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Financial AFinancial AccountingccountingChapter 2Chapter 2
Basic Financial StatementsBasic Financial Statements
Financial AFinancial AccountingccountingChapter 2Chapter 2
Basic Financial StatementsBasic Financial Statements
Assets = Liabilities +
Cash +Accts. Rec. +
Tools & Equip. + Truck =
Notes Payable +
Accts. Pay. +
Capital Stock +
Retained Earnings
May 1 8,000$ 8,000$ Balances 8,000$ 8,000$
May 2 (2,500) 2,500$ Balances 5,500$ 2,500$ 8,000$
May 8 (2,000) 15,000$ 13,000$ Balances 3,500$ 2,500$ 15,000$ 13,000$ 8,000$
May 11 300 300$ Balances 3,500$ 2,800$ 15,000$ 13,000$ 300$ 8,000$
May 18 150$ (150) Balances 3,500$ 150$ 2,650$ 15,000$ 13,000$ 300$ 8,000$
May 25 75 (75) Balances 3,575$ 75$ 2,650$ 15,000$ 13,000$ 300$ 8,000$
May 28 (150) (150) Balances 3,425$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$
May 29 750 750 Balances 4,175$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 750$
May 31 (50) (50) Balances 4,125$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 700$
Owners' Equity
Assets = Liabilities +
Cash +Accts. Rec. +
Tools & Equip. + Truck =
Notes Payable +
Accts. Pay. +
Capital Stock +
Retained Earnings
May 1 8,000$ 8,000$ Balances 8,000$ 8,000$
May 2 (2,500) 2,500$ Balances 5,500$ 2,500$ 8,000$
May 8 (2,000) 15,000$ 13,000$ Balances 3,500$ 2,500$ 15,000$ 13,000$ 8,000$
May 11 300 300$ Balances 3,500$ 2,800$ 15,000$ 13,000$ 300$ 8,000$
May 18 150$ (150) Balances 3,500$ 150$ 2,650$ 15,000$ 13,000$ 300$ 8,000$
May 25 75 (75) Balances 3,575$ 75$ 2,650$ 15,000$ 13,000$ 300$ 8,000$
May 28 (150) (150) Balances 3,425$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$
May 29 750 750 Balances 4,175$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 750$
May 31 (50) (50) Balances 4,125$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 700$
Owners' Equity
Now, let’s prepare the Balance Sheet for JJ’s Lawn Care Service for May 31, 2007.
These balances will appear on the Balance
Sheet.
These balances will appear on the Balance
Sheet.
Assets = Liabilities +
Cash +Accts. Rec. +
Tools & Equip. + Truck =
Notes Payable +
Accts. Pay. +
Capital Stock +
Retained Earnings
May 1 8,000$ 8,000$ Balances 8,000$ 8,000$
May 2 (2,500) 2,500$ Balances 5,500$ 2,500$ 8,000$
May 8 (2,000) 15,000$ 13,000$ Balances 3,500$ 2,500$ 15,000$ 13,000$ 8,000$
May 11 300 300$ Balances 3,500$ 2,800$ 15,000$ 13,000$ 300$ 8,000$
May 18 150$ (150) Balances 3,500$ 150$ 2,650$ 15,000$ 13,000$ 300$ 8,000$
May 25 75 (75) Balances 3,575$ 75$ 2,650$ 15,000$ 13,000$ 300$ 8,000$
May 28 (150) (150) Balances 3,425$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$
May 29 750 750 Balances 4,175$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 750$
May 31 (50) (50) Balances 4,125$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 700$
Owners' Equity
These transactions impact the Statement
of Cash Flows.
These transactions impact the Statement
of Cash Flows.
These transactions impact the Income
Statement.
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, 2007.
Learning Objective
LO6
To explain how the statement of cash flows presents the change in cash for a period of time in
terms of the company’s operating, investing, and
financing activities.
JJ's Lawn Care ServiceStatement of Cash Flows
For the Month Ended May 31, 2007Cash 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, 2007 - Cash balance, May 31, 2007 4,125$
JJ's Lawn Care ServiceStatement of Cash Flows
For the Month Ended May 31, 2007Cash 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, 2007 - Cash balance, May 31, 2007 4,125$
Operating activities include the cash effects of revenue and expense transactions.
