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Chap002
 

Chap002

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  • Chapter 2: Basic Financial Statements. <br /> The Balance Sheet: A summary of the company&apos;s assets, liabilities and equity; <br /> The Income Statement: A summary of the business&apos;s income, expenses, and profits <br /> The Statement of Cash Flows: A report on a company&apos;s cash flow activities, particularly its operating, investing and financing activities; and <br />
  • There are three fundamental financial statements used in accounting. <br /> The income statement shows revenues and expenses. <br /> The balance sheet is a listing of all asset, liability, and equity account balances that do not appear on the income statement. <br /> The statement of cash flows shows how the company receives and spends its cash. <br /> This chapter will look at the financial statements of a corporation. <br />
  • The balance sheet (also referred to as the statement of position) describes the financial position of a company at a specific point in time. A balance sheet may be prepared monthly, quarterly, or annually depending on the needs of management and external users. The balance sheet is sometimes referred to as the statement of financial position. <br />
  • Net income is defined as the excess of revenues over expenses. Financial statements begin with a three-line title comprised of the company name, the name of the statement, and the period covered by the report. The income statement lists revenues and expenses that were incurred over a period of time. Most companies prepare monthly income statements. <br /> In the long-run, revenues will generate positive cash inflows to the company and expenses will result in negative cash flows to the company. Just remember, revenues and expenses that appear on the income statement may not always produce cash flows in the current accounting period. Net income (or net loss) is simply the difference between revenues and expenses. When revenues exceed expenses, the result is net income. When expenses exceed revenues, the result is a net loss. <br />
  • The statement of cash flows will be covered in detail in a later chapter. The statement of cash flows is divided into three major sections: (1) cash flows from operating activities; (2) cash flows from investing activities, and (3) cash flows from financing activities. The statement describes cash inflows and outflows over a period of time. <br />
  • The statement of financial position, commonly referred to as the balance sheet, is an inventory of assets, liabilities, and equity at the end of the month. Our total assets are equal to $300,000. This includes cash of $22,500, notes receivable of $10,000, supplies of $2,000, and the balances in the remaining asset accounts. <br /> Liabilities include notes payable of $41,000, accounts payable of $36,000 and salaries payable of $3,000. The accounts in the owners’ equity section of the balance sheet are capital stock of $150,000 and retained earnings of $70,000. <br /> Notice that the total assets are equal to the total liabilities plus owners’ equity. <br />
  • The business entity principle states that the transactions of individual owners of a business and those of the business must be separate. <br />
  • Assets are resources owned or controlled by an entity. They include such items as cash, accounts receivable (amounts owed to the company by customers), land, building and equipment, and supplies. <br />
  • The cost principle tells us that accounting information is based upon actual cost incurred. We refer to this as historical cost. <br /> The going-concern assumption states that in the absence of information to the contrary, the business entity is assumed to continue operations into the foreseeable future. <br /> The objectivity principle states that accounting information must be unbiased and based upon independent evidence. <br /> The stable-dollar assumption tells us that we will only record accounting information that can be expressed in monetary units, usually dollars in the United States. <br />
  • Liabilities represent the claims of creditors on an entity’s assets. Liabilities include accounts payable (amounts owed to creditors for assets purchased on account), taxes payable, and wages payable (amounts owed to our employees at the end of the accounting period). <br />
  • The equities of an entity include investments by owners, withdrawals by owners, and earnings retained by the business. Investments by owners and net income increase owners’ equity. Payments to owners and net losses decrease owners’ equity. <br />
