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Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
Accnt lecture4
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Accnt lecture4

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  • 3 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.
  • 3 Here are the account balances to use when preparing the balance sheet.
  • 3 Part I All of the transactions that impacted the cash account will appear on the statement of cash flows. Part II The revenues and expenses that caused the change in retained earnings will appear on the income statement of the company. Part II Let’s begin by preparing the income statement and statement of cash flows for JJ’s Lawn Care for the period ended May 31, 2007.
  • Learning objective number 6 is to explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating, investing, and financing activities.
  • 3 Here is the statement of cash flows for JJ’s Lawn Care for the month ended May 31, 2007. Notice the three sections of the statement.
  • 3 Cash flows from operating activities include the $700 in net income calculated on the previous screen.
  • 3 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 them to ABC Lawns.
  • 3 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.
  • 3 Here are the account balances to use when preparing the balance sheet.
  • 3 Part I 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. Part II 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, 2007.
  • 3 Part I This is the balance sheet for JJ’s Lawn Care at the end of May. Part II Net income impacts the retained earnings of the company. Part III 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.
  • 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.
  • Part I 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. Part II 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. Part II 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.
  • 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.
  • 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.
  • Part I 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. Part II 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.
  • Transcript

    • 1. Financial AFinancial Accountingccounting Chapter 2Chapter 2 Basic Financial StatementsBasic Financial Statements Financial AFinancial Accountingccounting Chapter 2Chapter 2 Basic Financial StatementsBasic Financial Statements
    • 2. Assets = Liabilities + Cash + Accts. Rec. + Tools & Equip. + Truck = Notes Payable + Accts. Pay. + Capital Stock + Retained Earnings May 1 8,000$ 8,000$ Balances 8,000$ 8,000$ 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
    • 3. Assets = Liabilities + Cash + Accts. Rec. + Tools & Equip. + Truck = Notes Payable + Accts. Pay. + Capital Stock + Retained Earnings May 1 8,000$ 8,000$ Balances 8,000$ 8,000$ 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, 2007. These balances will appear on the Balance Sheet. These balances will appear on the Balance Sheet.
    • 4. Assets = Liabilities + Cash + Accts. Rec. + Tools & Equip. + Truck = Notes Payable + Accts. Pay. + Capital Stock + Retained Earnings May 1 8,000$ 8,000$ Balances 8,000$ 8,000$ 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 These transactions impact the Statement of Cash Flows. These transactions impact the Statement of Cash Flows. These transactions impact the Income Statement. These transactions impact the Income Statement. Let’s prepare the Income Statement and Statement of Cash Flows for JJ’s Lawn Care Service for the month ending May 31, 2007.
    • 5. Learning Objective LO6 To explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating, investing, and financing activities.
    • 6. JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2007 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, 2007 - Cash balance, May 31, 2007 4,125$
    • 7. JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2007 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, 2007 - Cash balance, May 31, 2007 4,125$ Operating activities include the cash effects of revenue and expense transactions. Operating activities include the cash effects of revenue and expense transactions.
    • 8. JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2007 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, 2007 - Cash balance, May 31, 2007 4,125$ Investing activities include the cash effects of purchasing and selling assets. Investing activities include the cash effects of purchasing and selling assets.
    • 9. JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2007 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, 2007 - Cash balance, May 31, 2007 4,125$ Financing activities include the cash effects of transactions with the owners and creditors. Financing activities include the cash effects of transactions with the owners and creditors.
    • 10. Assets = Liabilities + Cash + Accts. Rec. + Tools & Equip. + Truck = Notes Payable + Accts. Pay. + Capital Stock + Retained Earnings May 1 8,000$ 8,000$ Balances 8,000$ 8,000$ 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, 2007. These balances will appear on the Balance Sheet. These balances will appear on the Balance Sheet.
    • 11. 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 Balance Sheet May 31, 2007 Assets = Liabilities + Owners’ Equity $21,850 = $13,150 + $8,700 Assets = Liabilities + Owners’ Equity $21,850 = $13,150 + $8,700
    • 12. Financial Statement ArticulationJJ'sLawn Care Service Statement of Cash Flows For the Month Ended May 31, 2007 Cash flowsfrom operating activities: Cash received from revenue transactions 750$ Cash paid for expenses (50) Net cash provided by operating activities 700$ Cash flowsfrom 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 flowsfrom financing activities: Investment by owners 8,000 Increase in cash for month 4,125$ Cash balance, May 1, 2007 - Cash balance, May 31, 2007 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 Balance Sheet May 31, 2007 JJ's Lawn Care Service Income Statement Sales Revenue 750$ Operating Expense: Gasoline Expense 50 Net Income 700$ For the Month Ended May 31, 2007