Operating activities include the cash effects of revenue and expense transactions.
JJ's Lawn Care ServiceStatement of Cash Flows
For the Month Ended May 31, 2007Cash 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, 2007 - Cash balance, May 31, 2007 4,125$
Investing activities include the cash effects of purchasing and selling assets.
Investing activities include the cash effects of purchasing and selling assets.
JJ's Lawn Care ServiceStatement of Cash Flows
For the Month Ended May 31, 2007Cash 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, 2007 - Cash balance, May 31, 2007 4,125$
Financing activities include the cash effects of transactions with the owners and
creditors.
Financing activities include the cash effects of transactions with the owners and
creditors.
Assets = Liabilities +
Cash +Accts. Rec. +
Tools & Equip. + Truck =
Notes Payable +
Accts. Pay. +
Capital Stock +
Retained Earnings
May 1 8,000$ 8,000$ Balances 8,000$ 8,000$
May 2 (2,500) 2,500$ Balances 5,500$ 2,500$ 8,000$
May 8 (2,000) 15,000$ 13,000$ Balances 3,500$ 2,500$ 15,000$ 13,000$ 8,000$
May 11 300 300$ Balances 3,500$ 2,800$ 15,000$ 13,000$ 300$ 8,000$
May 18 150$ (150) Balances 3,500$ 150$ 2,650$ 15,000$ 13,000$ 300$ 8,000$
May 25 75 (75) Balances 3,575$ 75$ 2,650$ 15,000$ 13,000$ 300$ 8,000$
May 28 (150) (150) Balances 3,425$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$
May 29 750 750 Balances 4,175$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 750$
May 31 (50) (50) Balances 4,125$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 700$
Owners' Equity
Now, let’s prepare the Balance Sheet for JJ’s Lawn Care Service for May 31, 2007.
These balances will appear on the Balance
Sheet.
These balances will appear on the Balance
Sheet.
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, 2007
Assets = Liabilities + Owners’ Equity
$21,850 = $13,150 + $8,700
Assets = Liabilities + Owners’ Equity
$21,850 = $13,150 + $8,700
Financial Statement Articulation
JJ's Lawn Care ServiceStatement of Cash Flows
For the Month Ended May 31, 2007Cash flows from operating activities: Cash received from revenue transactions 750$ 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, 2007 - Cash balance, May 31, 2007 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, 2007
JJ's Lawn Care ServiceIncome Statement
Sales Revenue 750$ Operating Expense: Gasoline Expense 50 Net Income 700$
For the Month Ended May 31, 2007
FINANCIAL STATEMENTSFINANCIAL STATEMENTS
After transactions are identified, recorded, and summarized, 4 financial statements are prepared from the summarized accounting data:1 An income statement presents the revenues and expenses and resulting net income or net loss for a specific period of time.2 An owner’s equity statement/ Retained earnings summarizes the changes in owner’s equity/ retained earnings for a specific period of time.3 A balance sheet reports the assets, liabilities, and owner’s equity at a specific date.4 A statement of cash flows summarizes information
about the cash inflows (receipts) and outflows (payments) for a specific period of time.
ILLUSTRATION ILLUSTRATION 1-11 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE
Income Statement
For the Month Ended September 30, 2002
Revenues Service revenue $ 4,700 Expenses Salaries expense $ 900
Rent expense 600 Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net income
2,750
Net income of $2,750 shown on the income statement is added to the beginning balance of owner’s capital in the owner’s equity statement.Net income of $2,750 shown on the income statement is added to the beginning balance of owner’s capital in the owner’s equity statement.
ILLUSTRATION ILLUSTRATION 1-11 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE
Owner’s Equity/ Retained Earnings Statement
For the Month Ended September 30, 2002
Capital/ Retained earnings, September 1 $ –0– Add: Investments/ $ 15,000 Net income 17,750 17,750 Less: Drawings/ Dividends (1,300) Capital/ Retained earnings , September 30 $ 16,450
2,750
Net income of $2,750 is determined from the information in the owner’s equity column of the Summary of Transactions (Illustration 1-7).
