Basic Financial Statements

Chapter 2

McGraw-Hill/Irwin

Copyright © 2010 by The McGraw-Hill Companies, Inc. All

Introduction to Financial Statements
Balance Sheet

Three primary Income Statement financial Statement of Cash Flows statements.

We will use a corporation to describe these statements.
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Introduction to Financial Statements
Balance Sheet Income Statement
Statement of Cash Flows

Describes where the enterprise stands at a specific date.

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Introduction to Financial Statements
Balance Sheet Income Statement
Statement of Cash Flows

Depicts the revenue and expenses for a designated period of time.

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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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A Starting Point: Statement of Financial Position
Vagabond Travel Agency Balance Sheet December 31, 2009 Assets Liabilities & Owners' Equity Cash $ 22,500 Liabilities: Notes receivable 10,000 Notes payable $ 41,000 Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities $ 80,000 Building 90,000 Owners' Equity: Office equipment 15,000 Capital stock 150,000 Retained earnings 70,000 Total $ 300,000 Total $ 300,000

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The Concept of the Business Entity
A business entity is separate from the personal affairs of its owner.

Vagabond Travel Agency

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Assets
Vagabond Travel Agency Balance Sheet December 31, 2009 Assets Liabilities & Owners' Equity Cash $ 22,500 Liabilities: Notes receivable 10,000 Notes payable $ 41,000 Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities $ 80,000 Building 90,000 Ow ners' Equity: Office equipment 15,000 Capital stock 150,000 Retained earnings 70,000 Total $ 300,000 Total $ 300,000

Assets are economic resources that are owned by the business and are expected to benefit future operations.
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Assets
These accounting principles support cost as the basis for asset valuation.
Stable-Dollar Assumption Cost Principle

Objectivity Principle

Going-Concern Assumption

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Liabilities
Vagabond Travel Agency Balance Sheet December 31, 2009 Assets Liabilities & Ow ners' Equity Cash $ 22,500 Liabilities: Notes receivable 10,000 Notes payable $ 41,000 Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities $ 80,000 Building 90,000 Owners' Equity: Office equipment 15,000 Capital stock 150,000 Retained earnings 70,000 Total $ 300,000 Total $ 300,000

Liabilities are debts that represent negative future cash flows for the enterprise.

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Owners’ Equity
Vagabond Travel Agency Balance Sheet December 31, 2009 Assets Liabilities & Owners' Equity Cash $ 22,500 Liabilities: Notes receivable 10,000 Notes payable $ 41,000 Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities $ 80,000 Building 90,000 Owners' Equity: Office equipment 15,000 Capital stock 150,000 Retained earnings 70,000 Total $ 300,000 Total $ 300,000

Owners’ equity represents the owners’ claims on the assets of the business.

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The Accounting Equation
Assets = Liabilities + Owners’ Equity Assets = Liabilities + Owners’ Equity $300,000 = $300,000 = $80,000 + $80,000 + $220,000 $220,000

Vagabond Travel Agency Balance Sheet December 31, 2009 Assets Liabilities & Ow ners' Equity Cash $ 22,500 Liabilities: Notes receivable 10,000 Notes payable $ 41,000 Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities $ 80,000 Building 90,000 Ow ners' Equity Office equipment 15,000 Capital stock 150,000 Retained earnings 70,000 Total $ 300,000 Total $ 300,000

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Financial Reporting and Financial Statements
Financial statements are just one source of financial accounting information.
Statement of Cash Flows Income Statement Balance Sheet

Other Information: •Industry •Competitors •National economy
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End of Chapter 2

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