Slide

2-1

2 Financial Statements and

Business transactions

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide Exh.
2-2 2.1

Previewing Financial Statements

Income
Statement

Beginning Ending
Balance Statement of Balance
Sheet Cash Flows Sheet

Statement of
Changes in
Owner’s
Equity

Point in time Period of time Point in time

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide Exh.
2-3 2.2

Income Statement

Inflows
Inflowsof
ofassets
assetsin
in
exchange
exchangefor
for
products
productsand
and
services
servicesprovided
provided
to
tocustomers.
customers.

Outflows
Outflowsor orthe
the
using
usingup upof
ofassets
assets
that
thatresult
resultfrom
from
providing
providing
products
productsandand
services
servicestoto
customers.
customers.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide Exh.
2-4 2.3

Statement of Changes
in Owner’s Equity
For
For corporations,
corporations, instead
instead of
of Withdrawals
WithdrawalsbybyOwner
Owner we
we
use
usethe
theterm
term Dividends.
Dividends. Dividends
Dividendsrepresent
represent
distributions
distributionsto
tothe
the stockholders.
stockholders.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide Exh.
2-5 2.4

Balance Sheet
Assets
Assetsareareproperties
propertiesor
oreconomic
economic Liabilities
Liabilitiesare
are
resources
resourcesowned
ownedbybyaabusiness.
business. They
Theyareare obligations
obligationsof ofthe
the
expected
expectedtotoprovide
providefuture
futurebenefits
benefitsto
tothe
the business.
business. TheyThey
business.
business. are
areclaims
claims
against
againstthethe
assets
assetsof ofthe
the
business.
business.

Equity
Equityis isthe
the
owner’s
owner’sclaim
claimon on
the
theassets
assetsof ofthe
the
business.
business.ItItis isthe
the
residual
residualinterest
interestin in
the
theassets
assetsafter
after
deducting
deducting
liabilities.
liabilities.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide Exh.
2-6 2.4

Balance Sheet

Assets
Assets = Liabilities
Liabilities + Equity
Equity

Remember
from Chapter 1
that we learned
that total assets
must equal the
sum of total
liabilities and
total equity.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-7

Balance Sheet

Owner’s Investment Owner’s

Owner’s Owner’s Withdrawal
Equity
Equity

Revenues Expenses

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide Exh.
2-8 2.6

Describes
Describes
the
the
sources
sources
and
anduses
uses
of
ofcash
cash
for
foraa
reporting
reporting
period.
period.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide Exh.
2-9 2.9

Financial Statements, Auditing and

Users

FASB GAAP

Financial
Statements
Preparers

Audit
Report Decision makers
Auditors

ASB
GAAS
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
2-10

International Accounting Principles

Despite our growing global economy,
countries continue to maintain their unique
set of acceptable accounting practices.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-11

Fundamental Principles of
Accounting
Business
Business Entity
Entity AAbusiness
businessisisaccounted
accountedforforseparately
separately
Principle from
fromits
itsowner
owneror
orowners.
owners.
Principle
Financial
Financialstatement
statementinformation
informationis
Objectivity
Objectivity supported
is
supportedbybyindependent,
independent,unbiased
unbiased
Principle
Principle evidence.
evidence.
Financial
Financialstatements
statementsare
arebased
basedon onactual
actual
Cost
Cost Principle
Principle costs
costsincurred
incurredininbusiness
businesstransactions.
transactions.

Going-Concern
Going-Concern AAbusiness
businesscontinues
continuesoperating
operatinginstead
insteadof
of
Principle being
beingclosed
closedor
orsold.
sold.
Principle
Monetary
Monetary Unit
Unit Express
Expresstransactions
transactionsand
andevents
eventsin
in
Principle monetary
monetaryunits.
units.
Principle
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
2-12

Transactions and the Accounting

Equation
The accounting equation must remain in
balance after each transaction.

Assets
Assets = Liabilities
Liabilities + Equity
Equity

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-13

Transaction Analysis
Owners of Scott Company
contributed
$20,000 cash to start the business.

The accounts involved are:

(1) Cash (asset)
(2) Owner’s Equity (equity)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-14

Transaction Analysis
Owners of Scott Company
contributed
$20,000 cash to start the business.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-15

Transaction Analysis
Purchased supplies paying $1,000
cash.

The accounts involved are:

(1) Cash (asset)
(2) Supplies (asset)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-16

Transaction Analysis
Purchased supplies paying $1,000
cash.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-17

Transaction Analysis
Purchased equipment for $15,000
cash.

The accounts involved are:

(1) Cash (asset)
(2) Equipment (asset)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-18

Transaction Analysis
Purchased equipment for $15,000
cash.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-19

Transaction Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account.

The accounts involved are:

(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-20

Transaction Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-21

Transaction Analysis
The 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.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
2-22

Transaction Analysis
Rendered consulting services
receiving $3,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-23

Transaction Analysis
Rendered consulting services
receiving $3,000 cash.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-24

Transaction Analysis
Paid salaries to employees, $800
cash.

The accounts involved are:

(1) Cash (asset)
(2) Salaries expense (equity)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-25

Transaction Analysis
Paid salaries to employees, $800
cash.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-26

Transaction Analysis
Borrowed $4,000 from 1st American
Bank.

The accounts involved are:

(1) Cash (asset)
(2) Notes payable (liability)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-27

Transaction Analysis
Borrowed $4,000 from 1st American
Bank.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-28

Financial Statements

Let’s prepare the Financial Statements

reflecting the transactions we have
recorded.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-29

Income Statement
TheScott’s net
net income
income is the
of $2,200
difference
increases
between
Scott’s
Revenuesequity
and
by $2,200.
Expenses.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-30

Balance Sheet
The
Thebalance
balance sheet
sheet
reflects
reflectsScott’s
Scott’s
financial
financial position
positionat
at
12/31/01.
12/31/01.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-31

Statement of Cash Flows

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-32

Using the Information Return on

Equity
For Corporations . . .
Return
Net Income
on =
Average Equity
Equity

For Proprietorships and Partnerships . . .

Modified
Net Income - Value of Owners’ Efforts
Return on =
Average Equity
Equity

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
2-33

End of Chapter 2

We
We can’t
can’t wait
wait to
to
start
start Chapter
Chapter 3!3!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002