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Basic Financial Statements

This chapter provides an introduction to the three primary financial statements - Balance Sheet, Income Statement, and Statement of Cash Flows. It explains their purpose, how they are prepared, and their significance in evaluating the financial position and performance of a corporation.

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Basic Financial Statements

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  1. Basic Financial Statements Chapter 2

  2. Balance Sheet Income Statement Statement of Cash Flows Introduction to Financial Statements Three primary financial statements. We will use a corporation to describe these statements.

  3. Describes where the enterprise stands at a specific date. Balance Sheet Income Statement Statement of Cash Flows Introduction to Financial Statements

  4. Balance Sheet Depicts the revenue and expenses for a designated period of time. Income Statement Statement of Cash Flows Introduction to Financial Statements

  5. Balance Sheet Income Statement Statement of Cash Flows Depicts the ways cash has changed during a designated period of time. Introduction to Financial Statements

  6. A Starting Point: Statement of Financial Position

  7. The Concept of the Business Entity A business entity is separate from the personal affairs of its owner. Vagabond Travel Agency

  8. Assets Assets are economic resources that are owned by the business and are expected to benefit future operations.

  9. Assets These accounting principles support cost as the basis for asset valuation. Cost Principle Stable-Dollar Assumption Going-Concern Assumption Objectivity Principle

  10. Liabilities Liabilities are debts that represent negative future cash flows for the enterprise.

  11. Owners’ Equity Owners’ equity represents the owners’ claims on the assets of the business.

  12. The Accounting Equation Assets = Liabilities + Owners’ Equity $300,000 = $80,000 + $220,000

  13. Let’s analyze transactions for JJ’s Lawn Care Service.

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

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

  16. 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.

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

  18. 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.

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

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

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

  22. 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.

  23. 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, 2009. These transactions impact the Statement of Cash Flows.

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

  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, 2009. These balances will appear on the Balance Sheet.

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

  30. Relationships Among Financial Statements Date at beginning of period Date at end of period Time Balance Sheet Balance Sheet Income Statement Statement of Cash Flows

  31. Financial Statement Articulation

  32. Statement of Cash Flows Balance Sheet Income Statement • Other Information: • Industry • Competitors • National economy Financial Reporting and Financial Statements Financial statements are just one source of financial accounting information.

  33. Forms of Business Organization Sole Proprietorships Partnerships Corporations

  34. Sole Proprietorships Partnerships Corporations Reporting Ownership Equity in the Statement of Financial Position

  35. The Use of Financial Statements by External Parties Two concerns: Liquidity Profitability Creditors Investors

  36. Balance Sheet Income Statement Statement of Cash Flows The Need for Adequate Disclosure Notesto the financial statements often provide facts necessary for the proper interpretation of the statements.

  37. Management’s Interest in Financial Statements Creditors are more likely to extend credit if financial statements show a strong statement of financial position—that is, relatively little debt and large amounts of liquid assets. Window dressingoccurs when management takes measures to make the company appear as strong as possible in it financial statements.

  38. End of Chapter 2

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