All Rights Reserved

Chapter 2
Copyright © 2015 by McGraw-Hill Education (Asia).

All rights reserved.
Statement of Financial Three primary
financial
Position
Income Statement
statements.
Statement of Cash Flows
We will use a
corporation to
describe
these
statements.
2-2
Statement of Financial Describes
Position where the
Income Statement enterprise
stands at a
Statement of Cash Flows specific date.
2-3
Statement of Financial
Position
Income Statement
Depicts the
revenue and
Statement of Cash Flows expenses for a
designated
period of time.
2-4
Position
Income Statement

Depicts the
ways cash has
changed during
a designated
period of time.
2-5
Balance Sheet
31 December 2013
Assets Liabilities & Equity
Land $ 100,000 Liabilities:
Building 90,000 Notes payable $ 41,000
Office equipment 15,000 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Notes receivable 10,000 Total liabilities $ 80,000
Accounts receivable 60,500 Equity:
Cash 22,500 Share capital 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000
2-6
A business
entity is
Vagabond separate from
Travel the personal
Agency
affairs of its
owner.
2-7
Fortune Travel Agency
Balance Sheet
31 December 2013
Land
Assets are
$ 100,000 Liabilities:
Building 90,000 resources
Notes payable that $ are
41,000
Office equipment 15,000 controlled
Accounts payable the 36,000
Notes receivable 10,000 business
Total liabilitiesand$are80,000
Accounts receivable expected to have
60,500 Equity:
future economic
Total benefits flowed
$ 300,000 Total to
$ 300,000
the business.
2-8
These accounting principles support
cost as the basis for asset valuation.
Stable-Dollar Cost Principle

Assumption
Going-Concern
Objectivity Assumption
Principle
2-9
Balance Sheet
31 December 2013
Liabilities are
debts that
Building
Office equipment
90,000
15,000
Notes payable
Accounts payable
$ 41,000
36,000
represent
negative future
cash flows for Retained earnings 70,000
the enterprise.
Total $ 300,000 Total $ 300,000
2-10
Balance Sheet
31 December 2013
Land
Equity $ 100,000 Liabilities:
represents
Building
Office equipment
90,000
15,000
Notes payable
Accounts payable
$ 41,000
36,000
the owners’
claims on the
assets of the Retained earnings 70,000
Totalbusiness. $ 300,000 Total $ 300,000
2-11
Assets = Liabilities +
Fortune Travel Agency Equity
Balance Sheet
$300,000 = $80,00031 December 2013
+ $220,000
Building 90,000 Notes payable $ 41,000
Office equipment 15,000 Accounts payable 36,000
Total $ 300,000 Total $ 300,000
2-12
Let’s analyze
transactions
for JJ’s Lawn
Care Service.
2-13
On 1 May, Jill Jones and her family
invested $8,000 in JJ’s Lawn Care Service
and received 800 shares of the company.
JJ's Lawn Care Service
Balance Sheet
1 May 2013
Assets Equity
Cash $ 8,000 Share capital $ 8,000
Total $ 8,000 Total $ 8,000
2-14
On 2 May, JJ’s purchased a riding lawn
mower for $2,500 cash.
Balance Sheet
2 May 2013
Assets Equity
Tools & Equipment $ 2,500 Share capital $ 8,000
Cash 5,500
Total $ 8,000 Total $ 8,000
2-15
On 8 May, 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.
Balance Sheet
8 May 2013
Assets Liabilities and Equity
Tools & Equipment $ 2,500 Liabilities:
Truck 15,000 Notes Payable $ 13,000
Cash 3,500 Equity:
Share capital 8,000
Total $ 21,000 Total $ 21,000
2-16
On 11 May, JJ’s purchased some repair
parts for $300 on account.

Balance Sheet
11 May 2013
Cash 3,500 Accounts Payable 300
Total Liabilities $ 13,300
Equity:
Share capital 8,000
Total $ 21,300 Total $ 21,300
2-17
Jill realized she had purchased more repair parts
than needed. On 18 May, 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.
Balance Sheet
18 May 2013
Accounts Receivable 150 Accounts Payable 300
Cash 3,500 Total Liabilities $ 13,300
Equity:
Share capital 8,000
Total $ 21,300 Total $ 21,300

2-18
On 25 May, ABC Lawns pays JJ’s $75 as a
partial settlement of its accounts
receivable.
Balance Sheet
25 May 2013
Cash 3,575 Total Liabilities $ 13,300
Equity:
Share capital 8,000
Total $ 21,300 Total $ 21,300
2-19
On 28 May, JJ’s pays $150 of its accounts
payable.

