BASIC FINANCIAL

STATEMENTS

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 Introduction to Financial Statements

Companies prepare interim

financial statements and annual
financial statements.

2000

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 Introduction to Financial Statements
Statement of Financial
Position (Balance Sheet)
Three primary
financial
Income Statement
statements.
Statement of Cash Flows
We will use a corporation
to describe these
statements.

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 Introduction to Financial Statements

SOFP or Balance Describes

Sheet where the
Income Statement enterprise
stands at a
Statement of Cash Flows
specific date.

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 Introduction to Financial Statements

Balance Sheet

Income Statement
Depicts the
revenue and
Statement of Cash Flows expenses for a
designated
period of time.

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 Introduction to Financial Statements

Revenues Expenses
result in result in
positive negative
cash flow. cash flow.

Either in the past, present, or future.

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 Introduction to Financial Statements

Balance Sheet

Income Statement
Net income (or
net loss) is
Statement of Cash Flows simply the
difference
between
revenues and
expenses.

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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
 Introduction to Financial Statements

Balance Sheet

Income Statement

Statement of Cash Flows

Depicts the
ways cash has
changed during
a designated
period of time.

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 The Concept of the Business Entity

A business
entity is
Vagabond separate from
Travel the personal
Agency
affairs of its
owner.

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 A Starting Point: Statement of Financial
Position

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 A Starting Point: Statement of Financial
Position

Assets are
economic resources
that are owned by
the business and
are expected to
provide positive
future cash flows. 11
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 Assets
Cost Principle

These
accounting
Stable-Dollar principles Going-Concern
Assumption support cost as Assumption
the basis for
asset valuation.
Objectivity
Principle
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 Cost principle: Assets such as land, buildings,
merchandise, equipment etc. are reported at their
historical costs.
Going concern: Balance sheet is prepared on the
assumption that the business is a continuing
enterprise.
Objectivity principle: Another reason for using cost
rather than current market values in accounting for
many assets is the need for a definite, factual basis for
valuation.
Stable-Dollar Assumption: A basic premise that the
currency's value does not fluctuate significantly.
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 A Starting Point: Statement of Financial
Position

Liabilities are
debts that
represent negative
future cash flows
for the enterprise.
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 A Starting Point: Statement of Financial
Position

Owners’ equity
represents the
owner’s claim to
the assets of the
business.
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 Owners’ Equity

Changes in Owners’
Equity

•Owners’ •Payments
Investments to Owners
•Business •Business
Earnings Losses

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 A Starting Point: Statement of Financial
Position

Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

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 Let’s analyze
some
transactions for
Overnight Auto
Service.

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 The Company’s First Transaction: On Jan
20, 2011, McBryan and his family invested
$80,000 in Overnight Auto Service and received
8,000 shares of stock.

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 Purchase of an Asset for Cash: On
Jan 21, Overnight purchased land for
$52,000 cash.

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 Purchase of an Asset and Financing Part of
the Cost: On Jan 22, purchased a building for
$36,000. Overnight made a cash down payment of
$6,000 and issued a note payable for the remaining
$30,000.

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 Purchase of an Asset on Account:
On Jan 23, Overnight purchased some
tools and repair equipment for $13,800
on account.

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 Sale of an Asset: Overnight realized it had
purchased more repair parts than needed. On Jan 24,
Overnight sold some of its new tools to Ace Towing for
$1,800, a price equal to its cost. Overnight will receive
the cash within 45 days.

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 Collection of an Account Receivable: On
January 26, Overnight received $ 600 from Ace
Towing as partial settlement of its account
receivable from Ace.

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 Payment of a Liability: On January 27,
Overnight made a partial payment of $6,800
on its account payable to Snappy Tools.

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 Earning of Revenue: On Jan 31, Overnight
recorded sales of repair services for the last
week of January amounting to $2,200, all of
which was received in cash.

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 Payment of Expenses: Overnight decided to
pay all operating expenses at the end of the
month. For January, he owed $200 for utilities
and $1,200 for wages to his employees, a total
of $1,400, which he paid on January 31.

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2002
 Let’s review the impact of Overnight’s transactions
on the accounting equation.

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 Let’s prepare the Income
Statement for Overnight
Auto Service for the month
ending January 31, 2011

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 Note: Investments by and payments to the
owners are not included on the Income
Statement.
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 Relationships Among Financial Statements

Beginning End of
of period Time period

Balance Balance
Sheet Sheet

Income Statement
Statement of Cash Flows
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 Forms of Business Organizations

Sole
Partnership Corporation
Proprietorship

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 Reporting Ownership Equity in the Balance
Sheet
Sole
Proprietorship Michael McBryan, capital $ 80,800
Partners' equity
Michael McBryan, capital $ 40,400
Partnership
Rebecca McBryan, capital 40,400
Total partners' equity $ 80,800

Owners' equity
Capital stock $ 80,000
Corporation
Retained earnings 800
Total stockholders' equity $ 80,800
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 The Use of Financial Statements by Outsiders

Two concerns:
Creditors Solvency => Balance Sheet
Profitability => Income Statement

Investors
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 The Need for Adequate Disclosure

Balance Sheet Notes to the

Income Statement
financial
statements often
Statement of Cash Flows
provide facts
necessary for the
proper
interpretation of
the statements.

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 End of Chapter 2

Ex 2-1 to 2-13 except 2-11

&
Problem 2-1A to 2-7A

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