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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Copyright © 2012 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin

Basic Financial Basic Financial StatementsStatements

Chapter 2

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Describes where the enterprise stands at a

specific date.

Income Statement

Balance Sheet

Statement of Cash Flows

Introduction to Financial Introduction to Financial StatementsStatements

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Depicts the revenue and

expenses for a designated

period of time.

Income Statement

Balance Sheet

Statement of Cash Flows

Introduction to Financial Introduction to Financial StatementsStatements

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Depicts the ways cash has changed during

a designated period of time.

Income Statement

Balance Sheet

Statement of Cash Flows

Introduction to Financial Introduction to Financial StatementsStatements

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Vagabond Travel AgencyBalance Sheet

December 31, 2011Assets 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$

A Starting Point: A Starting Point: Statement of Financial Statement of Financial PositionPosition

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The Concept of the The Concept of the Business EntityBusiness Entity

Vagabond Travel

Agency

A business entity is

separate from the personal affairs of its

owner.

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Vagabond Travel AgencyBalance Sheet

December 31, 2011Assets 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$

AssetsAssets

Assets are economic

resources that are owned by the

business and are expected to benefit future operations.

Assets are economic

resources that are owned by the

business and are expected to benefit future operations.

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AssetsAssets

Cost Principle

Cost Principle

Going-ConcernAssumption

Going-ConcernAssumptionObjectivity

PrincipleObjectivity

Principle

Stable-DollarAssumptionStable-DollarAssumption

These accounting principles support cost as the basis for asset valuation.

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Vagabond Travel AgencyBalance Sheet

December 31, 2011Assets 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$

LiabilitiesLiabilities

Liabilities are debts that represent

negative future cash flows for the enterprise.

Liabilities are debts that represent

negative future cash flows for the enterprise.

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Owners’ EquityOwners’ Equity

Vagabond Travel AgencyBalance Sheet

December 31, 2011Assets 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’ claims on the assets of the business.

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

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Vagabond Travel AgencyBalance Sheet

December 31, 2011Assets 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' EquityOffice equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

The Accounting EquationThe Accounting Equation

Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

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Relationships Among Relationships Among Financial StatementsFinancial Statements

Date at beginning of

period

Date at end of period

Balance Sheet

Balance Sheet

Time

Income StatementStatement of Cash Flows

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JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2011Cash flows from operating activities: Cash received from revenue transactions 750$ Cash paid for expenses (50) Net cash provided by operating activities 700$ Cash flows from investing activities: Purchase of lawn mower (2,500)$ Purchase of truck (2,000) Collection for sale of repair parts 75 Payment for repair parts (150) Net cash used by investing activities (4,575) Cash flows from financing activities: Investment by owners 8,000 Increase in cash for month 4,125$ Cash balance, May 1, 2011 - Cash balance, May 31, 2011 4,125$

Cash 4,125$ Notes payable 13,000$ Accounts receivable 75 Accounts payable 150 Tools & equipment 2,650 Truck 15,000 Capital stock 8,000

Retained earnings 700 Total assets 21,850$ Total liabilities & equity 21,850$

Assets Liabilities

Owners' Equity

JJ's Lawn Care ServiceBalance SheetMay 31, 2011

JJ's Lawn Care ServiceIncome Statement

Sales Revenue 750$ Operating Expense: Gasoline Expense 50 Net Income 700$

For the Month Ended May 31, 2011

Financial Statement Articulation

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Statement of Cash Flows

Balance Sheet

Income Statement

Other Information:•Nonfinancial disclosures•Management interpretation•Industry•Competitors•National economy

Financial Reporting and Financial Reporting and Financial StatementsFinancial Statements

Financial statements are just one source of

financial accounting information.

Financial statements are just one source of

financial accounting information.

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Reporting Ownership Equity Reporting Ownership Equity in the Statement of in the Statement of Financial PositionFinancial Position

Owner's equity:

Jill Jones, capital 8,000$ Sole

Proprietorships

Sole Proprietorships

Partners' equity Jill Jones, capital 4,000$ Bill Jones, capital 4,000 Total partners' equity 8,000$

PartnershipsPartnerships

Owners' equity Capital stock 7,000$ Retained earnings 1,000 Total stockholders' equity 8,000$

CorporationsCorporations

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End of Chapter 2End of Chapter 2