    • 13. FINANCIAL STATEMENTSFINANCIAL STATEMENTS After transactions are identified, recorded, and summarized, 4 financial statements are prepared from the summarized accounting data: 1 An income statement presents the revenues and expenses and resulting net income or net loss for a specific period of time. 2 An owner’s equity statement/ Retained earnings summarizes the changes in owner’s equity/ retained earnings for a specific period of time. 3 A balance sheet reports the assets, liabilities, and owner’s equity at a specific date. 4 A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time.
    • 14. ILLUSTRATIONILLUSTRATION 1-111-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS SOFTBYTE Income Statement For the Month Ended September 30, 2002 Revenues Service revenue $ 4,700 Expenses Salaries expense $ 900 Rent expense 600 Advertising expense 250 Utilities expense 200 Total expenses 1,950 Net income 2,750 Net income of $2,750 shown on the income statement is added to the beginning balance of owner’s capital in the owner’s equity statement. Net income of $2,750 shown on the income statement is added to the beginning balance of owner’s capital in the owner’s equity statement.
    • 15. ILLUSTRATIONILLUSTRATION 1-111-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS SOFTBYTE Owner’s Equity/ Retained Earnings Statement For the Month Ended September 30, 2002 Capital/ Retained earnings, September 1 $ –0– Add: Investments/ $ 15,000 Net income 17,750 17,750 Less: Drawings/ Dividends (1,300) Capital/ Retained earnings , September 30 $ 16,450 2,750 Net income of $2,750 is determined from the information in the owner’s equity column of the Summary of Transactions (Illustration 1- 7). Net income of $2,750 is determined from the information in the owner’s equity column of the Summary of Transactions (Illustration 1- 7).
    • 16. ILLUSTRATIONILLUSTRATION 1-111-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS SOFTBYTE Owner’s Equity Statement For the Month Ended September 30, 2002 Capital, September 1 $ –0– Add: Investments $ 15,000 Net income 2,750 17,750 17,750 Less: Drawings 1,300 Capital, September 30 $16,450 Net income of $2,750 carried forward from the income statement to the owner’s equity statement. The owner’s capital of $16,450 at the end of the reporting period is shown as the final total of the owner’s equity column of the Summary of Transactions (Illustration 1-7). Net income of $2,750 carried forward from the income statement to the owner’s equity statement. The owner’s capital of $16,450 at the end of the reporting period is shown as the final total of the owner’s equity column of the Summary of Transactions (Illustration 1-7).
    • 17. ILLUSTRATIONILLUSTRATION 1-111-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS Owner’s capital of $16,450 at the end of the reporting period shown in the owner’s equity statement is shown on the balance sheet. Owner’s capital of $16,450 at the end of the reporting period shown in the owner’s equity statement is shown on the balance sheet. SOFTBYTE Balance Sheet September 30, 2002 Assets Cash $ 8,050 Accounts receivable 1,400 Supplies 1,600 Equipment 7,000 Total assets $ 18,050 Liabilities and Owner’s Equity Liabilities Accounts payable $ 1,600 Owner’s equity R. Neal, capital Total liabilities and owner’s equity $ 18,050 16,450
    • 18. ILLUSTRATIONILLUSTRATION 1-111-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS Cash of $8,050 on the balance sheet is reported on the statement of cash flows.Cash of $8,050 on the balance sheet is reported on the statement of cash flows. SOFTBYTE Balance Sheet September 30, 2002 Assets Cash $ 8,050 Accounts receivable 1,400 Supplies 1,600 Equipment 7,000 Total assets $ 18,050 Liabilities and Owner’s Equity Liabilities Accounts payable $ 1,600 Owner’s equity R. Neal, capital Total liabilities and owner’s equity $ 18,050
    • 19. ILLUSTRATIONILLUSTRATION 1-111-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS SOFTBYTE Statement of Cash Flows For the Month Ended September 30, 2002 Cash flows from operating activities Cash receipts from revenues $ 3,300 Cash payments for expenses (1,950) Net cash provided by operating activities 1,350 Cash flows from investing activities Purchase of equipment (7,000) Cash flows from financing activities Investment by owners $ 15,000 Withdraws by owners (1,300) Net cash provided by financing activities 13,700 Net increase in cash 8,050 Cash at the beginning of the period –0– Cash at the end of the period $ 8,050 Cash of $8,050 on the balance sheet and statement of cash flows is shown as the final total of the cash column of the Summary of Transactions (Illustration 1-7). Cash of $8,050 on the balance sheet and statement of cash flows is shown as the final total of the cash column of the Summary of Transactions (Illustration 1-7).
    • 20. Forms of Business Organization Sole Proprietorships Sole Proprietorships PartnershipsPartnerships CorporationsCorporations
    • 21. Reporting Ownership Equity in the Statement of Financial PositionOwner's equity: Jill Jones, capital 8,000$ Sole Proprietorships Sole Proprietorships Partners' equity Jill Jones, capital 4,000$ Bill Jones, capital 4,000 Total partners' equity 8,000$ PartnershipsPartnerships Owners' equity Capital stock 7,000$ Retained earnings 1,000 Total stockholders' equity 8,000$ CorporationsCorporations
    • 22. The Use of Financial Statements by External Parties Creditors Investors Two concerns: Liquidity Profitability Two concerns: Liquidity Profitability
    • 23. The Need for Adequate Disclosure Notes to the financial statements often provide facts necessary for the proper interpretation of the statements. Notes to the financial statements often provide facts necessary for the proper interpretation of the statements. Income Statement Balance Sheet Statement of Cash Flows
    • 24. Income Statement Net income Income Statement Net income Statement of Retained Earnings Beginning Retained Earnings + Net income – Dividends Ending retained earnings Statement of Retained Earnings Beginning Retained Earnings + Net income – Dividends Ending retained earnings Balance Sheet Ending Balance Retained Earnings Balance Sheet Ending Balance Retained Earnings Order of Preparation
    • 25.  Income statement—A summary of the revenue and expenses for a specific period of time.  Statement of retained earnings – a summary of the changes in the retained earnings that have occurred during a specific period of time.  Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date. Review
    • 26. 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.

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