  • The basic accounting equation states that assets are equal to liabilities plus equity of a company. The equation makes sense because it states that assets must be equal to the claims against those assets. <br /> There are two broad categories of claims against an asset: Claims by creditors (called liabilities), or after all creditor claims are satisfied, the residual owners (the stockholders) have a claim on those assets. <br />
  • Let’s look at how specific business transactions impact the basic financial statement. <br />
  • Part IOn May 1st, Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock in return. Let’s see how the balance sheet would look immediately after this transaction. <br /> Part II <br /> The cash account of JJ’s Lawn Care increased by eight thousand dollars and the capital stock of the company also increased by eight thousand dollars. Notice that the basic accounting equation is in balance. Total assets are equal to total liabilities plus owners’ equity. <br />
  • Part I <br /> On the 2nd of May, JJ’s Lawn Care purchased a riding lawn mower for $2,500 cash. Let’s see how the balance sheet looks now.Part IIThe cash account has been reduced by the $2,500 spent and the tools and equipment account has been increased by the same amount. One asset, cash, was merely traded for another, the riding lawn mower. Owners’ equity is not changed by the transaction and the basic accounting equation is still in balance. <br />
  • Part I <br /> In the next transaction JJ’s Lawn Care purchases a truck for $15,000, paying $2,000 cash and signing a note payable for $13,000. Let’s update the balance sheet.Part IIThe cash account decreased by $2,000 and the truck account increased by $15,000. There was a net increase in the asset side of the equation of $13,000. The liability account, notes payable, increased by $13,000. Total assets are now equal to $21,000. Total liabilities are equal to $13,000 and owners’ equity is equal to $8,000. The accounting equation is still in balance. <br />
  • Part IOn May 11th, JJ’s Lawn Care purchases repair parts for the riding lawn mower for $300. The parts are purchased on account. JJ’s will pay the balance on the account at some point in the future. Let’s update the balance sheet.Part II <br /> The tools and equipment account increased by $300 and the liability account, accounts payable, increased by the same amount. The balance sheet is getting progressively more complicated. <br />
  • Part I <br /> On May 18th, JJ’s Lawn Care sells one-half of its repair parts at cost to ABC Lawns. ABC agrees to pay for the parts in thirty days. One-half of the cost of the parts is $150. Can you update the balance sheet? Try before proceeding to the next slide. <br /> Part IIThe asset account, Tools and Equipment, decreased by $150 and the asset account, accounts receivable, increased by the same amount. Once again, one asset, repair parts, has been exchanged for another asset, accounts receivable. How did you do? <br />
  • Part I <br /> On May 25th, ABC Lawns makes a partial payment on account for $75 cash. Let’s prepare the updated balance sheet on May 25th.Part IIThe cash account increases by $75 and accounts receivable decreases by the same amount. Notice that total assets are still equal to total liabilities plus owners’ equity. <br />
  • Part IOn May 28th, JJ’s Lawn Care makes a partial payment on its accounts payable of $150. Its time to update the balance sheet.Part IIThe cash account decreases by $150 and accounts payable also decreases by $150. The total assets are now recorded at $21,150. Total liabilities plus owners’ equity is equal to the same amount. <br />
  • Part I <br /> On May 29th, JJ’s Lawn Care begins providing services to customers. On this date the company did work that totaled $750. All of the customers paid cash for the services rendered. Try updating the balance sheet before moving to the next slide. Be careful with this one. <br /> Part IIThe cash account increases by $750 and retained earnings increases by the same amount. The monies received represent earnings of the company that have been retained. The $750 represents revenue earned by the business. How did you do? <br />
  • Part I <br /> In the final transaction for May, JJ’s Lawn Care purchased $50 worth of gasoline for its riding mower and truck. Let’s make the final update to the balance sheet on May 31st.Part IIThe cash account decreased by $50 and so did the retained earnings of the company. JJ’s Lawn Care used $50 of its earnings to pay for the gasoline. The $50 spent is an expense of the business. <br /> Now, let’s review how JJ’s transactions affected the accounting equation. <br />
  • 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. <br />
  • Part IAll of the transactions that impacted the cash account will appear on the statement of cash flows.Part IIThe revenues and expenses that caused the change in retained earnings will appear on the income statement of the company.Part IILet’s begin by preparing the income statement and statement of cash flows for JJ’s Lawn Care for the period ended May 31, 2009. <br />
