accounting equation is still in balance. The total assets of
$21,850 is exactly equal to the total of the company’s liabilities
plus owners’ equity. Notice that the balance sheet lists all
assets, liabilities, and equities on a certain date. In this
example, the date is May 31, 2011.
Sheet1
Balance Sheet
Balance Sheet
Presenter
Presentation Notes
All the financial statements are interrelated. We can start with
the balance sheet at the beginning of an accounting period, analyze
the income and cash flows of the company, and arrive at the ending
balances that will appear on the balance sheet.
2-33
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash flows from operating
activities: Cash received from revenue transactions 750$ Cash paid
for expenses (50) Net cash provided by operating activities 700$
Cash flows from investing activities: Purchase of lawn mower
(2,500)$ Purchase of truck (2,000) Collection for sale of repair
parts 75 Payment for repair parts (150) Net cash used by investing
activities (4,575) Cash flows from financing activities: Investment
by owners 8,000 Increase in cash for month 4,125$ Cash balance, May
1, 2011 - Cash balance, May 31, 2011 4,125$
Cash 4,125$ Notes payable 13,000$ Accounts receivable 75 Accounts
payable 150 Tools & equipment 2,650 Truck 15,000 Capital stock
8,000
Retained earnings 700 Total assets 21,850$ Total liabilities &
equity 21,850$
Assets Liabilities
Owners' Equity
JJ's Lawn Care Service Income Statement
Sales Revenue 750$ Operating Expense: Gasoline Expense 50 Net
Income 700$
For the Month Ended May 31, 2011
Financial Statement Articulation
Presentation Notes
This is the balance sheet for JJ’s Lawn Care at the end of May. Net
income impacts the retained earnings of the company.The statement
of cash flows not only provides the balance in the cash account,
but also details information about the acquisition and disposition
of assets and liabilities as well as changes in the owners’ equity
balance. It’s clear to see how all the financial statements
articulate with each other.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
Sales Revenue
Financial Reporting and Financial Statements
Financial statements are just one source of
financial accounting information.
Presentation Notes
Financial statements are only one source of information about the
operations of a company. The financial statements of a company can
be compared to those of other companies in the same industry, major
national or international competitors, and to the norms for the
national economy.
2-35
Presentation Notes
There are three general forms of business operations. A
proprietorship is a business owned by just one individual. A
partnership is owned by two or more individuals. Some partnerships
have several thousand partners. A corporation is owned by
individuals who normally are not active in the day-to-day
operations of that business. For example, you may become an owner
of IBM by purchasing shares of stock on the New York Stock
Exchange. While you are a part owner, you do not necessarily work
for IBM nor are you active in the operations of the company.
2-36
Owner's equity: Jill Jones, capital 8,000$
Sole Proprietorships
Partners' equity Jill Jones, capital 4,000$ Bill Jones, capital
4,000 Total partners' equity 8,000$
Partnerships
Owners' equity Capital stock 7,000$ Retained earnings 1,000 Total
stockholders' equity 8,000$
Corporations
Presenter
Presentation Notes
The owners’ equity section of the balance sheet will look different
for each type of business entity. For a sole proprietorship, there
will be a capital account for the owner, and a drawing account to
record payments to the owner. For a partnership, each partner has a
separate account, where changes are tracked over time. There’s also
a separate drawing account for payments made to each partner. To
review, a corporation will show owners’ contributions in the
capital stock account and accumulated earnings of the company in
the retained earnings account. You should be able to tell the form
of business by looking at the equity section of a balance
sheet.
Sheet: Sheet1
Owner's equity:
Creditors
Investors
Presentation Notes
Creditors and investors have two major concerns about the
operations and financial position of any company. First, the
company must be liquid, that is, it must be able to pay all bills
when due. Second, the company must be profitable in the long-run.
Unprofitable companies drain the cash position of the company,
causing concern on the part of creditors and investors.
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Income Statement
Balance Sheet
interpretation of the statements.
Presentation Notes
In addition to the basic financial statements, companies prepare
notes to the financial statements. These notes are meant to provide
the reader with additional insights into the operations and
financial position of the company.
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Management’s Interest in Financial Statements
Creditors are more likely to extend credit if financial statements
show a strong statement of
financial position—that is, relatively little debt and large
amounts of liquid assets.
Window dressing occurs when management takes measures to make the
company appear
as strong as possible in it financial statements.
Presenter
Presentation Notes
Creditors and investors are more likely to be interested in
financially strong companies. These companies usually have little
or no debt and a significant amount of assets that can be converted
into cash quickly.When management engages in measures to make the
company appear financially stronger than it really is, this is
referred to as window dressing. Window dressing may be legal, but
it often impugns the integrity of the management team.
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The Concept of the Business Entity
Assets
Assets
Liabilities
Forms of Business Organization
The Use of Financial Statements by External Parties
The Need for Adequate Disclosure
Management’s Interest in Financial Statements
End of Chapter 2