financial statements and business transactions

© The McGraw-Hill Companies, Inc., 2002

Slide 2-1

McGraw-Hill/Irwin

2 Financial Statements and Business transactions


Slide 2-2

McGraw-Hill/Irwin

Point in time Point in timePeriod of timePeriod of time

Previewing Financial StatementsExh.2.1

IncomeStatement

Statement ofCash Flows

BeginningBalance

Sheet

EndingBalance

Sheet

Statement ofChanges in

Owner’sEquity


Slide 2-3

McGraw-Hill/Irwin

Income Statement

Inflows of assets in exchange for products and

services provided to customers.

Inflows of assets in exchange for products and

services provided to customers.

Outflows or the using up of assets

that result from providing

products and services to customers.

Outflows or the using up of assets

that result from providing

products and services to customers.

Exh.2.2


Slide 2-4

McGraw-Hill/Irwin

Statement of Changesin Owner’s Equity

For corporations, instead of Withdrawals by Owner we use the term Dividends. Dividends represent

distributions to the stockholders.

For corporations, instead of Withdrawals by Owner we use the term Dividends. Dividends represent

distributions to the stockholders.

Exh.2.3


Slide 2-5

McGraw-Hill/Irwin

Exh.2.4

Balance SheetAssets are properties or economic

resources owned by a business. They are expected to provide future benefits to the

business.

Assets are properties or economic resources owned by a business. They are expected to provide future benefits to the

business.

Liabilities are obligations of the business. They

are claims against the

assets of the business.

Liabilities are obligations of the business. They

are claims against the

assets of the business.

Equity is the owner’s claim on the assets of the business. It is the residual interest in

the assets after deducting liabilities.

Equity is the owner’s claim on the assets of the business. It is the residual interest in

the assets after deducting liabilities.


Slide 2-6

McGraw-Hill/Irwin

Balance Sheet

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Remember from Chapter 1 that we learned that total assets must equal the

sum of total liabilities and total equity.

Exh.2.4


Slide 2-7

McGraw-Hill/Irwin

Owner’sEquity

Owner’sEquity

Owner’s Investment

Revenues

Owner’s Withdrawal

Expenses

Balance Sheet


Slide 2-8

McGraw-Hill/Irwin

Describesthe

sources and usesof cash

for areportingperiod.

Describesthe

sources and usesof cash

for areportingperiod.

Exh.2.6


Slide 2-9

McGraw-Hill/Irwin

Preparers

ASB

Auditors

Decision makers

GAAP

Financial Statements, Auditing and Users

FinancialStatements

AuditReport

FASB

GAAS

Exh.2.9


Slide 2-10

McGraw-Hill/Irwin

International Accounting Principles

Despite our growing global economy, countries continue to maintain their unique

set of acceptable accounting practices.


Slide 2-11

McGraw-Hill/Irwin

Fundamental Principles of Accounting

Business Entity Principle

Business Entity Principle

Objectivity Principle

Objectivity Principle

Cost PrincipleCost Principle

Going-Concern Principle

Going-Concern Principle

Monetary Unit Principle

Monetary Unit Principle

A business is accounted for separately from its owner or owners.

A business is accounted for separately from its owner or owners.

Financial statement information is supported by independent, unbiased

evidence.

Financial statement information is supported by independent, unbiased

evidence.

Financial statements are based on actual costs incurred in business transactions.

Financial statements are based on actual costs incurred in business transactions.

A business continues operating instead of being closed or sold.

A business continues operating instead of being closed or sold.

Express transactions and events in monetary units.

Express transactions and events in monetary units.


Slide 2-12

McGraw-Hill/Irwin

The accounting equation must remain in balance after each transaction.

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Transactions and the Accounting Equation


Slide 2-13

McGraw-Hill/Irwin

The accounts involved are:

(1) Cash (asset)

(2) Owner’s Equity (equity)

Owners of Scott Company contributed

$20,000 cash to start the business.

Transaction Analysis


Slide 2-14

McGraw-Hill/Irwin

Owners of Scott Company contributed

$20,000 cash to start the business.



Slide 2-15

McGraw-Hill/Irwin


(1) Cash (asset)

(2) Supplies (asset)


Purchased supplies paying $1,000 cash.


Slide 2-16

McGraw-Hill/Irwin


Purchased supplies paying $1,000 cash.


Slide 2-17

McGraw-Hill/Irwin


(1) Cash (asset)

(2) Equipment (asset)


Purchased equipment for $15,000 cash.


Slide 2-18

McGraw-Hill/Irwin


Purchased equipment for $15,000 cash.


Slide 2-19

McGraw-Hill/Irwin


(1) Supplies (asset)

(2) Equipment (asset)

(3) Accounts Payable (liability)


Purchased Supplies of $200 and Equipment of $1,000 on account.


Slide 2-20

McGraw-Hill/Irwin

Purchased Supplies of $200 and Equipment of $1,000 on account.



Slide 2-21

McGraw-Hill/Irwin

Transaction AnalysisThe balances so far appear below. Note that the

Balance Sheet Equation is still in balance.

Now let’s look at transactions involving revenues and expenses.


Slide 2-22

McGraw-Hill/Irwin


(1) Cash (asset)

(2) Revenues (equity)


Rendered consulting services receiving $3,000 cash.


Slide 2-23

McGraw-Hill/Irwin

Rendered consulting services receiving $3,000 cash.



Slide 2-24

McGraw-Hill/Irwin


(1) Cash (asset)

(2) Salaries expense (equity)


Paid salaries to employees, $800 cash.


Slide 2-25

McGraw-Hill/Irwin

Paid salaries to employees, $800 cash.



Slide 2-26

McGraw-Hill/Irwin


(1) Cash (asset)

(2) Notes payable (liability)


Borrowed $4,000 from 1st American Bank.


Slide 2-27

McGraw-Hill/Irwin

Borrowed $4,000 from 1st American Bank.



Slide 2-28

McGraw-Hill/Irwin

Financial Statements

Let’s prepare the Financial Statements reflecting the transactions we have

recorded.


Slide 2-29

McGraw-Hill/Irwin

Scott’s net income is the

difference between

Revenues and Expenses.

The net income of $2,200 increases

Scott’s equity by $2,200.

In come Statement


Slide 2-30

McGraw-Hill/Irwin

#Balance Sheet

The balance sheet reflects Scott’s

financial position at 12/31/01.

The balance sheet reflects Scott’s

financial position at 12/31/01.


Slide 2-31

McGraw-Hill/Irwin

Statement of Cash Flows


Slide 2-32

McGraw-Hill/Irwin

Returnon

Equity

Net Income Average Equity

=

ModifiedReturn on

Equity

Net Income - Value of Owners’ Efforts Average Equity

=

For Corporations . . .

For Proprietorships and Partnerships . . .

Using the Information Return on Equity


Slide 2-33

McGraw-Hill/Irwin

We can’t wait tostart Chapter 3!We can’t wait tostart Chapter 3!

End of Chapter 2

financial statements and business transactions

Documents