  • Part IJJ’s Lawn care has one revenue for services for $750, and one expense for gasoline of $50. So the net income for the month of May is $700. Remember, net income is the excess of revenues over expenses incurred during the accounting period.Part IIInvestments by owners and payments to owners do not appear on the income statement. These amounts appear on the company’s balance sheet. <br />
  • Here is the statement of cash flows for JJ’s Lawn Care for the month ended May 31, 2009. Notice the three sections of the statement: Cash flows from operating activities, investing activities and financing activities. <br />
  • Cash flows from operating activities include the cash received from revenue transactions and the cash paid for expenses. <br />
  • 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 some excess parts to ABC Lawns. <br />
  • 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. <br />
  • Here are the account balances to use when preparing the balance sheet. <br />
  • Part I <br /> 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 IIAs 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, 2009. <br />
  • All the financial statements are interrelated. We can start with the balance sheet at the beginning of an accounting period, analyze the income and cash flows of the company, and arrive at the ending balances that will appear on the balance sheet.Let’s see how this works in the JJ’s Lawn Care example. <br />
  • Part I <br /> This is the balance sheet for JJ’s Lawn Care at the end of May. <br /> Part IINet income impacts the retained earnings of the company.Part III <br /> 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. <br />
  • Financial statements are only one source of information about the operations of a company. The financial statements of a company can be compared to those of other companies in the same industry, major national or international competitors, and to the norms for the national economy. <br />
  • There are three general forms of business operations. <br /> A proprietorship is a business owned by just one individual. <br /> A partnership is owned by two or more individuals. Some partnerships have several thousand partners. <br /> 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. <br />
  • Part I <br /> 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. <br /> Part IIFor 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. <br /> Part IITo review, a corporation will show owners’ contributions in the capital stock account and accumulated earnings of the company in the retained earnings account. <br /> You should be able to tell the form of business by looking at the equity section of a balance sheet. <br />
  • Creditors and investors have two major concerns about the operations and financial position of any company. <br /> First, the company must be liquid, that is, it must be able to pay all bills when due. <br /> 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. <br />
  • 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. <br />
  • Part I <br /> 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 IIWhen 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. <br />
  • End of chapter 2. <br />
  • While both of these are liabilities, Notes Payable involves a written promissory note. For example, if your company wishes to borrow $100,000 from its bank, the bank will require company officers to sign a formal loan agreement before the bank provides the money. (The bank might also require your company to pledge collateral and for the company owners to personally guarantee the loan.) Perhaps the loan paperwork will be a half inch high. Your company will record this loan in its general ledger account,Notes Payable. (The bank will record the loan in its general ledger account Notes Receivable.) <br /> Contrast the bank loan with phoning one of your company’s suppliers and asking for a delivery of products or supplies. On the next day the products arrive and you sign the delivery receipt. A few days later your company receives an invoice from the supplier and it states that the payment for the products is due in 30 days. This transaction did not involve a promissory note. As a result, this transaction is recorded in your company’s general ledger account Accounts Payable. The supplier will record the transaction with a debit to its asset account Accounts Receivable (and a credit to its account Sales). <br />

Chap002 Chap002 Presentation Transcript

  • Basic Financial Statements Chapter 2 McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
