Chapter 2 Statements and Transactions
Financial Statements <ul><li>Financial Statements report on the financial performance and condition of an organization. </...
Income Statement <ul><li>Reports revenues earned less expenses incurred by a business over a period of time </li></ul><ul>...
Statement of Owner’s Equity <ul><li>Reports on changes in equity over the reporting period </li></ul><ul><li>Starts with b...
Balance Sheet (Statement of Financial Position) <ul><li>Lists the type and dollar amounts if assets, liabilities and equit...
Statement of Cash Flows <ul><li>Describes the sources and uses of cash for a reporting period </li></ul><ul><li>Organized ...
Generally Accepted Accounting Principles (GAAP) <ul><li>Primary purpose is to make information in financial statements rel...
A Few GAAPs <ul><li>Business Entity Principle or Economic Entity Principle </li></ul><ul><ul><li>Each economic entity or b...
A Few More GAAPs <ul><li>Going-concern Principle or Continuing-concern Principle </li></ul><ul><ul><li>Financial statement...
Homework Question <ul><li>Choose three of the covered GAAP principles and explain, in detail, why they are important to en...
The Accounting Equation <ul><li>Investing = Financing </li></ul><ul><li>Assets = Non-owner Financing + Owner Financing </l...
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Statements And Transactions

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Accounting Unit One Continued

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Statements And Transactions

  1. 1. Chapter 2 Statements and Transactions
  2. 2. Financial Statements <ul><li>Financial Statements report on the financial performance and condition of an organization. </li></ul><ul><li>Four major financial statements – income statement, balance sheet, statement of owner’s equity and statement of cash flows </li></ul><ul><li>Balance Sheet - reports on an organization financial position at a point in time </li></ul><ul><li>Income Statement, OE and Cash Flow - report on performance over a period of time </li></ul><ul><li>Fiscal year can be based on a calendar year or based on their natural business year </li></ul>
  3. 3. Income Statement <ul><li>Reports revenues earned less expenses incurred by a business over a period of time </li></ul><ul><li>Lists types and amounts of revenues and expenses </li></ul><ul><li>Revenues are inflows of assets in exchange for products and service provided to customers as part of a business’s primary operations. </li></ul><ul><li>Expenses are outflows or the using up of assets from providing produces and service to customers </li></ul>
  4. 4. Statement of Owner’s Equity <ul><li>Reports on changes in equity over the reporting period </li></ul><ul><li>Starts with beginning equity and adjusts it for events that increase it (investments by the owner and net income) and decrease it (owner withdraws and net loss) </li></ul><ul><li>Owner investments occur when the owner transfers personal assets into the business (not reported on the income statement) </li></ul><ul><li>Owner withdrawals occur when the owner takes cash or their assets from the business (not reported on the income statement) </li></ul>
  5. 5. Balance Sheet (Statement of Financial Position) <ul><li>Lists the type and dollar amounts if assets, liabilities and equity </li></ul><ul><li>Assets are the properties or economic resources owned by a business </li></ul><ul><li>Common characteristic is their ability to provide future benefits to the company </li></ul><ul><li>Eg: cash, accounts receivable merchandise held for sale, supplies equipment, buildings and land </li></ul><ul><li>Liabilities are the obligations of the business </li></ul><ul><li>Claims others have against the assets of the business </li></ul><ul><li>Common characteristic is their capability to reduce future assets or to require future service or products </li></ul><ul><li>Eg: accounts payable, notes payable </li></ul><ul><li>Equity is the owner’s claim on the assets of a business </li></ul>
  6. 6. Statement of Cash Flows <ul><li>Describes the sources and uses of cash for a reporting period </li></ul><ul><li>Organized by a company’s major activities: operating, investing and financing </li></ul><ul><li>Useful for determining the company’s liquidity and solvency </li></ul>
  7. 7. Generally Accepted Accounting Principles (GAAP) <ul><li>Primary purpose is to make information in financial statements relevant, reliable, consistent and comparable. </li></ul><ul><li>General principles are basic assumptions, concept and guidelines used for preparing financial statements </li></ul><ul><li>Specific principles are detailed rules used in reporting on business transactions and events </li></ul>
  8. 8. A Few GAAPs <ul><li>Business Entity Principle or Economic Entity Principle </li></ul><ul><ul><li>Each economic entity or business of the owner must keep accounting records and reports that are separate from those of the owner and any other economic entity of the owner. </li></ul></ul><ul><li>Objectivity Principle </li></ul><ul><ul><li>Financial statement information must be supported by independent, unbiased, and verifiable evidence. </li></ul></ul><ul><li>Cost Principle </li></ul><ul><ul><li>All transactions are recorded based on the actual cash amount received or paid. In the absence of cash, the cash equivalent amount of the exchange is recorded. </li></ul></ul>
  9. 9. A Few More GAAPs <ul><li>Going-concern Principle or Continuing-concern Principle </li></ul><ul><ul><li>Financial statement users assume that the statements reflect a business that is going to continue its operations instead of being closed or sold. </li></ul></ul><ul><li>Monetary Unit Principle or Stable-dollar Principle </li></ul><ul><ul><li>Transactions are expressed using units of money as the common denominator. It is assumed that the monetary unit is stable; therefore, a transaction is left as originally recorded and is not later adjusted for changes in currency value or inflation. </li></ul></ul><ul><li>Revenue Recognition Principle or Realization Principle </li></ul><ul><ul><li>Revenue is recorded at the time that is earned regardless of whether cash or another asset has been exchanged. The amount of revenue to be recorded is measured by the cash plus the cash equivalent value (market value) of any other assets received. </li></ul></ul>
  10. 10. Homework Question <ul><li>Choose three of the covered GAAP principles and explain, in detail, why they are important to ensure information in financial statements relevant, reliable, consistent and comparable. </li></ul>
  11. 11. The Accounting Equation <ul><li>Investing = Financing </li></ul><ul><li>Assets = Non-owner Financing + Owner Financing </li></ul><ul><li>Assets = Liabilities + Owner’s Equity </li></ul><ul><li>Transactions and the Accounting Equation </li></ul><ul><ul><li>A business transaction is an exchange of economic consideration between two parties that causes a change in assets, liabilities or owner’s equity. </li></ul></ul><ul><ul><li>Every transaction leaves the equation in the balance. </li></ul></ul>

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