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Whbc02 Final
Whbc02 Final
2
BASIC FINANCIAL
STATEMENTS
LO1
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
Introduction
Introduction to
to Financial
Financial Statements
Statements
Three primary
Balance Sheet
financial
Income Statement
statements.
Statement of Cash Flows
We will use a corporation
to describe these
statements.
Balance Sheet
Describes
where the
Income Statement enterprise
stands at a
Statement of Cash Flows
specific date.
Balance Sheet
Income Statement
Depicts the
revenue and
Statement of Cash Flows expenses for a
designated
period of time.
Revenues Expenses
result in result in
positive negative
cash flow. cash flow.
Balance Sheet
Income Statement
Net income (or
net loss) is
Statement of Cash Flows simply the
difference
between
revenues and
expenses.
Balance Sheet
Income Statement
LO2
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
The
The Concept
Concept of
of the
the Business
Business Entity
Entity
A business
entity is
Vagabond separate from
Travel the personal
Agency
affairs of its
owner.
Cost Principle
These accounting
Stable-Dollar principles support Going-Concern
Assumption cost as the basis Assumption
for asset valuation.
Objectivity
Principle
Changes in Owners’
Equity
•Owners’ •Payments
Investments to Owners
•Business •Business
Earnings Losses
To demonstrate how
certain business
transactions affect the
elements of the
accounting equation:
Assets = Liabilities +
Owners’ Equity.
LO3
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
The
The Accounting
Accounting Equation
Equation
Assets
Assets ==Vagabond
Liabilities ++ Agency
Travel
Liabilities Owners’
Owners’ Equity
Equity
Balance Sheet
December 31, 2007
$300,000
Assets=
$300,000 = $80,000
$80,000 +Liabilities
+ $220,000
$220,000
& 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
LO4
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
On May 31, JJ’s purchased gasoline for the
lawn mower and the truck for $50 cash.
JJ's Lawn Care Service
Balance Sheet
May 31, 2007
Assets Liabilities and Owners' Equity
Cash $ 4,125 Liabilities:
Accounts Receivable 75 Notes Payable $ 13,000
Tools & Equipment 2,650 Accounts Payable 150
Truck 15,000 Total Liabilities 13,150
Owners' Equity:
Capital Stock 8,000
Retained Earnings 700
Total $ 21,850 Total $ 21,850
LO5
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
JJ's Lawn Care Service
Income Statement
For the Month Ended May 31, 2007
LO6
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2007
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash provided by 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, May 1, 2007 -
Cash balance, May 31, 2007 $ 4,125
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2007
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash provided by operating activities $ 700
Cash flows from investing activities:
Operating
Operating activities
activities include
Purchase of lawn mower include the
the cash
cash $ (2,500)
effects
effects of
of revenue
revenue and
Purchase of truck
and expense
expense (2,000)
Collection for sale of repair parts 75
transactions.
transactions.
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, May 1, 2007 -
Cash balance, May 31, 2007 $ 4,125
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2007
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash provided by 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:
Investing
Investing activities
activities include
Investment by owners include the
the cash
cash 8,000
effects
effects of
of purchasing
purchasing and
Increase in cash for month
and selling
selling $ 4,125
Cash balance, May 1, 2007 -
assets.
assets.
Cash balance, May 31, 2007 $ 4,125
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2007
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash provided by operating activities $ 700
Cash flows from investing activities:
Purchase of lawn mower $ (2,500)
Financing
Financing activities
activities include
Purchase of truck include the
the cash
cash (2,000)
effects
effects of
of transactions
transactions with
with the
the owners
Collection for sale of repair parts
owners 75
Payment for repair parts (150)
and
and creditors.
creditors.
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, May 1, 2007 -
Cash balance, May 31, 2007 $ 4,125
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
Now, let’s prepare the Balance Sheet for JJ’s
Lawn
Assets Care Service
= for May 31,
Liabilities + 2007.
Owners' Equity
Accts. Tools & Notes Accts. Capital Retained
Cash + Rec. + Equip. + Truck = Payable + Pay. + Stock + 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 These
These
$ 2,650 balances
$ 15,000 $ 13,000 will
balances will
$ 300 $ 8,000
May 25 75 (75)
Balances $ 3,575 $ 75 $ 2,650 appear
appear
$ 15,000 on
on
$ the
the $ 300
13,000 $ 8,000
May 28
Balances
(150)
$ 3,425 $ 75
Balance
$ 2,650 Balance
$ 15,000
Sheet.
$Sheet.
13,000
(150)
$ 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
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
JJ's Lawn Care Service
Balance Sheet
May 31, 2007
Assets Liabilities
Cash $ 4,125 Notes payable $ 13,000
Accounts receivable 75 Accounts payable 150
Tools & equipment 2,650 Owners' Equity
Truck 15,000 Capital stock 8,000
Retained earnings 700
Total assets $ 21,850 Total liabilities & equity $ 21,850
Assets
Assets == Liabilities
Liabilities ++ Owners’
Owners’ Equity
Equity
$21,850
$21,850 == $13,150
$13,150 ++ $8,700
$8,700
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
Learning
Learning Objective
Objective
LO7
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
Relationships
Relationships Among
Among Financial
Financial
Statements
Statements
Date at Date at
beginning end of
of period Time period
Balance Balance
Sheet Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
Financial
Financial Statement
Statement Articulation
Articulation
JJ's Lawn Care Service
Statement of Cash Flows
JJ's Lawn Care Service
For the Month Ended May 31, 2007
Cash flows from operating activities: Income Statement
Cash received from revenue transactions $ 750 For the Month Ended May 31, 2007
Cash paid for expenses (50)
Net cash provided by operating activities $ 700
Cash flows from investing activities:
Sales Revenue $ 750
Purchase of lawn mower $ (2,500) Operating Expense:
Purchase of truck (2,000) Gasoline Expense 50
Collection for sale of repair parts 75
Net Income $ 700
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 JJ's Lawn Care Service
Cash balance, May 1, 2007 -
Balance Sheet
Cash balance, May 31, 2007 $ 4,125
May 31, 2007
Assets Liabilities
Cash $ 4,125 Notes payable $ 13,000
Accounts receivable 75 Accounts payable 150
Tools & equipment 2,650 Owners' Equity
Truck 15,000 Capital stock 8,000
Retained earnings 700
Total assets $ 21,850 Total liabilities & equity $ 21,850
Other Information:
•Industry
•Competitors
•National economy
LO8
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
Forms
Forms of
of Business
Business Organization
Organization
Sole
Sole Partnerships
Partnerships Corporations
Corporations
Proprietorships
Proprietorships
Partners' equity
Jill Jones, capital $ 4,000
Partnerships
Partnerships Bill Jones, capital 4,000
Total partners' equity $ 8,000
Owners' equity
Capital stock $ 7,000
Corporations
Corporations Retained earnings 1,000
Total stockholders' equity $ 8,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
The
The Use
Use of
of Financial
Financial Statements
Statements by
by
External
External Parties
Parties
Two
Two concerns:
concerns:
Creditors Liquidity
Liquidity
Profitability
Profitability
Investors
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
The
The Need
Need for
for Adequate
Adequate Disclosure
Disclosure
LO9
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008
Management’s
Management’s Interest
Interest in
in Financial
Financial
Statements
Statements