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Accnt lecture4

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Accnt lecture4

  1. 1. Financial AFinancial Accountingccounting Chapter 2Chapter 2 Basic Financial StatementsBasic Financial Statements Financial AFinancial Accountingccounting Chapter 2Chapter 2 Basic Financial StatementsBasic Financial Statements
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 + $8,700
  12. 12. Financial Statement ArticulationJJ'sLawn Care Service Statement of Cash Flows For the Month Ended May 31, 2007 Cash flowsfrom operating activities: Cash received from revenue transactions 750$ 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. 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. 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. 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. 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. 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. 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. 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 $8,050 on the balance sheet and statement of cash flows is shown as the final total of the cash column of the Summary of Transactions (Illustration 1-7).
  20. 20. Forms of Business Organization Sole Proprietorships Sole Proprietorships PartnershipsPartnerships CorporationsCorporations
  21. 21. Reporting Ownership Equity in the Statement of Financial PositionOwner's equity: Jill Jones, capital 8,000$ 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. 22. The Use of Financial Statements by External Parties Creditors Investors Two concerns: Liquidity Profitability Two concerns: Liquidity Profitability
  23. 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. 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. 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. 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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