FA I Chap2 & Notes

8/8/2019 FA I Chap2 & Notes

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The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

2-1

BASIC FINANCIAL

STATEMENTS

Chapter

2


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2-2

Introduction to Financial Statements

Three primaryfinancial

statements.Income Statement

Balance Sheet

Statement of Cash FlowsWe will use a corporation

to describe thesestatements.


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2-3


Describeswhere theenterprise

stands at aspecific date.

Income Statement

Balance Sheet

Statement of Cash Flows


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2-4


Depicts the

revenue andexpenses for a

designatedperiod of time.

Income Statement

Balance Sheet



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Revenuesresult inpositive

cash flow.

Expensesresult innegative

cash flow.

Either in the past, present, or future.


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Net income (or

net loss) issimply thedifferencebetween

revenues andexpenses.

Income Statement

Balance Sheet



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2-7


Depicts theways cash haschanged during

a designatedperiod of time.

Income Statement

Balance Sheet



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2-8

Vagabond Travel Agency

Balance Sheet

ecember 31, 2005

Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:

otes receivable 10,000 otes 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

etained earnings 70,000

Total 300,000$ Total 300,000$

A Starting Point: Statement ofFinancial Position


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2-9

The Concept of the Business Entity

VagabondTravel

Agency

A business

entity isseparate fromthe personal

affairs of itsowner.


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Balance Sheet

ecember 31, 2005










Total 300,000$ Total 300,000$

Assets

Assets areeconomic resources

that are owned by

the business andare expected toprovide positive

future cash flows.


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2-11

Assets

Cost Principle

Going-ConcernAssumption

ObjectivityPrinciple

Stable-DollarAssumption

These accountingprinciples supportcost as the basis

for asset valuation.


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Balance Sheet

ecember 31, 2005










Total 300,000$ Total 300,000$

Liabilities

Liabilities aredebts that

represent negative

future cash flowsfor the enterprise.


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Balance Sheet

ecember 31, 2005










Total 300,000$ Total 300,000$

Owners Equity

Owners equityrepresents the

owners claims to

the assets of thebusiness.


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Owners Equity

Changes in OwnersEquity

OwnersInvestments

BusinessEarnings

Paymentsto Owners

BusinessLosses


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Balance Sheet

ecember 31, 2005







Building 90,000 Owners' Equity



Total 300,000$ Total 300,000$

The Accounting Equation

Assets = Liabilities + Owners Equity

$300,000 = $80,000 + $220,000


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Lets analyze

sometransactions forJJs Lawn Care

Service.


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2-17

JJ's awn Care Service

Balance Sheet

May 1, 2005

AssetsCash 8,000$ Capital Stock 8,000$

Total 8,000$ Total 8,000$

Owners' Equity

On May 1, 2005, Jill Jones and herfamilyinvested $8,000 in JJs awn Care Service and

received 800 shares ofstock.


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2-18

JJ's awn Care Service

Balance Sheet

May 2, 2005

AssetsCash 5,500$ Capital Stock 8,000$

Tools & Equipment 2,500


Owners' Equity

On May 2, JJs purchased a riding lawn

mowerfor $2,500 cash.


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On May 8, JJs purchased a $15,000 truck.

JJs paid $2,000 down in cash and issued a note payablefor the remaining $13,000.

JJ 's La w n Ca re Se rvice

Ba lance Sh e e t

M a y 8, 2005

Asse tsCa sh 3,500$ Liabilities:

Tools &Equipm e nt 2,500 Note s a ya ble 13,000$

Truck 15,000 O w n e r s'Equity:

Capi ta l Stock 8,000

Tota l 21,000$ Tota l 21,000$

Liab i l ities a nd O w ne rs'Equity


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JJ's Lawn Care Service

Balance Sheet

May 11, 2005

AssetsCash 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, JJs purchased some repair

parts for $300 on account.


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JJ'sL wn vi

l n h t

y ,

AssetsCash , Liabilities:

A ounts Receivable 150 Notes ayable 13,000$

Tools quip ent ,650 Accounts ayable 300

T uck 15,000 Total Liabilities 13,300$

Owners' quity:Capital tock 8,000


Liabilitiesand Owners' quity

Jill realized she had purchased orerepairparts than needed.

On ay 18, JJs wasable tosell halfoftherepairparts toA CLawnsfor$150, a priceequal toJJscost. JJs will receive thecash within30 days.


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Balance Sheet

May 25, 2005


Accounts eceivable 75 Notes Payable 13,000$

Tools & Equipment 2, 50 Accounts Payable 300

Truck 15,000 Total Liabilities 13,300$


Total 21,300$ Total 21,300$


On May 25, ABCLawns pays JJs $75 as a partial

settlement ofits accounts receivable.


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Balance Sheet

May 28, 2005




Truck 15,000 Total Liabilities 13,150


Total 21,150$ Total 21,150$


On May 28, JJs pays $150 ofits accounts

payable.


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Balance Sheet

May 29, 2005






etained Earnings 750

Total 21,900$ Total 21,900$


On May 29, JJs recorded lawn care servicesprovided during May of$750. All clients paid in

cash.


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Balance Sheet

May 31, 2005






etained Earnings 700

Total 21,850$ Total 21,850$


Now, lets review how JJs transactions

affected the accounting equation.

On May 31, JJs purchased gasoline for the

lawn mower and the truck for $50 cash.


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Income StatementFor the Month Ended May 31, 2005

Sales Revenue 750$

Operating Expense:

Gasoline Expense 50

Net Income 700$

Investments by and payments to the ownersare not included on the Income Statement.


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2-28JJ's Lawn Care Service


For the Month Ended May 31, 2005

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, 2005 -

Cash balance, May 31, 2005 4,125$

Operating activities include the casheffects of revenue and expense

transactions.


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Investing activities include the casheffects of purchasing and selling

assets.


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Financing activities include the casheffects of transactions with the owners

and creditors.


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Cash ,12$ Notes payable 13,$

Accounts receivable Accounts payable 1Tools & equipment 2,

Truck 1 , Capital stock ,

Retained earnings

Total assets 21,$ Total liabilities & equity 21,$

Assets L ties

Owners' Equity

JJ's L wn Care Service

Balance Sheet

May 31, 2005

Assets = Liabilities + Owners Equity

$21,850 = $13,150 + $8,700


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Relationships Among FinancialStatements

Date atbeginningof period

Date atend ofperiod

BalanceSheet

BalanceSheet

Time

Income Statement



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2-34

Financial Reporting and FinancialStatements

Statement

of Cash

Flows

BalanceSheet

Income

Statement

Other Information:

Industry

Competition

National economy

Financial statements are

just one source of financial

accountinginformation.


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Forms of Business Organizations

SoleProprietorship

Partnership Corporation


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The Use of Financial Statements byExternal Parties

Creditors

Investors

Two concernsLiquidity

Profitability


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The Need forAdequate Disclosure

Notes to thefinancial

statements oftenprovide facts

necessary for theproper

interpretation ofthe statements.

Income Statement

Balance Sheet



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Managements Interest in FinancialStatements

Creditors are more likely to extend credit if financial

statements show a strong statement of financial

positionthat 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 init financial statements.


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End of Chapter 2


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Assignment # 1Q#1

The night manager of Dixie

Transportation Service, who had

no accounting background,

prepared the following balance

sheet for the company at

February 28, 2007. The dollaramounts were taken directly

from the companys accounting

records and are correct.

However, the balance sheet

contains a number of errors in its

headings, format, and the

classification of assets, liabilities,

and owners equity.


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Assignment # 1Q#2

Documents

FA I Chap2 & Notes