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BASIC FINANCIAL
STATEMENTS
Introduction
Introduction to
to Financial
Financial Statements
Statements
Companies prepare interim
financial statements and annual
financial statements.
2000
X
McGraw-Hill/Irwin
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin
Three primary
financial
statements.
We will use a corporation
to describe these
statements.
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin
Describes
where the
enterprise
stands at a
specific date.
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin
Depicts the
revenue and
expenses for a
designated
period of time.
Introduction
Introduction to
to Financial
Financial Statements
Statements
Revenues
result in
positive
cash flow.
Expenses
result in
negative
cash flow.
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin
Depicts the
ways cash has
changed during
a designated
period of time.
The
The Concept
Concept of
of the
the Business
Business Entity
Entity
Vagabond
Travel
Agency
McGraw-Hill/Irwin
A business
entity is
separate from
the personal
affairs of its
owner.
A
A Starting
Starting Point:
Point: Statement
Statement of
of
Financial
Financial Position
Position
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes receivable
10,000
Notes payable
$ 41,000
Accounts receivable
60,500
Accounts payable
36,000
Supplies
2,000
Salaries payable
3,000
Land
100,000
Total liabilities
$ 80,000
Building
90,000 Owners' Equity:
Office equipment
15,000
Capital stock
150,000
Retained earnings
70,000
Total
$ 300,000 Total
$ 300,000
McGraw-Hill/Irwin
Assets
Assets
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes receivable
10,000
Notes payable
$ 41,000
Accounts receivable
60,500
Accounts payable
36,000
Supplies
2,000
Salaries payable
3,000
Land
100,000
Total liabilities
$ 80,000
Building
90,000 Owners' Equity:
Office equipment
15,000
Capital stock
150,000
Retained earnings
70,000
Total
$ 300,000 Total
$ 300,000
Assets are
economic resources
that are owned by
the business and
are expected to
provide positive
future cash flows.
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Assets
Assets
Cost Principle
Stable-Dollar
Assumption
These accounting
principles support Going-Concern
cost as the basis
Assumption
for asset valuation.
Objectivity
Principle
McGraw-Hill/Irwin
Liabilities
Liabilities
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes receivable
10,000
Notes payable
$ 41,000
Accounts receivable
60,500
Accounts payable
36,000
Supplies
2,000
Salaries payable
3,000
Land
100,000
Total liabilities
$ 80,000
Building
90,000 Owners' Equity:
Office equipment
15,000
Capital stock
150,000
Retained earnings
70,000
Total
$ 300,000 Total
$ 300,000
Liabilities are
debts that
represent negative
future cash flows
for the enterprise.
McGraw-Hill/Irwin
Owners
OwnersEquity
Equity
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes receivable
10,000
Notes payable
$ 41,000
Accounts receivable
60,500
Accounts payable
36,000
Supplies
2,000
Salaries payable
3,000
Land
100,000
Total liabilities
$ 80,000
Building
90,000 Owners' Equity:
Office equipment
15,000
Capital stock
150,000
Retained earnings
70,000
Total
$ 300,000 Total
$ 300,000
Owners equity
represents the
owners claim to
the assets of the
business.
McGraw-Hill/Irwin
Owners
OwnersEquity
Equity
Changes in Owners
Equity
Owners
Investments
Payments
to Owners
Business
Earnings
Business
Losses
McGraw-Hill/Irwin
The
The Accounting
Accounting Equation
Equation
Travel
Assets
Liabilities
++ Agency
Owners
Assets ==Vagabond
Liabilities
OwnersEquity
Equity
Balance Sheet
December 31, 2002
$300,000
$220,000
$300,000
= $80,000
$80,000 +Liabilities
+
$220,000
Assets=
& Owners' Equity
Cash
$ 22,500 Liabilities:
Notes receivable
10,000
Notes payable
$ 41,000
Accounts receivable
60,500
Accounts payable
36,000
Supplies
2,000
Salaries payable
3,000
Land
100,000
Total liabilities
$ 80,000
Building
90,000 Owners' Equity
Office equipment
15,000
Capital stock
150,000
Retained earnings
70,000
Total
$ 300,000 Total
$ 300,000
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Lets analyze
some
transactions for
JJs Lawn Care
Service.
McGraw-Hill/Irwin
Cash
Total
McGraw-Hill/Irwin
8,000 Total
8,000
8,000
Total
McGraw-Hill/Irwin
8,000 Total
8,000
8,000
Total
McGraw-Hill/Irwin
$ 21,000 Total
$ 21,000
McGraw-Hill/Irwin
$ 21,300 Total
$ 21,300
Jill realized she had purchased more repair parts than needed.
On May 18, JJs was able to sell half of the repair parts to ABC Lawns for
$150, a price equal to JJs cost. JJs will receive the cash within 30 days.
JJ's Lawn Care Service
Balance Sheet
May 18, 2003
Assets
Liabilities and Owners' Equity
Cash
$ 3,500 Liabilities:
Accounts Receivable
150 Notes Payable
$ 13,000
Tools & Equipment
2,650 Accounts Payable
300
Truck
15,000
Total Liabilities
$ 13,300
Owners' Equity:
Capital Stock
8,000
Total
McGraw-Hill/Irwin
$ 21,300 Total
$ 21,300
McGraw-Hill/Irwin
$ 21,300 Total
$ 21,300
McGraw-Hill/Irwin
$ 21,150 Total
$ 21,150
McGraw-Hill/Irwin
May 1
Balances
May 2
Balances
May 8
Balances
May 11
Balances
May 18
Balances
May 25
Balances
May 28
Balances
May 29
Balances
May 31
Balances
Cash
$ 8,000
$ 8,000
(2,500)
$ 5,500
(2,000)
$ 3,500
Assets
Accts.
