Basic Financial StatementsBasic Financial Statements

Chapter 2

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Introduction to FinancialIntroduction to FinancialStatementsStatements

Three primaryfinancial

statements.Income Statement

Balance Sheet

Statement of Cash Flows

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Three primaryfinancial

statements.Statement of Cash Flows

We will use a corporation to describe thesestatements.

Describeswhere theenterprisestands at a

specific date.

Income Statement

Balance Sheet

Statement of Cash Flows

Introduction to FinancialIntroduction to FinancialStatementsStatements

2-3

Describeswhere theenterprisestands at a

specific date.Statement of Cash Flows

Depicts therevenue and

expenses for adesignated

period of time.

Income Statement

Balance Sheet

Statement of Cash Flows

Introduction to FinancialIntroduction to FinancialStatementsStatements

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Depicts therevenue and

expenses for adesignated

period of time.

Statement of Cash Flows

Depicts theways cash haschanged during

a designatedperiod of time.

Income Statement

Balance Sheet

Statement of Cash Flows

Introduction to FinancialIntroduction to FinancialStatementsStatements

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Depicts theways cash haschanged during

a designatedperiod of time.

Statement of Cash Flows

Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$Accounts receivable 60,500 Accounts payable 36,000Supplies 2,000 Salaries payable 3,000Land 100,000 Total liabilities 80,000$Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000Total 300,000$ Total 300,000$

A Starting Point: Statement ofA Starting Point: Statement ofFinancial PositionFinancial Position

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Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$Accounts receivable 60,500 Accounts payable 36,000Supplies 2,000 Salaries payable 3,000Land 100,000 Total liabilities 80,000$Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000Total 300,000$ Total 300,000$

The Concept of the BusinessThe Concept of the BusinessEntityEntity

VagabondTravel

Agency

A businessentity is

separate fromthe personalaffairs of its

owner.

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VagabondTravel

Agency

A businessentity is

separate fromthe personalaffairs of its

owner.

Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$Accounts receivable 60,500 Accounts payable 36,000Supplies 2,000 Salaries payable 3,000Land 100,000 Total liabilities 80,000$Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000Total 300,000$ Total 300,000$

AssetsAssets

Assets areeconomic

resources that areowned by the

business and areexpected to benefitfuture operations.

Assets areeconomic

resources that areowned by the

business and areexpected to benefitfuture operations.

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Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$Accounts receivable 60,500 Accounts payable 36,000Supplies 2,000 Salaries payable 3,000Land 100,000 Total liabilities 80,000$Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000Total 300,000$ Total 300,000$

Assets areeconomic

resources that areowned by the

business and areexpected to benefitfuture operations.

Assets areeconomic

resources that areowned by the

business and areexpected to benefitfuture operations.

AssetsAssets

Cost PrincipleCost PrincipleCost PrincipleCost PrincipleStableStable--DollarDollarAssumptionAssumption

StableStable--DollarDollarAssumptionAssumption

These accounting principles supportcost as the basis for asset valuation.

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Cost PrincipleCost PrincipleCost PrincipleCost Principle

GoingGoing--ConcernConcernAssumptionAssumption

GoingGoing--ConcernConcernAssumptionAssumptionObjectivityObjectivity

PrinciplePrincipleObjectivityObjectivityPrinciplePrinciple

StableStable--DollarDollarAssumptionAssumption

StableStable--DollarDollarAssumptionAssumption

Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$Accounts receivable 60,500 Accounts payable 36,000Supplies 2,000 Salaries payable 3,000Land 100,000 Total liabilities 80,000$Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000Total 300,000$ Total 300,000$

LiabilitiesLiabilities

Liabilities aredebts thatrepresent

negative futurecash flows for the

enterprise.

Liabilities aredebts thatrepresent

negative futurecash flows for the

enterprise.

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Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$Accounts receivable 60,500 Accounts payable 36,000Supplies 2,000 Salaries payable 3,000Land 100,000 Total liabilities 80,000$Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000Total 300,000$ Total 300,000$

Liabilities aredebts thatrepresent

negative futurecash flows for the

enterprise.

Liabilities aredebts thatrepresent

negative futurecash flows for the

enterprise.

Owners’ EquityOwners’ Equity

Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$Accounts receivable 60,500 Accounts payable 36,000Supplies 2,000 Salaries payable 3,000Land 100,000 Total liabilities 80,000$Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000Total 300,000$ Total 300,000$

Owners’ equityrepresents theowners’ claimson the assets of

the business.

Owners’ equityrepresents theowners’ claimson the assets of

the business.

