© the mcgraw-hill companies, inc., 2002 slide 2-1 mcgraw-hill/irwin 2 financial statements and...
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© The McGraw-Hill Companies, Inc., 2002
Slide 2-1
McGraw-Hill/Irwin
2 Financial Statements and Business transactions
© The McGraw-Hill Companies, Inc., 2002
Slide 2-2
McGraw-Hill/Irwin
Point in time Point in timePeriod of timePeriod of time
Previewing Financial StatementsExh.2.1
IncomeStatement
Statement ofCash Flows
BeginningBalance
Sheet
EndingBalance
Sheet
Statement ofChanges in
Owner’sEquity
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Income Statement
Inflows of assets in exchange for products and
services provided to customers.
Inflows of assets in exchange for products and
services provided to customers.
Outflows or the using up of assets
that result from providing
products and services to customers.
Outflows or the using up of assets
that result from providing
products and services to customers.
Exh.2.2
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Statement of Changesin Owner’s Equity
For corporations, instead of Withdrawals by Owner we use the term Dividends. Dividends represent
distributions to the stockholders.
For corporations, instead of Withdrawals by Owner we use the term Dividends. Dividends represent
distributions to the stockholders.
Exh.2.3
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Exh.2.4
Balance SheetAssets are properties or economic
resources owned by a business. They are expected to provide future benefits to the
business.
Assets are properties or economic resources owned by a business. They are expected to provide future benefits to the
business.
Liabilities are obligations of the business. They
are claims against the
assets of the business.
Liabilities are obligations of the business. They
are claims against the
assets of the business.
Equity is the owner’s claim on the assets of the business. It is the residual interest in
the assets after deducting liabilities.
Equity is the owner’s claim on the assets of the business. It is the residual interest in
the assets after deducting liabilities.
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Balance Sheet
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Remember from Chapter 1 that we learned that total assets must equal the
sum of total liabilities and total equity.
Exh.2.4
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Owner’sEquity
Owner’sEquity
Owner’s Investment
Revenues
Owner’s Withdrawal
Expenses
Balance Sheet
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Describesthe
sources and usesof cash
for areportingperiod.
Describesthe
sources and usesof cash
for areportingperiod.
Exh.2.6
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Preparers
ASB
Auditors
Decision makers
GAAP
Financial Statements, Auditing and Users
FinancialStatements
AuditReport
FASB
GAAS
Exh.2.9
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International Accounting Principles
Despite our growing global economy, countries continue to maintain their unique
set of acceptable accounting practices.
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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.
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The accounting equation must remain in balance after each transaction.
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Transactions and the Accounting Equation
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The accounts involved are:
(1) Cash (asset)
(2) Owner’s Equity (equity)
Owners of Scott Company contributed
$20,000 cash to start the business.
Transaction Analysis
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Owners of Scott Company contributed
$20,000 cash to start the business.
Transaction Analysis
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The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Transaction Analysis
Purchased supplies paying $1,000 cash.
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Transaction Analysis
Purchased supplies paying $1,000 cash.
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The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Transaction Analysis
Purchased equipment for $15,000 cash.
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Transaction Analysis
Purchased equipment for $15,000 cash.
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The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Transaction Analysis
Purchased Supplies of $200 and Equipment of $1,000 on account.
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Purchased Supplies of $200 and Equipment of $1,000 on account.
Transaction Analysis
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Transaction AnalysisThe balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Now let’s look at transactions involving revenues and expenses.
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The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Transaction Analysis
Rendered consulting services receiving $3,000 cash.
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Rendered consulting services receiving $3,000 cash.
Transaction Analysis
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The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)
Transaction Analysis
Paid salaries to employees, $800 cash.
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Paid salaries to employees, $800 cash.
Transaction Analysis
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The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
Transaction Analysis
Borrowed $4,000 from 1st American Bank.
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Borrowed $4,000 from 1st American Bank.
Transaction Analysis
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Financial Statements
Let’s prepare the Financial Statements reflecting the transactions we have
recorded.
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Scott’s net income is the
difference between
Revenues and Expenses.
The net income of $2,200 increases
Scott’s equity by $2,200.
Income Statement
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Balance Sheet
The balance sheet reflects Scott’s
financial position at 12/31/01.
The balance sheet reflects Scott’s
financial position at 12/31/01.
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Statement of Cash Flows
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Returnon
Equity
Net Income Average Equity
=
ModifiedReturn on
Equity
Net Income - Value of Owners’ Efforts Average Equity
=
For Corporations . . .
For Proprietorships and Partnerships . . .
Using the Information Return on Equity
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We can’t wait tostart Chapter 3!We can’t wait tostart Chapter 3!
End of Chapter 2