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Basic Financial

Statements
Chapter 2

McGraw-Hill/Irwin

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

What About Bookkeeping?


Bookkeeping is the clerical side of accounting
the recording of routine transactions and day-today record keeping.

Professional accountants are involved more with


the interpretation and use of accounting
information than with its actual preparation. 2-2

FINANCIAL STATEMENTS
are
arethe
thefinal
final
product
productofof the
the
accounting
accountingprocess.
process.

tell
tellhow
howthe
the
business
businessisisperforming
performing
and
andwhere
whereititstands.
stands.

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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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1) BALANCE SHEET
(A Statement of Financial
Shows the financial )
position of a company at a specific date. A balance
Position
sheet may be prepared monthly, quarterly, or annually depending on the
needs of management and external users.

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a) Assets
It

is something a company owns


which has future economic value.

Current Assets:
Cash
Accounts Receivable
Notes Receivable
Office Supplies
Inventories
Fixed Assets:
Equipment
Buildings
Land
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Assets

Assets are resources that are controlled by the business and are
expected to have future economic benefits flowed to the business.
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Assets
These accounting principles support
cost as the basis for asset valuation.
Cost Principle

Assets and services acquired should be


recorded at their actual cost

The entity will continue to operate in the


future.

Objectivity
Principle

Going-Concern
Assumption

Information must be reasonably accurate,


free from bias and shoul report what
actually happened.

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b) Liabilities
It

is something a company owes.

Short-Term Liabilities:
Notes Payable
Accounts Payable
Unearned Revenue
Salaries Payable
Interest Payable
Taxes Payable
Long-Term Liabilities:
mortgages payable
bonds payable
long-term notes.
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Liabilities

Liabilities are debts that represent negative future cash flows


for the enterprise.
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c) Owners Equity
It

is whats left of the assets after


liabilities have been deducted.
It is owners ownership in the business,
or the amount of the business assests
owned by the business owners.
-

Share Capital
Withdrawals by owners
Revenues
Expenses
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Transactions that Affect


Owners Equity
OWNERS EQUITY
INCREASES

OWNERS EQUITY
DECREASES
Owner Withdrawals
from the Business

Owner Investments
in the Business
Owners Equity

Revenues

Expenses
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Owners Equity

Equity represents
the owners claims on the assets of the business.
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Forms of Business
Organization
Sole
Sole
Proprietorships
Proprietorships

Partnerships
Partnerships

Corporations
Corporations

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Reporting Ownership Equity


in the Statement of
Financial
Position
Sole
Sole

Proprietorships
Proprietorships

Partnerships
Partnerships

Partners' equity
Jill Jones, capital $ 4,000
Bill Jones, capital
4,000
Total partners' equity

$ 8,000

Corporations
Corporations
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THE ACCOUNTING
EQUATION

Assets
Assets == Liabilities
Liabilities ++ Equity
Equity
$300,000
$300,000 == $80,000
$80,000 ++ $220,000
$220,000
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Lets analyze
transactions
for JJs Lawn
Care Service.

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On 1 May, Jill Jones and her family


invested $8,000 in JJs Lawn Care Service
and received 800 shares of the company.

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On 2 May, JJs purchased a riding lawn


mower for $2,500 cash.

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On 8 May, JJs purchased a $15,000 truck.


JJs paid $2,000 down in cash and issued
a note payable for the remaining $13,000.

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On 11 May, JJs purchased some repair


parts for $300 on account.

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Jill realized she had purchased more repair parts


than needed.
On 18 May, JJs was able to sell half of the repair parts to
ABC Lawns for $150, a price equal to JJs cost. JJs will
receive the cash within 30 days.

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On 25 May, ABC Lawns pays JJs $75 as a


partial settlement of its accounts
receivable.

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On 28 May, JJs pays $150 of its accounts


payable.

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On 29 May, JJs recorded lawn care


services provided during May of $750. All
clients were paid in cash.

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On 31 May, JJs purchased gasoline for the


lawn mower and the truck for $50 cash.

Now, lets review how JJs transactions


affected the accounting equation.
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Lets prepare the Income Statement and Statement of Cash Flows for
JJs Lawn Care Service for the month ending 31 May 2009.

These
Thesetransactions
transactionsimpact
impactthe
theStatement
StatementofofCash
CashFlows.
Flows.

These
Thesetransactions
transactionsimpact
impactthe
theIncome
IncomeStatement.
Statement.

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2) INCOME STATEMENT

A financial statement that measures a


companys financial performance over a
specific accounting period.

Lists revenues and expenses that were


incurred over a period of time.

Summarizes companys revenue and


expense transactions for a period of time.

Revenues Expenses = (+)NET INCOME


(-)NTE LOSS
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a) Revenues
Revenues

are amounts received


or to be received from customers
for sales of products or services.

sales
performance of services
rent
interest

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b) Expenses
Expenses

are amounts that have


been paid or will be paid later for
costs that have been incurred to
earn revenue.

salaries and wages


utilities expense
supplies expense
advertising expense

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Investments
Investments by
by and
and payments
payments to
to the
the owners
owners
are
are not
not included
included on
on the
the Income
Income Statement.
Statement.
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3) STATEMENT of CASH
FLOWS
The

cash flow statement is concerned


with the flow of cash in and out of the
business.

The

statement of cash flows is divided


into three major sections:
(a) cash flows from operating activities
(b) cash flows from investing activities
(c) cash flows from financing activities
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Operating
Operatingactivities
activitiesinclude
includethe
thecash
casheffects
effectsof
ofrevenue
revenueand
andexpense
expensetransactions.
transactions.
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Investing
Investingactivities
activitiesinclude
includethe
thecash
casheffects
effectsof
ofpurchasing
purchasingand
andselling
sellingassets.
assets.
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Financing
Financingactivities
activitiesinclude
includethe
thecash
casheffects
effectsof
oftransactions
transactionswith
withthe
theowners
ownersand
and
creditors.
creditors.

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Now, lets prepare the Balance Sheet for JJs Lawn


Care Service for May 31, 2009.

These
These
balances
balances
will
will
appear
appear
on
onthe
the
Balance
Balance
Sheet.
Sheet.

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Assets
Assets ==
$21,850
$21,850 ==

Liabilities
Liabilities ++
$13,150
$13,150 ++

Equity
Equity
$8,700
$8,700
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Relationships Among
Financial Statements
Date at
beginning of
period

Time

Balance
Sheet

Date at
end of
period

Balance
Sheet

Income Statement
Statement of Cash Flows
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Financial Statement
Articulation

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End of Chapter 2

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