  • Introduction to Financial Statements Balance Sheet Three primary Income Statement financial statements. Statement of Cash Flows We will use a corporation to describe these statements. 2-2
  • Introduction to Financial Statements Balance Sheet Income Statement Statement of Cash Flows Describes where the enterprise stands at a specific date. 2-3
  • Introduction to Financial Statements Balance Sheet Income Statement Statement of Cash Flows Depicts the revenue and expenses for a designated period of time. 2-4
  • Introduction to Financial Statements Balance Sheet Income Statement Statement of Cash Flows Depicts the ways cash has changed during a designated period of time. 2-5
  • A Starting Point: Statement of Financial Position Vagabond Travel Agency Balance Sheet December 31, 2009 Assets Liabilities & Owners' Equity Cash $ 22,500 Liabilities: Notes receivable 10,000 Notes 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 Retained earnings 70,000 Total $ 300,000 Total $ 300,000 2-6
  • The Concept of the Business Entity Vagabond Travel Agency A business entity is separate from the personal affairs of its owner. 2-7
  • Assets Vagabond Travel Agency Balance Sheet December 31, 2009 Assets Liabilities & Owners' Equity Cash $ 22,500 Liabilities: Notes receivable 10,000 Notes 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 Retained earnings 70,000 Total $ 300,000 Total $ 300,000 Assets are economic resources that are owned by the business and are expected to benefit future operations. 2-8
  • Assets These accounting principles support cost as the basis for asset valuation. Stable-Dollar Assumption Cost Principle Objectivity Principle Going-Concern Assumption 2-9
  • Liabilities Vagabond Travel Agency Balance Sheet December 31, 2009 Assets Liabilities & Owners' Equity Cash $ 22,500 Liabilities: Notes receivable 10,000 Notes 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 Retained earnings 70,000 Total $ 300,000 Total $ 300,000 Liabilities are debts that represent negative future cash flows for the enterprise. 2-10
  • Owners’ Equity Vagabond Travel Agency Balance Sheet December 31, 2009 Assets Liabilities & Owners' Equity Cash $ 22,500 Liabilities: Notes receivable 10,000 Notes 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 Retained earnings 70,000 Total $ 300,000 Total $ 300,000 Owners’ equity represents the owners’ claims on the assets of the business. 2-11
  • Assets = Liabilities + Owners’ Equity Assets = Liabilities + Owners’ Equity The Accounting Equation $300,000 = $300,000 = $80,000 + $80,000 + $220,000 $220,000 Vagabond Travel Agency Balance Sheet December 31, 2009 Assets Liabilities & Owners' Equity Cash $ 22,500 Liabilities: Notes receivable 10,000 Notes 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 Retained earnings 70,000 Total $ 300,000 Total $ 300,000 2-12
  • Let’s analyze transactions for JJ’s Lawn Care Service. 2-13
  • On May 1, Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock. Cash Total JJ's Lawn Care Service Balance Sheet May 1, 2009 Assets Owners' Equity $ 8,000 Capital Stock $ $ 8,000 Total $ 8,000 8,000 2-14
  • On May 2, JJ’s purchased a riding lawn mower for $2,500 cash. JJ's Lawn Care Service Balance Sheet May 2, 2009 Assets Owners' Equity Cash $ 5,500 Capital Stock $ Tools & Equipment 2,500 Total $ 8,000 Total $ 8,000 8,000 2-15
  • On May 8, JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a note payable for the remaining $13,000. JJ's Lawn Care Service Balance Sheet May 8, 2009 Assets Liabilities and Owners' Equity Cash $ 3,500 Liabilities: Tools & Equipment 2,500 Notes Payable $ 13,000 Truck 15,000 Owners' Equity: Capital Stock 8,000 Total $ 21,000 Total $ 21,000 2-16
  • On May 11, JJ’s purchased some repair parts for $300 on account. JJ's Lawn Care Service Balance Sheet May 11, 2009 Assets Liabilities and Owners' Equity Cash $ 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 2-17
  • Jill realized she had purchased more repair parts than needed. On May 18, JJ’s was able to sell half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. JJ’s will receive the cash within 30 days. JJ's Lawn Care Service Balance Sheet May 18, 2009 Assets Liabilities and Owners' Equity Cash $ 3,500 Liabilities: Accounts Receivable 150 Notes Payable $ 13,000 Tools & Equipment 2,650 Accounts Payable 300 Truck 15,000 Total Liabilities $ 13,300 Owners' Equity: Capital Stock 8,000 Total $ 21,300 Total $ 21,300 2-18
  • On May 25, ABC Lawns pays JJ’s $75 as a partial settlement of its accounts receivable. JJ's Lawn Care Service Balance Sheet May 25, 2009 Assets Liabilities and Owners' Equity Cash $ 3,575 Liabilities: Accounts Receivable 75 Notes Payable $ 13,000 Tools & Equipment 2,650 Accounts Payable 300 Truck 15,000 Total Liabilities $ 13,300 Owners' Equity: Capital Stock 8,000 Total $ 21,300 Total $ 21,300 2-19