Tools &
+ Rec. + Equip. +
McGraw-Hill/Irwin
Truck
Liabilities
+
Owners' Equity
Notes
Accts.
Capital
Retained
= Payable + Pay. + Stock + Earnings
$ 8,000
$ 8,000
$ 2,500
$ 2,500
$ 3,500
$ 3,500
75
$ 3,575
(150)
$ 3,425
750
$ 4,175
(50)
$ 4,125
$ 150
$ 150
(75)
$ 75
$ 75
$ 2,500
300
$ 2,800
(150)
$ 2,650
$ 8,000
$ 15,000
$ 15,000
$ 13,000
$ 13,000
$ 8,000
$ 15,000
$ 13,000
$ 300
$ 300
$ 15,000
$ 13,000
$ 300
$ 8,000
$ 2,650
$ 15,000
$ 13,000
$ 8,000
$ 2,650
$ 15,000
$ 13,000
$ 300
(150)
$ 150
$ 8,000
$ 8,000
$ 75
$ 2,650
$ 15,000
$ 13,000
$ 150
$ 8,000
$ 75
$ 2,650
$ 15,000
$ 13,000
$ 150
$ 8,000
750
750
(50)
700
$ 8,000
$ 8,000
(2,500)
$ 5,500
(2,000)
$ 3,500
$ 3,500
$ 3,500
75
$ 3,575
(150)
$ 3,425
750
$ 4,175
(50)
$ 4,125
McGraw-Hill/Irwin
These
These transactions
transactions
impact
the
impact
the
$ 15,000
$ 13,000
$ 2,500Statement
$ 15,000
$ 13,000
of
Statement
of Cash
Cash
300
$ 300
$ 2,800
$ 15,000
$ 13,000
$ 300
Flows.
Flows.
(150)
$ 2,500
$ 2,500
$ 150
$ 150
(75)
$ 75
$ 75
$ 8,000
$ 8,000
$ 8,000
$ 8,000
$ 8,000
$ 2,650
$ 15,000
$ 13,000
$ 300
$ 8,000
$ 2,650
$ 15,000
$ 13,000
$ 8,000
$ 2,650
$ 15,000
$ 13,000
$ 300
(150)
$ 150
$ 75
$ 2,650
$ 75
$ 2,650
$ 8,000
These
transactions
These
transactions
$ 15,000
$ 13,000
$ 150
$ 8,000
impact
impact the
the Income
Income
$ 15,000
$ 13,000
$ 150
$ 8,000
Statement.
Statement.
$
$
750
750
(50)
700
750
50
700
Investments
Investments by
by and
and payments
payments to
to the
the owners
owners
are
are not
not included
included on
on the
the Income
Income Statement.
Statement.
McGraw-Hill/Irwin
Operating
Operating activities
activities include
include the
the cash
cash
effects
effects of
of revenue
revenue and
and expense
expense
transactions.
transactions.
McGraw-Hill/Irwin
Investing
Investing activities
activities include
include the
the cash
cash
effects
effects of
of purchasing
purchasing and
and selling
selling
assets.
assets.
McGraw-Hill/Irwin
Financing
Financing activities
activities include
include the
the cash
cash
effects
effects of
of transactions
transactions with
with the
the owners
owners
and
and creditors.
creditors.
McGraw-Hill/Irwin
Relationships
Relationships Among
Among Financial
Financial
Statements
Statements
Beginning
of period
End of
period
Time
Balance
Sheet
Balance
Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin
Forms
Forms of
of Business
Business Organizations
Organizations
Sole
Sole
Proprietorship
Proprietorship
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Partnership
Partnership
Corporation
Corporation
Reporting
Reporting Ownership
Ownership Equity
Equity in
in the
the
Balance
Balance Sheet
Sheet
Sole
Sole
Proprietorship
Proprietorship
Partnership
Partnership
Corporation
Corporation
McGraw-Hill/Irwin
Ow ner's equity:
Jill Jones, capital
8,000
Partners' equity
Jill Jones, capital $ 4,000
Bill Jones, capital
4,000
Total partners' equity
$ 8,000
Owners' equity
Capital stock
$ 7,000
Retained earnings
1,000
Total stockholders' equity
$ 8,000
The
The Use
Use of
of Financial
Financial Statements
Statements by
by
Outsiders
Outsiders
Two
Two concerns:
concerns:
Creditors
Solvency
Solvency
Profitability
Profitability
Investors
McGraw-Hill/Irwin
The
The Need
Need for
for Adequate
Adequate Disclosure
Disclosure
Balance Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin
Notes
Notes to
to the
the
financial
financial
statements
statements often
often
provide
provide facts
facts
necessary
necessary for
for the
the
proper
proper
interpretation
interpretation of
of
the
the statements.
statements.
End
End of
of Chapter
Chapter 22
McGraw-Hill/Irwin