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Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$Accounts receivable 60,500 Accounts payable 36,000Supplies 2,000 Salaries payable 3,000Land 100,000 Total liabilities 80,000$Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000Total 300,000$ Total 300,000$

Owners’ equityrepresents theowners’ claimson the assets of

the business.

Owners’ equityrepresents theowners’ claimson the assets of

the business.

Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$Accounts receivable 60,500 Accounts payable 36,000Supplies 2,000 Salaries payable 3,000Land 100,000 Total liabilities 80,000$Building 90,000 Owners' EquityOffice equipment 15,000 Capital stock 150,000

Retained earnings 70,000Total 300,000$ Total 300,000$

The Accounting EquationThe Accounting EquationAssets = Liabilities + Owners’ Equity

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

Assets = Liabilities + Owners’ Equity

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

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Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$Accounts receivable 60,500 Accounts payable 36,000Supplies 2,000 Salaries payable 3,000Land 100,000 Total liabilities 80,000$Building 90,000 Owners' EquityOffice equipment 15,000 Capital stock 150,000

Retained earnings 70,000Total 300,000$ Total 300,000$

Let’s analyzetransactionsfor JJ’s LawnCare Service.

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Let’s analyzetransactionsfor JJ’s LawnCare Service.

JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 1, 2009Asse ts

Ca sh 8,000$ Ca p ita l S tock 8,000$

Tota l 8,000$ Tota l 8,000$

O w ne rs' Equ ity

On May 1, Jill Jones and her familyinvested $8,000 in JJ’s Lawn Care Service

and received 800 shares of stock.

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JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 1, 2009Asse ts

Ca sh 8,000$ Ca p ita l S tock 8,000$

Tota l 8,000$ Tota l 8,000$

O w ne rs' Equ ity

JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 2, 2009Asse ts

Ca sh 5,500$ Ca p ita l S tock 8,000$Too ls & Equ ipm e nt 2,500

Tota l 8,000$ Tota l 8,000$

O w ne rs' Equ ity

On May 2, JJ’s purchased a riding lawnmower for $2,500 cash.

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JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 2, 2009Asse ts

Ca sh 5,500$ Ca p ita l S tock 8,000$Too ls & Equ ipm e nt 2,500

Tota l 8,000$ Tota l 8,000$

O w ne rs' Equ ity

On May 8, 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.JJ's La w n Ca re S e rvice

Ba la nce S he e tM a y 8, 2009

Asse tsCa sh 3,500$ L ia b il itie s:Too ls & Equ ipm e nt 2,500 Note s P a ya b le 13,000$Truck 15,000 O w ne rs' Equ ity:

Ca p ita l S tock 8,000

Tota l 21,000$ Tota l 21,000$

L ia b il itie s a nd O w ne rs' Equ ity

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JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 8, 2009Asse ts

Ca sh 3,500$ L ia b il itie s:Too ls & Equ ipm e nt 2,500 Note s P a ya b le 13,000$Truck 15,000 O w ne rs' Equ ity:

Ca p ita l S tock 8,000

Tota l 21,000$ Tota l 21,000$

L ia b il itie s a nd O w ne rs' Equ ity

JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 11, 2009Asse ts

Ca sh 3,500$ L ia b il itie s:Too ls & Equ ipm e nt 2,800 Note s P a ya b le 13,000$Truck 15,000 Accounts P a ya b le 300

To ta l L ia b il itie s 13,300$O w ne rs' Equ ity:Ca p ita l S tock 8,000

Tota l 21,300$ Tota l 21,300$

L ia b il itie s a nd O w ne rs' Equ ity

On May 11, JJ’s purchased some repairparts for $300 on account.

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JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 11, 2009Asse ts

Ca sh 3,500$ L ia b il itie s:Too ls & Equ ipm e nt 2,800 Note s P a ya b le 13,000$Truck 15,000 Accounts P a ya b le 300

To ta l L ia b il itie s 13,300$O w ne rs' Equ ity:Ca p ita l S tock 8,000

Tota l 21,300$ Tota l 21,300$

L ia b il itie s a nd O w ne rs' Equ ity

JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 18, 2009Asse ts

Ca sh 3,500$ L ia b il itie s:Accounts Re ce iva b le 150 Note s P a ya b le 13,000$Too ls & Equ ipm e nt 2,650 Accounts P a ya b le 300Truck 15,000 To ta l L ia b il itie s 13,300$

O w ne rs' Equ ity:Ca p ita l S tock 8,000

Tota l 21,300$ Tota l 21,300$

L ia b il itie s a nd O w ne rs' Equ ity

Jill realized she had purchased more repair parts thanneeded.

On May 18, JJ’s was able to sell half of the repair parts toABC Lawns for $150, a price equal to JJ’s cost. JJ’s will

receive the cash within 30 days.

