Learning Objectives 1.Nature of a Business 2.The Role of Accounting in Business 3.Business Ethics 4.Profession of Accounting 5.Generally Accepted Accounting

Learning Objectives

1. Nature of a Business

2. The Role of Accounting in Business

3. Business Ethics

4. Profession of Accounting

5. Generally Accepted Accounting Principles

6. Assets, Liabilities, and Owner’s Equity

7. Business Transactions

8. Financial Statements

9. Financial Analysis and Interpretation

Power Notes Introduction to Accounting and Business Introduction to Accounting and Business

CommunicationCommunication NewsNews

FactsFacts

AccessAccess

CommentaryCommentary

Living in the Information Age

DataData

Timeliness

Independence

Freedom-of-Expression

Living in the Information Age

CommunicationCommunication NewsNews

FactsFacts

AccessAccess

CommentaryCommentary

DataData

BusinessSells/provides

Products

Profit

Profit

Services

Goal

Business and Investment

Labor and EquipmentAccounting Information

Land and Building

Factors of production are the means businesses use to make profit.

Factors of production are the means businesses use to make profit.

Accounting Information

Sales- Expenses

Profit

Sales- Expenses

Profit

Amounts earned from selling products or services

Amounts earned from selling products or services

Business Profit

Costs incurred with salesCosts incurred with sales

Amounts earned from sales less

expenses incurred

Amounts earned from sales less

expenses incurred

7

ServiceService BusinessBusiness ServiceService ServiceService BusinessBusiness ServiceService

The Walt Disney Company EntertainmentDelta Air Lines TransportationMarriott International Hotels Hospitality and

lodgingBank of America Corporation Financial servicesXM Satellite Radio Satellite radio

The Walt Disney Company EntertainmentDelta Air Lines TransportationMarriott International Hotels Hospitality and

lodgingBank of America Corporation Financial servicesXM Satellite Radio Satellite radio

1-1Types of Businesses

8

Merchandising BusinessMerchandising Business ProductProductMerchandising BusinessMerchandising Business ProductProduct

Wal-Mart General merchandiseGameStop Corporation Video games and accessoriesBest Buy Consumer electronicsGap Inc. ApparelAmazon.com Internet books, music,

video

Wal-Mart General merchandiseGameStop Corporation Video games and accessoriesBest Buy Consumer electronicsGap Inc. ApparelAmazon.com Internet books, music,

video

Types of Businesses 1-1

9

Manufacturing BusinessManufacturing Business ProductProductManufacturing BusinessManufacturing Business ProductProduct

General Motors Corp. Cars, trucks, vansSamsung Cell phonesDell Inc. Personal computersNike Athletic shoes and apparelThe Coca-Cola CompanyBeveragesSony Corporation Stereos and televisions

General Motors Corp. Cars, trucks, vansSamsung Cell phonesDell Inc. Personal computersNike Athletic shoes and apparelThe Coca-Cola CompanyBeveragesSony Corporation Stereos and televisions

Types of Businesses 1-1

Corporation

Law Offices

PartnershipProprietorship

Sally’sGrocery

Business

Forms of Organization

Exh.1.4

11

Proprietorship Partnership Corporation Limited liability company

Common Forms of Business Organizations 1-1

12

Comprises 70% of business organizations in the United States.

Requires low cost of organizing. Is limited to financial resources of

the owner. Is used by small businesses.

A proprietorship is owned by one individual and—

1-1

13

Comprises 10% of business organizations in the United States.

Combines the skills and resources of more than one person.

A partnership is similar to a proprietorship except that it is owned by two or more individuals and—

1-1

14

Generates 90% of the total dollars of business receipts received.

Comprises 20% of the businesses.

A corporation is organized under state or federal statues as a separate legal taxable entity and—

1-1

Continued

Owners of a corporation are called shareholders (or stockholders).

When a corporation issues only one class of stock, we call it

common stock (or capital stock).

Corporation

16

Includes ownership divided into shares of stock, sold to shareholders (stockholders).

Is able to obtain large amounts of resources by issuing stock.

Is used by large businesses.

