Financial Statements and Business transactions

1. 2 Financial Statements and Business transactions

2. Exh. 2.1 Previewing Financial Statements Income Statement Beginning Balance Sheet Ending Balance Sheet Statement of Cash Flows Statement of Changes in Owner’s Equity Point in time Period of time Point in time

3. Exh. 2.2 Income Statement 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.

4. Exh. 2.3 Statement of Changesin Owner’s Equity For corporations, instead of Withdrawals by Owner we use the term Dividends. Dividends represent distributions to the stockholders.

5. Exh. 2.4 Balance Sheet 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. Equity is the owner’s claim on the assets of the business. It is the residual interest in the assets after deducting liabilities.

6. = + Assets Liabilities Equity Exh. 2.4 Balance Sheet Remember from Chapter 1 that we learned that total assets must equal the sum of total liabilities and total equity.

7. Owner’s Investment Owner’s Withdrawal Revenues Expenses Balance Sheet Owner’s Equity

8. Exh. 2.6 Describes the sources and uses of cash for a reporting period.

9. GAAP FASB Financial Statements Preparers Audit Report Decision makers Auditors ASB GAAS Exh. 2.9 Financial Statements, Auditing and Users

10. International Accounting Principles Despite our growing global economy, countries continue to maintain their unique set of acceptable accounting practices.

11. Fundamental Principles of Accounting Business Entity Principle A business is accounted for separately from its owner or owners. Objectivity Principle Financial statement information is supported by independent, unbiased evidence. Cost Principle Financial statements are based on actual costs incurred in business transactions. Going-Concern Principle A business continues operating instead of being closed or sold. Monetary Unit Principle Express transactions and events in monetary units.

12. The accounting equation must remain in balance after each transaction. = + Assets Liabilities Equity Transactions and the Accounting Equation

13. The accounts involved are: (1) Cash (asset) (2) Owner’s Equity (equity) Transaction Analysis Owners of Scott Company contributed $20,000 cash to start the business.

14. Transaction Analysis Owners of Scott Company contributed $20,000 cash to start the business.

15. Theaccounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction Analysis Purchased supplies paying $1,000 cash.

16. Transaction Analysis Purchased supplies paying $1,000 cash.

17. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction Analysis Purchased equipment for $15,000 cash.

18. Transaction Analysis Purchased equipment for $15,000 cash.

19. Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account. The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability)

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

21. Transaction Analysis The 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.

22. Transaction Analysis Rendered consulting services receiving $3,000 cash. The accounts involved are: (1) Cash (asset) (2) Revenues (equity)

23. Transaction Analysis Rendered consulting services receiving $3,000 cash.

24. Transaction Analysis Paid salaries to employees, $800 cash. The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity)

25. Transaction Analysis Paid salaries to employees, $800 cash.

26. Transaction Analysis Borrowed $4,000 from 1st American Bank. The accounts involved are: (1) Cash (asset) (2) Notes payable (liability)

27. Transaction Analysis Borrowed $4,000 from 1st American Bank.

28. Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded.

29. Income Statement Scott’s net income is the difference between Revenues and Expenses. The net income of $2,200 increases Scott’s equity by $2,200.

30. Balance Sheet The balance sheet reflects Scott’s financial position at 12/31/01.

31. Statement of Cash Flows

32. Return on Equity Net Income Average Equity = Modified Return on Equity Net Income - Value of Owners’ Efforts Average Equity = Using the Information Return on Equity For Corporations . . . For Proprietorships and Partnerships . . .

33. End of Chapter 2 We can’t wait to start Chapter 3!