  • On May 28, JJ’s pays $150 of its accounts payable. JJ's Lawn Care Service Balance Sheet May 28, 2009 Assets Liabilities and Owners' Equity Cash $ 3,425 Liabilities: Accounts Receivable 75 Notes Payable $ 13,000 Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150 Owners' Equity: Capital Stock 8,000 Total $ 21,150 Total $ 21,150 2-20
  • On May 29, JJ’s recorded lawn care services provided during May of $750. All clients were paid in cash. JJ's Lawn Care Service Balance Sheet May 29, 2009 Assets Liabilities and Owners' Equity Cash $ 4,175 Liabilities: Accounts Receivable 75 Notes Payable $ 13,000 Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150 Owners' Equity: Capital Stock 8,000 Retained Earnings 750 Total $ 21,900 Total $ 21,900 2-21
  • On May 31, JJ’s purchased gasoline for the lawn mower and the truck for $50 cash. JJ's Lawn Care Service Balance Sheet May 31, 2009 Assets Liabilities and Owners' Equity Cash $ 4,125 Liabilities: Accounts Receivable 75 Notes Payable $ 13,000 Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150 Owners' Equity: Capital Stock 8,000 Retained Earnings 700 Total $ 21,850 Total $ 21,850 Now, let’s review how JJ’s transactions affected the accounting equation. 2-22
  • May 1 Balances May 2 Balances May 8 Balances May 11 Balances May 18 Balances May 25 Balances May 28 Balances May 29 Balances May 31 Balances Cash $ 8,000 $ 8,000 (2,500) $ 5,500 (2,000) $ 3,500 Assets Accts. Tools & + Rec. + Equip. + Truck Liabilities + Owners' Equity Notes Accts. Capital Retained = Payable + Pay. + Stock + Earnings $ 8,000 $ 8,000 $ 2,500 $ 2,500 $ 3,500 $ 3,500 75 $ 3,575 (150) $ 3,425 750 $ 4,175 (50) $ 4,125 = $ 150 $ 150 (75) $ 75 $ 75 $ 2,500 300 $ 2,800 (150) $ 2,650 $ 8,000 $ 15,000 $ 15,000 $ 13,000 $ 13,000 $ 8,000 $ 15,000 $ 13,000 $ 300 $ 300 $ 15,000 $ 13,000 $ 300 $ 8,000 $ 2,650 $ 15,000 $ 13,000 $ 8,000 $ 2,650 $ 15,000 $ 13,000 $ 300 (150) $ 150 $ 8,000 $ 8,000 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 750 750 (50) 700 $ 2-23
  • Let’s prepare the Income Statement and Statement of Cash Flows for JJ’s Lawn Care Assets = Liabilities + Owners' Equity Accts. Service Tools the Truck = Payable + Accts. + Capital 2009. for & + month Notes Pay. Stock + Retained ending May 31, Earnings Cash + Rec. + Equip. May 1 Balances May 2 Balances May 8 Balances May 11 Balances May 18 Balances May 25 Balances May 28 Balances May 29 Balances May 31 Balances $ 8,000 $ 8,000 (2,500) $ 5,500 (2,000) $ 3,500 $ 3,500 $ 3,500 75 $ 3,575 (150) $ 3,425 750 $ 4,175 (50) $ 4,125 These transactions These transactions impact13,000 impact the $ 15,000 $ the $ 2,500 $ 15,000 $ Statement 13,000Cash Statement of Cash of $ 300 300 $ 2,800 $ 15,000 $ 13,000 $ 300 Flows. Flows. (150) $ 2,500 $ 2,500 $ 150 $ 150 (75) $ 75 $ 75 $ 75 $ 75 $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 2,650 $ 15,000 $ 13,000 $ 300 $ 8,000 $ 2,650 $ 15,000 $ 13,000 $ 8,000 $ 2,650 $ 15,000 $ 13,000 $ 300 (150) $ 150 These transactions These transactions $ 2,650 $ 15,000 $ 13,000 $ 150 impact the Income impact the Income $ 2,650 $ 15,000 $ 13,000 Statement. $ 150 Statement. $ 8,000 $ 8,000 $ $ 8,000 $ 750 750 (50) 700 2-24
  • JJ's Lawn Care Service Income Statement For the Month Ended May 31, 2009 Sales Revenue Operating Expense: Gasoline Expense Net Income $ 750 $ 50 700 Investments by and payments to the owners Investments by and payments to the owners are not included on the Income Statement. are not included on the Income Statement. 2-25
  • JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2009 Cash flows from operating activities: Cash received from revenue transactions $ 750 Cash paid for expenses (50) Net cash provided by operating activities $ 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 Cash flows from financing activities: Investment by owners Increase in cash for month $ Cash balance, May 1, 2009 Cash balance, May 31, 2009 $ 700 (4,575) 8,000 4,125 4,125 2-26
  • JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2009 Cash flows from operating activities: Cash received from revenue transactions $ 750 Cash paid for expenses (50) Net cash provided by operating activities $ 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 Cash flows from financing activities: Investment by owners Increase in cash for month $ Cash balance, May 1, 2009 Cash balance, May 31, 2009 $ 700 Operating activities include the cash Operating activities include the cash effects of revenue and expense effects of revenue and expense transactions. transactions. (4,575) 8,000 4,125 4,125 2-27
  • JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2009 Cash flows from operating activities: Cash received from revenue transactions $ 750 Cash paid for expenses (50) Net cash provided by operating activities $ 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 Cash flows from financing activities: Investment by owners Increase in cash for month $ Cash balance, May 1, 2009 Cash balance, May 31, 2009 $ 700 (4,575) Investing activities include the cash Investing activities include the cash 8,000 effects of purchasing and selling 4,125 effects of purchasing and selling assets. assets. 4,125 2-28
  • JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2009 Cash flows from operating activities: Cash received from revenue transactions $ 750 Cash paid for expenses (50) Net cash provided by operating activities $ 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 Cash flows from financing activities: Investment by owners Increase in cash for month $ Cash balance, May 1, 2009 Cash balance, May 31, 2009 $ 700 Financing activities include the cash Financing activities include the cash effects of transactions with the owners effects of transactions with the owners and creditors. and creditors. (4,575) 8,000 4,125 4,125 2-29
  • Now, let’s prepare the Balance Sheet for JJ’s Lawn Care Service for May 31, 2009. May 1 Balances May 2 Balances May 8 Balances May 11 Balances May 18 Balances May 25 Balances May 28 Balances May 29 Balances May 31 Balances Cash $ 8,000 $ 8,000 (2,500) $ 5,500 (2,000) $ 3,500 Assets Accts. Tools & + Rec. + Equip. + Truck Liabilities + Owners' Equity Notes Accts. Capital Retained = Payable + Pay. + Stock + Earnings $ 8,000 $ 8,000 $ 2,500 $ 2,500 $ 3,500 $ 3,500 75 $ 3,575 (150) $ 3,425 750 $ 4,175 (50) $ 4,125 = $ 2,500 300 $ 2,800 (150) $ 2,650 $ 8,000 $ 15,000 $ 15,000 $ 13,000 $ 13,000 $ 8,000 $ 15,000 $ 13,000 $ 300 $ 300 $ 15,000 $ 13,000 $ 300 $ 8,000 These balances will These balances will $ 2,650 $ 15,000 13,000 $ 300 appear$ on the(150) appear on the $ 2,650 Balance13,000 $ 15,000 $ $ 150 Balance Sheet. Sheet. $ 8,000 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ $ 150 $ 150 (75) $ 75 $ 75 $ 8,000 $ 8,000 750 750 (50) 700 2-30
  • JJ's Lawn Care Service Balance Sheet May 31, 2009 Assets Cash Accounts receivable Tools & equipment Truck $ Total assets $ 4,125 75 2,650 15,000 21,850 Liabilities Notes payable $ Accounts payable Owners' Equity Capital stock Retained earnings Total liabilities & equity $ 13,000 150 8,000 700 21,850 Assets = Liabilities + Owners’ Equity Assets = Liabilities + Owners’ Equity $21,850 = $21,850 = $13,150 + $13,150 + $8,700 $8,700 2-31
  • Relationships Among Financial Statements Date at beginning of period Time Balance Sheet Date at end of period Balance Sheet Income Statement Statement of Cash Flows 2-32
  • Financial Statement Articulation JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2009 Cash flows from operating activities: Cash received from revenue transactions $ 750 Cash paid for expenses (50) Net cash provided by operating activities $ 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 Cash flows from financing activities: Investment by owners Increase in cash for month $ Cash balance, May 1, 2009 Cash balance, May 31, 2009 $ JJ's Lawn Care Service Income Statement For the Month Ended May 31, 2009 700 Sales Revenue Operating Expense: Gasoline Expense Net Income $ 750 $ 50 700 (4,575) 8,000 4,125 4,125 JJ's Lawn Care Service Balance Sheet May 31, 2009 Assets Cash Accounts receivable Tools & equipment Truck $ Total assets $ 4,125 75 2,650 15,000 21,850 Liabilities Notes payable $ Accounts payable Owners' Equity Capital stock Retained earnings Total liabilities & equity $ 13,000 150 8,000 700 21,850 2-33
  • Financial Reporting and Financial Statements Financial statements are just one source of financial accounting information. Income Statement Balance Sheet Statement of Cash Flows Other Information: •Industry •Competitors •National economy 2-34
  • Forms of Business Organization Sole Sole Proprietorships Proprietorships Partnerships Partnerships Corporations Corporations 2-35
  • Reporting Ownership Equity in the Statement of Financial Position Sole Sole Proprietorships Proprietorships Partnerships Partnerships Corporations Corporations Ow ner's equity: Jill Jones, capital $ 8,000 Partners' equity Jill Jones, capital $ 4,000 Bill Jones, capital 4,000 Total partners' equity $ 8,000 Owners' equity Capital stock $ 7,000 Retained earnings 1,000 Total stockholders' equity $ 8,000 2-36
  • The Use of Financial Statements by External Parties Creditors Two concerns: Two concerns: Liquidity Liquidity Profitability Profitability Investors 2-37
  • The Need for Adequate Disclosure Balance Sheet Income Statement Statement of Cash Flows Notes to the Notes to the financial financial statements statements often provide often provide facts necessary facts necessary for the proper for the proper interpretation of interpretation of the statements. the statements. 2-38
  • 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. 2-39
  • End of Chapter 2 2-40
  • 2-41