1-1

17

Is a popular alternative to a partnership.

Has tax and liability advantages to the owners.

A limited liability company (LLC) combines attributes of a partnership and a corporation in that it is organized as a corporation. However, a limited liability corporation can elect to be taxed as a partnership and—

1-1

PrivateNonprofitGovernment

Nonbusiness

Forms of Organization

Exh.1.4

Libraries Army

Airports Cities

Colleges

Museums Hospitals

Prisons Shelters

Schools

Accounting for these organizations is usually a fund-based system, but the basic principles are similar to

accounting for business organizations.

Accounting for these organizations is usually a fund-based system, but the basic principles are similar to

accounting for business organizations.

Nonbusiness Organization

20

The Role of Accounting in Business

Accounting can be defined as an information system that provides reports to users about the economic activities and condition of a business.

1

Identifying Economic

Events

Recording Economic

Events Reporting

and Analyzing Economic

Events

Focus of Accounting

IdentifiesIdentifies

RecordsRecords

CommunicatesCommunicatesRelevantRelevant

ReliableReliable

ComparableComparable

Influence of Accounting

AccountingAccountingis a

system that

information

that is

to help users make better decisions.

to help users make better decisions.

23

• Identify users.

• Assess users’ informational needs.

• Design the accounting information system to meet users’ needs.

• Record economic data about business activities and events.

• Prepare accounting reports for users.

The process by which accounting provides information to users is as follows:

1

Accounting — An Information Process Accounting — An Information Process


Identificationof Users

EXTERNAL USERS

Financial AccountingFinancial Accounting

investors creditors regulators customers competitors

Users of Accounting InformationUsers of Accounting InformationUsers of Accounting InformationUsers of Accounting Information

EXTERNAL USERS

Financial AccountingFinancial Accounting• investors• creditors• regulators• customers• competitors

owners managers employees

INTERNAL USERS

ManagerialManagerial AccountingAccounting

Users of Accounting InformationUsers of Accounting InformationUsers of Accounting InformationUsers of Accounting Information

1-271-2727

The area of accounting that provides external users with information is called financial accounting.

Financial Accounting

The objective of financial accounting is to provide relevant and timely information for the decision-making needs of users outside of the business.

1

1-281-2828

The area of accounting that provides internal users with information is called managerial accounting.

Managerial Accounting

The objective of managerial accounting is to provide relevant and timely information for managers’ and employees’ decision-making needs.

1


UserInformation

Needs

AccountingSystem




UserInformation

Needs

AccountingSystem

Economic Dataand Activities




UserInformation

Needs

AccountingSystem


Reports




UserInformation

Needs

AccountingSystem

Reports


UserDecisions



33

1

Exhibit 1 Users of Accounting Information

34

Ethics are moral principles that guide the conduct of individuals.

Role of Ethics in Accounting and Business

1

Beliefs that separate right

from wrong Accepted standards of

good and bad

behavior

Often coincide with laws

Ethics

Ethics and Social Responsibility

Identify Ethical Issues

Analyze Options

Make Ethical Decision

Use personal ethics to

recognize ethical issues.

Consider both the good and bad

consequences for all affected.

Choose the best option after weighing all

consequences.

Guidelines for Ethical Decision Making

37

Under the Under the business entity concept, the activities of a the activities of a business are recorded business are recorded separately from the activities separately from the activities of its owners, creditors, or of its owners, creditors, or other businesses.other businesses.

Business Entity Concept

2

38

Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price.

2

Cost Concept

39

Cost Concept

On August 25, Gallatin Repair Service extended an offer of $125,000 for land that had been priced for sale at $150,000. On September 3, Gallatin Repair Service accepted the seller’s counteroffer of $137,000. On October 20, the land was assessed at a value of $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service’s records?

Example Exercise 1-12

1-28

40

$137,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service.

For Practice: PE 1-1A, PE 1-1B

1-29

2

Follow My Example 1-1

Example Exercise 1-1 (continued)

41

The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence.

2

Objectivity Concept

42

The unit of measure concept requires that economic data be recorded in dollars.