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JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 18, 2009Asse ts

Ca sh 3,500$ L ia b il itie s:Accounts Re ce iva b le 150 Note s P a ya b le 13,000$Too ls & Equ ipm e nt 2,650 Accounts P a ya b le 300Truck 15,000 To ta l L ia b il itie s 13,300$

O w ne rs' Equ ity:Ca p ita l S tock 8,000

Tota l 21,300$ Tota l 21,300$

L ia b il itie s a nd O w ne rs' Equ ity

JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 25, 2009Asse ts

Ca sh 3,575$ L ia b il itie s:Accounts Re ce iva b le 75 Note s P a ya b le 13,000$Too ls & Equ ipm e nt 2,650 Accounts P a ya b le 300Truck 15,000 To ta l L ia b il itie s 13,300$

O w ne rs' Equ ity:Ca p ita l S tock 8,000

Tota l 21,300$ Tota l 21,300$

L ia b il itie s a nd O w ne rs' Equ ity

On May 25, ABC Lawns pays JJ’s $75 as apartial settlement of its accounts

receivable.

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JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 25, 2009Asse ts

Ca sh 3,575$ L ia b il itie s:Accounts Re ce iva b le 75 Note s P a ya b le 13,000$Too ls & Equ ipm e nt 2,650 Accounts P a ya b le 300Truck 15,000 To ta l L ia b il itie s 13,300$

O w ne rs' Equ ity:Ca p ita l S tock 8,000

Tota l 21,300$ Tota l 21,300$

L ia b il itie s a nd O w ne rs' Equ ity

JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 28, 2009Asse ts

Ca sh 3,425$ L ia b il itie s:Accounts Re ce iva b le 75 Note s P a ya b le 13,000$Too ls & Equ ipm e nt 2,650 Accounts P a ya b le 150Truck 15,000 To ta l L ia b il itie s 13,150

O w ne rs' Equ ity:Ca p ita l S tock 8,000

Tota l 21,150$ Tota l 21,150$

L ia b il itie s a nd O w ne rs' Equ ity

On May 28, JJ’s pays $150 of its accountspayable.

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JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 28, 2009Asse ts

Ca sh 3,425$ L ia b il itie s:Accounts Re ce iva b le 75 Note s P a ya b le 13,000$Too ls & Equ ipm e nt 2,650 Accounts P a ya b le 150Truck 15,000 To ta l L ia b il itie s 13,150

O w ne rs' Equ ity:Ca p ita l S tock 8,000

Tota l 21,150$ Tota l 21,150$

L ia b il itie s a nd O w ne rs' Equ ity

JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 29, 2009Asse ts

Ca sh 4,175$ L ia b il itie s:Accounts Re ce iva b le 75 Note s P a ya b le 13,000$Too ls & Equ ipm e nt 2,650 Accounts P a ya b le 150Truck 15,000 To ta l L ia b il itie s 13,150

O w ne rs' Equ ity:Ca p ita l S tock 8,000Re ta ine d Ea rn ings 750

Tota l 21,900$ Tota l 21,900$

L ia b il itie s a nd O w ne rs' Equ ity

On May 29, JJ’s recorded lawn careservices provided during May of $750. All

clients were paid in cash.

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JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 29, 2009Asse ts

Ca sh 4,175$ L ia b il itie s:Accounts Re ce iva b le 75 Note s P a ya b le 13,000$Too ls & Equ ipm e nt 2,650 Accounts P a ya b le 150Truck 15,000 To ta l L ia b il itie s 13,150

O w ne rs' Equ ity:Ca p ita l S tock 8,000Re ta ine d Ea rn ings 750

Tota l 21,900$ Tota l 21,900$

L ia b il itie s a nd O w ne rs' Equ ity

JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 31, 2009Asse ts

Ca sh 4,125$ L ia b il itie s:Accounts Re ce iva b le 75 Note s P a ya b le 13,000$Too ls & Equ ipm e nt 2,650 Accounts P a ya b le 150Truck 15,000 To ta l L ia b il itie s 13,150

O w ne rs' Equ ity:Ca p ita l S tock 8,000Re ta ine d Ea rn ings 700

Tota l 21,850$ Tota l 21,850$

L ia b il itie s a nd O w ne rs' Equ ity

On May 31, JJ’s purchased gasoline for thelawn mower and the truck for $50 cash.