Balance Sheet
28 May 2013
Cash 3,425 Total Liabilities 13,150
Equity:
Share capital 8,000
Total $ 21,150 Total $ 21,150
2-20
On 29 May, JJ’s recorded lawn care
services provided during May of $750. All
clients were paid in cash.
Balance Sheet
29 May 2013
Equity:
Share capital 8,000
Retained Earnings 750
Total $ 21,900 Total $ 21,900
2-21
On 31 May, JJ’s purchased gasoline for the
lawn mower and the truck for $50 cash.
Balance Sheet
31 May 2013
Equity:
Share capital 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
Assets = Liabilities + Equity
Accts. Tools & Notes Accts. Share Retained
Cash + Rec. + Equip. + Truck = Payable + Pay. + Capital + 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
2-23
Let’s prepare the Income Statement and
Statement Assets of Cash Flows
= for JJ’s+ Lawn
Liabilities Care
Equity
Cash
Service
Accts.
for
Tools &
the month ending
Notes
31
Accts.
May
Share
2013.
Retained
+ Rec. + Equip. + Truck = Payable + Pay. + Capital + Earnings
May 1 $ 8,000 $ 8,000
Balances $ 8,000 $ 8,000
May 2 (2,500) These transactions
$ 2,500
Balances $ 5,500 $ 2,500 $ 8,000
May 8 (2,000)
impact
$ 15,000
the
$ 13,000
Balances $ 3,500 $ 2,500Statement
$ 15,000 of Cash
$ 13,000 $ 8,000
May 11 300 $ 300
Balances $ 3,500 $ 2,800 Flows.
$ 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 These transactions 750
Balances $ 4,175 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 750
May 31 (50) impact the Income (50)
Balances $ 4,125 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 700
Statement.
2-24
Income Statement
For the Month Ended 31 May 2013
Sales Revenue $ 750

Operating Expense:
Gasoline Expense 50
Profit $ 700
Investments by and payments to the owners

are not included on the Income Statement.
2-25
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash from 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, 1 May 2009 -
Cash balance, 31 May 2009 $ 4,125
2-26
Operating activities include the cash
effects of revenue and expense
transactions.
2-27
Investing activities include the cash
effects of purchasing and selling 4,125
Increase in cash for month $
assets.
Cash balance, 31 May 2009 4,125 $
2-28
Financing activities include the cash
effects of transactions with the owners
and creditors.
Net cash used by investing activities
(4,575)
2-29
Now, let’s prepare the Statement of Financial
Position for JJ’s Lawn Care Service for May 31, 2013
Accts. Tools & Notes Accts. Share Retained
Cash + Rec. + Equip. + Truck = Payable + Pay. + Capital + 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
May 25
$ 3,500
75
$ 150
(75)
These balances
$ 2,650 $ 15,000
will appear
$ 13,000 $ 300 $ 8,000
Balances $ 3,575 $ 75 on the

$ 2,650 Statement
$ 15,000 $ 13,000 $of
300 $ 8,000
May 28 (150) (150)
Balances $ 3,425 $ 75 Financial
$ 2,650 $ 15,000 Position.
$ 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
2-30
Balance Sheet
31 May 2013
Assets Liabilities
Tools & equipment $ 2,650 Notes payable $ 13,000
Truch 15,000 Accounts payable 150
Account receivable 75 Equity
Retained earnings 700
Total assets $ 21,850 Total liabilities & equity $ 21,850
$21,850 = $13,150 + $8,700
2-31
Date at Date at
beginning of end of
period period
Time
Statement of Statement of
Financial Position Financial Position
Income Statement
2-32
Financial Statement Articulation
Cash flows from operating activities: Income Statement
Cash received from revenue transactions $ 750 For the Month Ended 31 May 2013
Sales Revenue $ 750
Purchase of lawn mower $ (2,500) Operating Expense:
Purchase of truck (2,000) Gasoline Expense 50
Profit $ 700
Increase in cash for month $ 4,125 JJ's Lawn Care Service
Balance Sheet
31 May 2013
Assets Liabilities
Tools & equipment $ 2,650 Notes payable $ 13,000
Truch 15,000 Accounts payable 150
Account receivable 75 Equity
Retained earnings 700
Total assets $ 21,850 Total liabilities & equity $ 21,850
2-33
Financial statements are
just one source of
financial accounting Income
Statement
information. Statement
of
Financial
Statement
Position
of Cash
Flows
Other Information:
• Industry
• Competitors
• National economy
2-34
Sole
Proprietorships Partnerships Corporations
2-35
Sole
Ow ner's equity:
Proprietorships Jill Jones, capital $ 8,000
Partners' equity
Jill Jones, capital $ 4,000
Partnerships
Bill Jones, capital 4,000
Total partners' equity $ 8,000
Equity
Share capital $ 7,000
Corporations
Total shareholders' equity $ 8,000
2-36
Two concerns:
Creditors Liquidity
Profitability
Investors
2-37
Position Notes to the
financial
Income Statement
statements
Statement of Cash Flows often provide
facts necessary
for the proper
interpretation of
the statements.
2-38
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
2-40

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Chapter 2

Copyright © 2015 by McGraw-Hill Education (Asia).

Statement of Cash Flows

Stable-Dollar Cost Principle

Total $ 8,000 Total $ 8,000

Total $ 8,000 Total $ 8,000

Total $ 21,000 Total $ 21,000

JJ's Lawn Care Service

Total $ 21,300 Total $ 21,300

Total $ 21,300 Total $ 21,300

Total $ 21,300 Total $ 21,300

JJ's Lawn Care Service

Total $ 21,150 Total $ 21,150

Now, let’s review how JJ’s transactions

Sales Revenue $ 750

Investments by and payments to the owners

Balances $ 3,575 $ 75 on the

Assets = Liabilities + Equity

$21,850 = $13,150 + $8,700

Window dressing occurs when management

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