2

Unit of Measure Concept

Fundamental Principles of Accounting

Business Entity Principle

Business Entity Principle

Objectivity Principle

Objectivity Principle

Cost PrincipleCost Principle

Going-Concern Principle

Going-Concern Principle

Monetary Unit Principle

Monetary Unit Principle

A business is accounted for separately from its owner or owners.

A business is accounted for separately from its owner or owners.

Financial statement information is supported by independent, unbiased

evidence.

Financial statement information is supported by independent, unbiased

evidence.

Financial statements are based on actual costs incurred in business transactions.

Financial statements are based on actual costs incurred in business transactions.

A business continues operating instead of being closed or sold.

A business continues operating instead of being closed or sold.

Express transactions and events in monetary units.

Express transactions and events in monetary units.

Resources

The Accounting EquationThe Accounting Equation

What are an organization’s resources called?

45

Assets = Liabilities + Owner’s Equity

The resources owned by a

business

The Accounting Equation 1-3

Assets

Resources = Sources


What are the sources of the assets?

Cost of resources usedin the business

Assets

Liabilities

Owner’sEquity

Resources = Sources

Cost of resources usedin the business

Resources supplied by

creditors and owners


48

The rights of the creditors,

which represent

debts of the business



49

The rights of the owners



50

Accounting Equation

John Joos is the owner and operator of You’re A Star, a motivational consulting business. At the end of its accounting period, December 31, 2009, You’re A Star has assets of $800,000 and liabilities of $350,000. Using the accounting equation, determine the following amounts:

a. Owner’s equity, as of December 31, 2009.

b. Owner’s equity, as of December 31, 2010, assuming that assets increased by $130,000 and liabilities decreased by $25,000 during 2010.


1-34

51

3

Example Exercise1-2 continued For Practice: PE 1-2A, PE 1-2B1-35

a. Assets = Liabilities + Owner’s Equity $800,000 = $350,000 + Owner’s Equity

Owner’s Equity = $450,000



b. First, determine the change in Owner’s Equity during 2010 as follows:

Assets = Liabilities + Owner’s Equity $130,000 = –$25,000 + Owner’s Equity

Owner’s Equity = $155,000

Next, add the change in Owner’s Equity on December 31, 2009 to arrive at Owner’s Equity on December 31, 2010, as shown below:

$605,000 = $450,000 + $155,000

52

A business transaction is an economic event or condition that directly changes an entity’s financial condition or its results of operations.

4

Business Transaction

53

On November 1, 2009, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.

Transaction A

4

a. Chris Clark deposits $25,000 in a bank account for NetSolutions.

ASSETS

=

Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions

OWNER’S EQUITY

LIABILITIES

a. Chris Clark deposits $25,000 in a bank account for NetSolutions.

ASSETS

=


OWNER’S EQUITYCash Cash 25,00025,000

LIABILITIES

Chris Clark, Chris Clark, Capital Capital 25,00025,000

Chris Clark deposits $25,000 in a bank account for NetSolutions.

The accounts involved are:

(1) Cash (asset)

(2) Chris Clark, Capital (equity)

Transaction Analysis


58

Transaction B

On November 5, 2009, NetSolutions paid $20,000 for the purchase of land as a future building site.

4


b. NetSolutions buys land for $20,000.

ASSETS

=OWNER’S EQUITY

LIABILITIES


b. NetSolutions buys land for $20,000.

ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (20,000)(20,000)

Land Land 20,00020,000


(1) Cash (asset)

(2) Land (asset)

Transaction AnalysisNetSolutions buys land for $20,000.


63

On November 10, 2009, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future.

4

Transaction C


ASSETS

=OWNER’S EQUITY

LIABILITIES

c. NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.


ASSETS

=OWNER’S EQUITY

LIABILITIES

c. NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.

Accounts PayableAccounts Payable1,3501,350

Supplies Supplies 1,3501,350


(1) Supplies (asset)

(2) Accounts Payable (liability)

Transaction AnalysisNetSolutions buys supplies for

$1,350, agreeing to pay the supplier in the near future.


68

On November 18, 2009, NetSolutions received cash of $7,500 for providing services to customers. A business earns money by selling goods or services to its customers. This amount is called Revenue.

