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Financial A ccounting Chapter 2 Basic Financial Statements

Financial A ccounting Chapter 2 Basic Financial Statements. STUDY OBJECTIVE . Understand what the four financial statements are and how they are prepared. FINANCIAL STATEMENTS.

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Financial A ccounting Chapter 2 Basic Financial Statements

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  1. Financial Accounting Chapter 2 Basic Financial Statements

  2. STUDY OBJECTIVE Understand what the four financial statements are and how they are prepared.

  3. FINANCIAL STATEMENTS After transactions are identified, recorded, and summarized, 4 financial statements are prepared from the summarized accounting data: 1 An income statement presents the revenues and expenses and resulting net income or net loss for a specific period of time. 2 An owner’s equity statement summarizes the changes in owner’s equity for a specific period of time. 3 A balance sheet reports the assets, liabilities, and owner’s equity at a specific date. 4A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time.

  4. ILLUSTRATION 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS 2,750 Net income of $2,750 shown on the income statement is added to the beginning balance of owner’s capital in the owner’s equity statement.

  5. ILLUSTRATION 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS 2,750 Net income of $2,750 is determined from the information in the owner’s equity column of the Summary of Transactions (Illustration 1-7).

  6. ILLUSTRATION 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS $16,450 Net income of $2,750 carried forward from the income statement to the owner’s equity statement. The owner’s capital of $16,450 at the end of the reporting period is shown as the final total of the owner’s equity column of the Summary of Transactions (Illustration 1-7).

  7. ILLUSTRATION 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS 16,450 Owner’s capital of $16,450 at the end of the reporting period shown in the owner’s equity statement is shown on the balance sheet.

  8. ILLUSTRATION 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS Cash of $8,050 on the balance sheet is reported on the statement of cash flows.

  9. ILLUSTRATION 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS $ 8,050 Cash of $8,050 on the balance sheet and statement of cash flows is shown as the final total of the cash column of the Summary of Transactions (Illustration 1-7).

  10. Let’s analyze some transactions for JJ’s Lawn Care Service.

  11. On May 1, Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock.

  12. On May 2, JJ’s purchased a riding lawn mower for $2,500 cash.

  13. 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.

  14. On May 11, JJ’s purchased some repair parts for $300 on account.

  15. Jill realized she had purchased more repair parts than needed. On May 18, JJ’s was able to sell half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. JJ’s will receive the cash within 30 days.

  16. On May 25, ABC Lawns pays JJ’s $75 as a partial settlement of its accounts receivable.

  17. On May 28, JJ’s pays $150 of its accounts payable.

  18. On May 29, JJ’s recorded lawn care services provided during May of $750. All clients were paid in cash.

  19. Learning Objective To explain how the statement of financial position, often referred to as the balance sheet, is an expansion of the basic accounting equation. LO4

  20. On May 31, JJ’s purchased gasoline for the lawn mower and the truck for $50 cash. Now, let’s review how JJ’s transactions affected the accounting equation.

  21. These transactions impact the Income Statement. Let’s prepare the Income Statement and Statement of Cash Flows for JJ’s Lawn Care Service for the month ending May 31, 2007. These transactions impact the Statement of Cash Flows.

  22. Learning Objective To explain how the income statement reports an enterprise’s financial performance for a period of time in terms of the relationship of revenues and expenses. LO5

  23. Investments by and payments to the owners are not included on the Income Statement.

  24. Learning Objective To explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating, investing, and financing activities. LO6

  25. Operating activities include the cash effects of revenue and expense transactions.

  26. Investing activities include the cash effects of purchasing and selling assets.

  27. Financing activities include the cash effects of transactions with the owners and creditors.

  28. Now, let’s prepare the Balance Sheet for JJ’s Lawn Care Service for May 31, 2007. These balances will appear on the Balance Sheet.

  29. Assets = Liabilities + Owners’ Equity $21,850 = $13,150 + $8,700

  30. Financial Statement Articulation

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