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JJ's La w n Ca re S e rviceBa la nce S he e t

M a y 31, 2009Asse ts

Ca sh 4,125$ L ia b il itie s:Accounts Re ce iva b le 75 Note s P a ya b le 13,000$Too ls & Equ ipm e nt 2,650 Accounts P a ya b le 150Truck 15,000 To ta l L ia b il itie s 13,150

O w ne rs' Equ ity:Ca p ita l S tock 8,000Re ta ine d Ea rn ings 700

Tota l 21,850$ Tota l 21,850$

L ia b il itie s a nd O w ne rs' Equ ity

Now, let’s review how JJ’s transactionsaffected the accounting equation.

Assets = Liabilities +

Cash +Accts.Rec. +

Tools &Equip. + Truck =

NotesPayable +

Accts.Pay. +

CapitalStock +

RetainedEarnings

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 750Balances 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$

Owners' Equity

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Assets = Liabilities +

Cash +Accts.Rec. +

Tools &Equip. + Truck =

NotesPayable +

Accts.Pay. +

CapitalStock +

RetainedEarnings

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 750Balances 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$

Owners' Equity

Assets = Liabilities +

Cash +Accts.Rec. +

Tools &Equip. + Truck =

NotesPayable +

Accts.Pay. +

CapitalStock +

RetainedEarnings

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 750Balances 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$

Owners' Equity

These transactionsimpact the

Statement of CashFlows.

These transactionsimpact the

Statement of CashFlows.

Let’s prepare the Income Statement andStatement of Cash Flows for JJ’s Lawn CareService for the month ending May 31, 2009.

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Assets = Liabilities +

Cash +Accts.Rec. +

Tools &Equip. + Truck =

NotesPayable +

Accts.Pay. +

CapitalStock +

RetainedEarnings

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 750Balances 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$

Owners' Equity

These transactionsimpact the

Statement of CashFlows.

These transactionsimpact the

Statement of CashFlows.

These transactionsimpact the Income

Statement.

These transactionsimpact the Income

Statement.

JJ's Lawn Care ServiceIncome Statement

For the Month Ended May 31, 2009

Sales Revenue 750$Operating Expense: Gasoline Expense 50Net Income 700$

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JJ's Lawn Care ServiceIncome Statement

For the Month Ended May 31, 2009

Sales Revenue 750$Operating Expense: Gasoline Expense 50Net Income 700$

Investments by and payments to the ownersare not included on the Income Statement.

Investments by and payments to the ownersare not included on the Income Statement.

JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2009Cash 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 8,000Increase in cash for month 4,125$Cash balance, May 1, 2009 -Cash balance, May 31, 2009 4,125$

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JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2009Cash 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 8,000Increase in cash for month 4,125$Cash balance, May 1, 2009 -Cash balance, May 31, 2009 4,125$

JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2009Cash 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 8,000Increase in cash for month 4,125$Cash balance, May 1, 2009 -Cash balance, May 31, 2009 4,125$

Operating activities include the casheffects of revenue and expense

transactions.

Operating activities include the casheffects of revenue and expense

transactions.

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JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2009Cash 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 8,000Increase in cash for month 4,125$Cash balance, May 1, 2009 -Cash balance, May 31, 2009 4,125$

Operating activities include the casheffects of revenue and expense

transactions.

Operating activities include the casheffects of revenue and expense

transactions.

JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2009Cash 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 8,000Increase in cash for month 4,125$Cash balance, May 1, 2009 -Cash balance, May 31, 2009 4,125$

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JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2009Cash 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 8,000Increase in cash for month 4,125$Cash balance, May 1, 2009 -Cash balance, May 31, 2009 4,125$

Investing activities include the casheffects of purchasing and selling

assets.

Investing activities include the casheffects of purchasing and selling

assets.

JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2009Cash 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 8,000Increase in cash for month 4,125$Cash balance, May 1, 2009 -Cash balance, May 31, 2009 4,125$

Financing activities include the casheffects of transactions with the owners

and creditors.

Financing activities include the casheffects of transactions with the owners

and creditors.

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JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2009Cash 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 8,000Increase in cash for month 4,125$Cash balance, May 1, 2009 -Cash balance, May 31, 2009 4,125$

Financing activities include the casheffects of transactions with the owners

and creditors.

Financing activities include the casheffects of transactions with the owners

and creditors.

Assets = Liabilities +

Cash +Accts.Rec. +

Tools &Equip. + Truck =

NotesPayable +

Accts.Pay. +

CapitalStock +

RetainedEarnings

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 750Balances 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$

Owners' Equity

Now, let’s prepare the Balance Sheet for JJ’sLawn Care Service for May 31, 2009.

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Assets = Liabilities +

Cash +Accts.Rec. +

Tools &Equip. + Truck =

NotesPayable +

Accts.Pay. +

CapitalStock +

RetainedEarnings

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 750Balances 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$

Owners' Equity

These balances willappear on the

Balance Sheet.