Transaction D

4


ASSETS

=OWNER’S EQUITY

LIABILITIES

d. NetSolutions earns fees of $7,500, receiving cash.


ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash 7,5007,500

Fees Earned Fees Earned 7,5007,500

d. NetSolutions earns fees of $7,500, receiving cash.


(1) Cash (asset)

(2) Revenues (equity)

Transaction AnalysisNetSolutions earns fees of $7,500,

receiving cash.


73

During the month, NetSolutions spent cash or used up other assets in earning revenue. Assets used in this process of earning revenue are called expenses.

4

Expenses

74

On November 30, 2009, NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

Transaction E

4


ASSETS

=OWNER’S EQUITY

LIABILITIES

e. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.


ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (3,650)(3,650)

ExpensesExpenses(3,650)(3,650)

e. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.


(1) Cash (asset)

(2) Expenses (equity)

Transaction AnalysisNetSolutions paid: wages, $2,125; rent, $800;

utilities, $450; and miscellaneous, $275.


79

On November 30, 2009, NetSolutions paid creditors on account, $950.

Transaction F

4


ASSETS

=OWNER’S EQUITY

LIABILITIES

f. NetSolutions pays $950 to creditors on account.


ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (950)(950)

Accounts PayableAccounts Payable(950)(950)

f. NetSolutions pays $950 to creditors on account.


(1) Cash (asset)

(2) Accounts payable (liability)

Transaction AnalysisNetSolutions pays $950 to creditors

on account


84

On November 30, 2009, Chris Clark determined that the cost of supplies on hand at the end of the period was $550.

Transaction G

4


ASSETS

=OWNER’S EQUITY

LIABILITIES

g. At the end of the month, the cost of supplies on hand is $550.


ASSETS

=OWNER’S EQUITY

LIABILITIES

Supplies Supplies (800)(800)

Supplies ExpenseSupplies Expense(800)(800)

g. At the end of the month, the cost of supplies on hand is $550.


(1) Supplies (asset)

(2) Supplies expense (equity)

Transaction AnalysisAt the end of the month, the cost of supplies on

hand is $550.


89

On November 30, 2009, Chris Clark withdrew $2,000 from NetSolutions for personal use.

Transaction H

4


ASSETS

=OWNER’S EQUITY

LIABILITIES

h. Chris Clark withdraws $2,000 in cash.


ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (2,000)(2,000)

Chris Clark, Chris Clark, DrawingDrawing(2,000)(2,000)

h. Chris Clark withdraws $2,000 in cash.


(1) Cash (asset)

(2) Chris Clark, Drawing (equity)

Transaction AnalysisChris Clark withdraws $2,000 in cash


Transaction SummaryTransaction SummaryTransaction SummaryTransaction Summary

ASSETS

= OWNER’S EQUITY

LIABILITIES

CashCash 5,9005,900SuppliesSupplies 550550LandLand 20,00020,000


ASSETS

= OWNER’S EQUITY

LIABILITIES


Accts. PayableAccts. Payable 400400


ASSETS

= OWNER’S EQUITY

LIABILITIES


Accts. PayableAccts. Payable 400400

C. Clark, CapitalC. Clark, Capital 25,00025,000C. Clark, DrawingC. Clark, Drawing (2,000)(2,000)Fees EarnedFees Earned 7,5007,500Wages ExpenseWages Expense (2,125)(2,125)Rent ExpenseRent Expense (800)(800)Supplies ExpenseSupplies Expense (800)(800)Utilities ExpenseUtilities Expense (450)(450)Misc. ExpenseMisc. Expense (275)(275)

OWNER’S EQUITY

Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity

Owner’s withdrawals

Expenses

decreased bydecreased by

OWNER’S EQUITY


Owner’s investments

Revenues

increased byincreased by

OWNER’S EQUITY



Expenses


Revenues

decreased bydecreased by increased byincreased by

OWNER’S EQUITY



Expenses


Revenues

decreased bydecreased by increased byincreased by

NET INCOME

101

4

Exhibit 5 Effects of Transactions on Owner’s Equity

102

Transactions

Salvo Delivery Service is owned and operated by Joel Salvo. The following selected transactions were completed by Salvo Delivery Service during February:

