2 Financial Statements and Business transactions
Previewing Financial Statements Point in time Point in time Period of time Exh. 2.1 Income Statement Statement of Cash Flows Beginning Balance Sheet Ending Balance Sheet Statement of Changes in Owner’s Equity
Income Statement 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. Exh. 2.2
Statement of Changes in Owner’s Equity For corporations, instead of Withdrawals by Owner we use the term Dividends . Dividends represent distributions to the stockholders. Exh. 2.3
Balance Sheet Exh. 2.4 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. Equity is the owner’s claim on the assets of the business. It is the residual interest in the assets after deducting liabilities.
Balance Sheet Remember from Chapter 1 that we learned that total assets must equal the sum of total liabilities and total equity. Exh. 2.4 Liabilities Equity Assets = +
International Accounting Principles <ul><li>Despite our growing global economy, countries continue to maintain their unique set of acceptable accounting practices. </li></ul>
Fundamental Principles of Accounting Business Entity Principle Objectivity Principle Cost Principle Going-Concern Principle Monetary Unit Principle A business is accounted for separately from its owner or owners. Financial statement information is supported by independent, unbiased evidence. Financial statements are based on actual costs incurred in business transactions. A business continues operating instead of being closed or sold. Express transactions and events in monetary units.
<ul><li>The accounting equation must remain in balance after each transaction. </li></ul>Transactions and the Accounting Equation Liabilities Equity Assets = +
<ul><li>The accounts involved are: </li></ul><ul><li>(1) Cash ( asset ) </li></ul><ul><li>(2) Owner’s Equity ( equity ) </li></ul>Transaction Analysis Owners of Scott Company contributed $20,000 cash to start the business.
Transaction Analysis Owners of Scott Company contributed $20,000 cash to start the business.
Using the Information Return on Equity For Corporations . . . For Proprietorships and Partnerships . . . Return on Equity Net Income Average Equity = Modified Return on Equity Net Income - Value of Owners’ Efforts Average Equity =
End of Chapter 2 We can’t wait to start Chapter 3!