These balances willappear on the

Balance Sheet.

Cash 4,125$ Notes payable 13,000$Accounts receivable 75 Accounts payable 150Tools & equipment 2,650Truck 15,000 Capital stock 8,000

Retained earnings 700Total assets 21,850$ Total liabilities & equity 21,850$

Assets Liabilities

Owners' Equity

JJ's Lawn Care ServiceBalance SheetMay 31, 2009

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Cash 4,125$ Notes payable 13,000$Accounts receivable 75 Accounts payable 150Tools & equipment 2,650Truck 15,000 Capital stock 8,000

Retained earnings 700Total assets 21,850$ Total liabilities & equity 21,850$

Assets Liabilities

Owners' Equity

JJ's Lawn Care ServiceBalance SheetMay 31, 2009

Assets = Liabilities + Owners’ Equity

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

Assets = Liabilities + Owners’ Equity

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

Relationships Among FinancialRelationships Among FinancialStatementsStatements

Date atbeginning of

period

Date atend ofperiodTime

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BalanceSheet

BalanceSheet

Time

Income StatementStatement of Cash Flows

JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2009Cash 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 8,000Increase in cash for month 4,125$Cash balance, May 1, 2009 -Cash balance, May 31, 2009 4,125$

JJ's Lawn Care ServiceIncome Statement

Sales Revenue 750$Operating Expense: Gasoline Expense 50Net Income 700$

For the Month Ended May 31, 2009

Financial Statement ArticulationFinancial Statement Articulation

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JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2009Cash 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 8,000Increase in cash for month 4,125$Cash balance, May 1, 2009 -Cash balance, May 31, 2009 4,125$

Cash 4,125$ Notes payable 13,000$Accounts receivable 75 Accounts payable 150Tools & equipment 2,650Truck 15,000 Capital stock 8,000

Retained earnings 700Total assets 21,850$ Total liabilities & equity 21,850$

Assets Liabilities

Owners' Equity

JJ's Lawn Care ServiceBalance SheetMay 31, 2009

JJ's Lawn Care ServiceIncome Statement

Sales Revenue 750$Operating Expense: Gasoline Expense 50Net Income 700$

For the Month Ended May 31, 2009

Statementof CashFlows

BalanceSheet

IncomeStatement

Financial Reporting and FinancialFinancial Reporting and FinancialStatementsStatements

Financial statements arejust one source of

financial accountinginformation.

Financial statements arejust one source of

financial accountinginformation.

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Statementof CashFlows

Other Information:•Industry•Competitors•National economy

Forms of Business OrganizationForms of Business Organization

SoleProprietorships

SoleProprietorships PartnershipsPartnerships CorporationsCorporations

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Reporting Ownership Equity in theReporting Ownership Equity in theStatement of Financial PositionStatement of Financial Position

Ow ner's equity: Jill Jones, capital 8,000$

SoleProprietorships

SoleProprietorships

Partners' equity Jill Jones, capital 4,000$ Bill Jones, capital 4,000 Total partners' equity 8,000$

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Partners' equity Jill Jones, capital 4,000$ Bill Jones, capital 4,000 Total partners' equity 8,000$

PartnershipsPartnerships

Owners' equity Capital stock 7,000$ Retained earnings 1,000 Total stockholders' equity 8,000$

CorporationsCorporations

The Use of Financial StatementsThe Use of Financial Statementsby External Partiesby External Parties

CreditorsTwo concerns:

LiquidityProfitability

Two concerns:Liquidity

Profitability

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Creditors

Investors

Two concerns:Liquidity

Profitability

Two concerns:Liquidity

Profitability

The Need for AdequateThe Need for AdequateDisclosureDisclosure

Income Statement

Balance Sheet

Statement of Cash Flows

Notes to thefinancial

statementsoften provide

facts necessaryfor the proper

interpretation ofthe statements.

Notes to thefinancial

statementsoften provide

facts necessaryfor the proper

interpretation ofthe statements.

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Statement of Cash Flows

Notes to thefinancial

statementsoften provide

facts necessaryfor the proper

interpretation ofthe statements.

Notes to thefinancial

statementsoften provide

facts necessaryfor the proper

interpretation ofthe statements.

Management’s Interest inManagement’s Interest inFinancial StatementsFinancial Statements

Creditors are more likely to extend credit iffinancial statements show a strong statement of

financial position—that is, relatively little debtand large amounts of liquid assets.

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Window dressing occurs when managementtakes measures to make the company appear

as strong as possible in it financial statements.

End of Chapter 2End of Chapter 2

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