1. Received cash from owner as additional investment, $35,000.

2. Paid creditors on account, $1,800.

3. Billed customers for delivery services on account, $11,250.

4. Received cash from customers on account, $6,740.

5. Paid cash to owner for personal use, $1,000.(Continued)


1-63

103

Indicate the effect of each transaction on the accounting equation elements (Assets, Liabilities, Owner’s Equity, Drawing, Revenue, and Expense) by listing the numbers identifying the transactions, (1) through (5). Also, indicate the specific item within the accounting equation element that is affected. To illustrate, the answer to (1) is shown below.

(1) Asset (Cash) increases by $35,000; Owner’s Equity (Joel Salvo, Capital) increases by $35,000.

Example Exercise 1-3 (continued) 4

1-64

104


(2) Asset (Cash) decreases by $1,800; Liability (Accounts Payable) decreases by $1,800.

(3) Asset (Accounts Receivable) increases by $11,250; Revenue (Delivery Service Fees) increases by $11,250.

(4) Asset (Cash) increases by $6,740; Asset (Accounts Receivable) decreases by $6,740.

(5) Asset (Cash) decreases by $1,000; Drawing (Joel Salvo, Drawing) increases by $1,000.


4


1-65


105

After transactions have been recorded and summarized, reports are prepared for users. The accounting reports providing this information are called financial statements.

5

Financial Statements

106

The income statement reports the revenues and expenses for a period of time, based on the matching concept.

5

Income Statement

107

The matching concept is applied by matching the expenses with the revenue generated during a period by those expenses.

5

Matching Concept

108

The excess of revenue over the expenses is called net income or net profit. If the expenses exceed the revenue, the excess is a net loss.

5

109

Net income is carried to the statement of

owner’s equity.

5

Exhibit 6 Financial Statements for NetSolutions

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

NetSolutionsIncome Statement

For the Month Ended November 30, 2009

Fees earned $7,500Operating expenses: Wages expense $2,125 Rent expense 800 Supplies expense 800 Utilities expense 450 Miscellaneous expense 275 Total operating expenses 4,450Net income $3,050









113

Income Statement

The assets and liabilities of Chickadee Travel Service at April 30, 2010, the end of the current year, and its revenue and expenses for the year are listed below. The capital of the owner, Adam Cellini, was $80,000 at May 1, 2009, the beginning of the current year.

Accounts payable $ 12,200 Miscellaneous expense $ 12,950Accounts receivable 31,350 Office expense 63,000Cash 53,050 Supplies 3,350Fees earned 263,200 Wages expense 131,700Land 80,000

Prepare an income statement for the current year ended April 30, 2010.


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114

CHICKADEE TRAVEL SERVICEINCOME STATEMENT

For the Year Ended April 30, 2010

Fees earned $263,200Expenses:

Wages expense $131,700Office expense 63,000Miscellaneous expense 12,950 Total expenses 207,650

Net income $ 55,550



1-73

Follow My Example 1-3 Follow My Example 1-4

1-115

1-115 115

The statement of owner’s equity reports the changes in the owner’s equity for a period of time.

5

Statement of Owner’s Equity

1-116

1-116 116

From the income statement

To the balance sheet

5

Exhibit 6 Financial Statements for NetSolutions (continued)

NetSolutionsStatement of Owner’s Equity



Chris Clark, capital, November 1, 2009 $ 0Investment on November 1, 2009 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2009 $26,050













121

Statement of Owner’s Equity

Using the data for Chickadee Travel Service shown in Example Exercise 1-4, prepare a statement of owner’s equity for the current year ended April 30, 2010. Adam Cellini invested an additional $50,000 in the business during the year and withdrew cash of $30,000 for personal use.


