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Basic Financial Statements

Basic Financial Statements. Chapter 2. What About Bookkeeping?. Bookkeeping is the clerical side of accounting—the recording of routine transactions and day-to-day record keeping.

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Basic Financial Statements

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  1. Basic Financial Statements Chapter 2

  2. What About Bookkeeping? Bookkeeping is the clerical side of accounting—the recording of routine transactions and day-to-day record keeping. Professional accountants are involved more with the interpretation and use of accounting information than with its actual preparation.

  3. FINANCIAL STATEMENTS – are the final product of the accounting process. – tell how the business is performing and where it stands.

  4. 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.

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

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

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

  8. 1) BALANCE SHEET (AStatement of Financial Position) Shows the financial position of a company at a specific date. A balance sheet may be prepared monthly, quarterly, or annually depending on the needs of management and external users.

  9. a) Assets • It is something a company owns which has future economic value. CurrentAssets: • Cash • Accounts Receivable • Notes Receivable • Office Supplies • Inventories FixedAssets: • Equipment • Buildings • Land

  10. Assets Assets are resources that are controlled by the business and are expected to have future economic benefits flowed to the business.

  11. Assets These accounting principles support cost as the basis for asset valuation. Cost Principle Assets and servicesacquiredshould be recordedat their actual cost Going-Concern Assumption The entity will continueto operate in the future. Objectivity Principle Information must be reasonably accurate, free from bias and shoul report what actually happened.

  12. b) Liabilities • It is something a company owes. Short-TermLiabilities: • Notes Payable •AccountsPayable • Unearned Revenue • Salaries Payable • Interest Payable • Taxes Payable Long-Term Liabilities: • mortgages payable • bonds payable • long-term notes.

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

  14. c) Owner’s Equity • It is what’s left of the assets after liabilities have been deducted. • It is owners’ ownership in thebusiness, ortheamount of thebusinessassestsownedbythebusinessowners. • ShareCapital • Withdrawalsbyowners • Revenues • Expenses

  15. Transactions that AffectOwner’s Equity OWNER’S EQUITY INCREASES OWNER’S EQUITY DECREASES Owner Withdrawals from the Business Owner Investments in the Business Owner’s Equity Revenues Expenses

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

  17. Forms of Business Organization Sole Proprietorships Partnerships Corporations

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

  19. THE ACCOUNTING EQUATION Assets = Liabilities + Equity $300,000 = $80,000 + $220,000

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

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

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

  23. On 8 May, 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.

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

  25. Jill realized she had purchased more repair parts than needed. On 18 May, 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.

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

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

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

  29. On 31 May, 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.

  30. Let’s prepare the Income Statement and Statement of Cash Flows for JJ’s Lawn Care Service for the month ending 31 May 2009. These transactions impact the Statement of Cash Flows. These transactions impact the Income Statement.

  31. 2) INCOME STATEMENT • A financialstatementthatmeasures a company’sfinancialperformanceover a specificaccountingperiod. • Lists revenues and expenses that were incurred over a period of time. • Summarizescompany’srevenueandexpensetransactionsfor a period of time. • Revenues – Expenses = (+)NET INCOME (-)NTE LOSS

  32. a) Revenues • Revenues are amounts received or to be received from customers for sales of products or services. • sales • performance of services • rent • interest

  33. b) Expenses • Expenses are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. • salaries and wages • utilitiesexpense • supplies expense • advertisingexpense

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

  35. 3) STATEMENT of CASH FLOWS • The cashflowstatement is concernedwiththeflow of cash in andout of thebusiness. • The statement of cash flows is divided into three major sections: (a) cash flows from operating activities (b) cash flows from investing activities (c) cash flows from financing activities

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

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

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

  39. 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.

  40. Assets = Liabilities + Equity $21,850 = $13,150 + $8,700

  41. 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

  42. Financial Statement Articulation

  43. End of Chapter 2

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