1-76

122

CHICKADEE TRAVEL SERVICESTATEMENT OF OWNER’S EQUITY

For the Year Ended April 30, 2010

Example Exercise 1-5 continued


5


1-77

Adam Cellini, capital, May 1, 2009 $ 80,000 Additional investment by owner during year $ 50,000Net income for the year 55,550

$105,550Less withdrawals 30,000 Increase in owner’s equity 75,550Adam Cellini, capital, April 30, 2010 $155,550

123

A balance sheet is a list of the assets, liabilities, and owner’s equity as of a specific date.

5

Balance Sheet

124

The account form of a balance sheet lists the assets on the left and the liabilities and owner’s equity on the right—similar to the design of an account.

5

Account Form

125

This amount is compared to the net cash flow on the statement of cash flows.

From the statement of owner’s equity

5

Exhibit 6 Financial Statements for NetSolutions (continued)

126

Balance Sheet

Using the data for Chickadee Travel Service shown in Example Exercises 1-4 and 1-5, prepare the balance sheet as of April 30, 2010.


1-81

127



CHICKADEE TRAVEL SERVICEBALANCE SHEET

April 30, 2010 Assets Liabilities

Cash $ 53,050 Accounts payable $ 12,200Accounts receivable 31,350Supplies 3,350 Owner’s EquityLand 80,000 Adam Cellini, capital 155,550Total assets $167,750 Total liab. & owner’s eq. $167,750

1-82


NetSolutionsBalance Sheet

November 30, 2009

AssetsCash $5,900Supplies 550Land 20,000 Total assets $26,450

LiabilitiesAccounts payable $ 400

Owner’s EquityChris Clark, capital 26,050 Total liabilities and owner’s equity $26,450



November 30, 2009






November 30, 2009






November 30, 2009





132

A statement of cash flows is a summary of the cash receipts and payments for a specific period of time. It consists of three sections: (1) operating activities, (2) investing activities, and (3) financing activities.

5

Statement of Cash Flows

133

The cash flows from operating activities section reports a summary of cash receipts and cash payments from operations.

5

Operating Activities

134

The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively permanent assets.

5

Investing Activities

135

The cash flows from financing activities section reports the cash transactions related to cash investments by the owner, borrowings, and withdrawals by the owner.

5

Financing Activities


NetSolutionsStatement of Cash Flows


Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000)Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900




)


Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900



)


Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000)Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900




Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900

)

141

Statement of Cash Flows

A summary of cash flows for Chickadee Travel Service for the year ended April 30, 2010, is shown below.

Cash receipts:Cash received from customers $251,000Cash received from additional investment of owner 50,000

Cash payments:Cash paid for expenses 210,000Cash paid for land 80,000Cash paid to owner for personal use 30,000

The cash balance as of May 1, 2009, was $72,050.

Prepare a statement of cash flows for Chickadee Travel Service for the year ended April 30, 2010.


1-88

142

Cash flows from operating activities:Cash received from customers $251,000Deduct cash payments for expenses 210,000Net cash flows from operating activities $ 41,000

Cash flows from investing activities:Cash payments for purchase of land (80,000)

Cash flows from financing activities:Cash received from owner as investment $ 50,000Deduct cash withdrawals by owner 30,000Net cash flows from financing activities 20,000

Net decrease in cash during year $(19,000)Cash as of May 1, 2009 72,050Cash as of April 30, 2010 $ 53,050


1-89



143

• The income statement and the statement of owner’s equity are interrelated.

Net income or net loss appears on both statements.

Interrelationships Among Financial Statements

5

144

• The statement of owner’s equity and the balance sheet are interrelated.

The owner’s capital at the end of the period on the statement of owner’s equity also appears on the balance sheet as owner’s capital.


5

145

• The balance sheet and the statement of cash flows are interrelated.

The cash reported on the balance sheet is also reported as the end-of-period cash on the statement of cash flows.


5

146

Financial Analysis and Interpretation

Ratio of Liabilities to Owner’s Equity =

Total Liabilities

Total Owner’s Equity (or Total Stockholders’ Equity)

For NetSolutions:

Ratio of Liabilities to Owner’s Equity =

$400

$26,050 = 0.015

5

147

Documents

Learning Objectives 1.Nature of a Business 2.The Role of Accounting in Business 3.Business Ethics 4.Profession of Accounting 5.Generally Accepted Accounting