Net income of $2,750 is determined from the information in the owner’s equity column of the Summary of Transactions (Illustration 1-7).
ILLUSTRATION ILLUSTRATION 1-11 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2002
Capital, September 1 $ –0– Add: Investments $ 15,000 Net income 2,750 17,750 17,750 Less: Drawings 1,300 Capital, September 30
$16,450
Net income of $2,750 carried forward from the income statement to the owner’s equity statement. The owner’s capital of $16,450 at the end of the reporting period is shown as the final total of the owner’s equity column of the Summary of Transactions (Illustration 1-7).
Net income of $2,750 carried forward from the income statement to the owner’s equity statement. The owner’s capital of $16,450 at the end of the reporting period is shown as the final total of the owner’s equity column of the Summary of Transactions (Illustration 1-7).
ILLUSTRATION ILLUSTRATION 1-11 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
Owner’s capital of $16,450 at the end of the reporting period shown in the owner’s equity statement is shown on the balance sheet.Owner’s capital of $16,450 at the end of the reporting period shown in the owner’s equity statement is shown on the balance sheet.
SOFTBYTE
Balance Sheet
September 30, 2002
Assets Cash $ 8,050 Accounts receivable 1,400 Supplies 1,600 Equipment 7,000 Total assets $ 18,050
Liabilities and Owner’s Equity Liabilities Accounts payable $ 1,600 Owner’s equity R. Neal, capital Total liabilities and owner’s equity $ 18,050
16,450
ILLUSTRATION ILLUSTRATION 1-11 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
Cash of $8,050 on the balance sheet is reported on the statement of cash flows.Cash of $8,050 on the balance sheet is reported on the statement of cash flows.
SOFTBYTE
Balance Sheet
September 30, 2002
Assets Cash $ 8,050 Accounts receivable 1,400 Supplies 1,600 Equipment 7,000 Total assets $ 18,050
Liabilities and Owner’s Equity Liabilities Accounts payable $ 1,600 Owner’s equity R. Neal, capital Total liabilities and owner’s equity $ 18,050
ILLUSTRATION ILLUSTRATION 1-11 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE
Statement of Cash Flows
For the Month Ended September 30, 2002
Cash flows from operating activities Cash receipts from revenues $ 3,300 Cash payments for expenses (1,950) Net cash provided by operating activities 1,350 Cash flows from investing activities Purchase of equipment (7,000) Cash flows from financing activities Investment by owners $ 15,000 Withdraws by owners (1,300) Net cash provided by financing activities 13,700 Net increase in cash 8,050 Cash at the beginning of the period –0– Cash at the end of the period
$ 8,050
Cash of $8,050 on the balance sheet and statement of cash flows is shown as the final total of the cash column of the Summary of Transactions (Illustration 1-7).Cash of $8,050 on the balance sheet and statement of cash flows is shown as the final total of the cash column of the Summary of Transactions (Illustration 1-7).
Forms of Business Organization
Sole Proprietorships
Sole Proprietorships PartnershipsPartnerships CorporationsCorporations
Reporting Ownership Equity in the Statement of Financial
PositionOwner's equity:
Jill Jones, capital 8,000$ 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
The Use of Financial Statements by External Parties
Creditors
Investors
Two concerns:Liquidity
Profitability
Two concerns:Liquidity
Profitability
The Need for Adequate Disclosure
Notes to the financial statements often
provide facts necessary for the
proper interpretation of the
statements.
Notes to the financial statements often
provide facts necessary for the
proper interpretation of the
statements.
Income Statement
Balance Sheet
Statement of Cash Flows
Income Statement
Net income
Income Statement
Net income
Statement of Retained Earnings
Beginning Retained Earnings+ Net income– Dividends
Ending retained earnings
Statement of Retained Earnings
Beginning Retained Earnings+ Net income– Dividends
Ending retained earnings
Balance Sheet
Ending Balance Retained Earnings
Balance Sheet
Ending Balance Retained Earnings
Order of Preparation
Income statement—A summary of the revenue and expenses for a specific period of time.
Statement of retained earnings – a summary of the changes in the retained earnings that have occurred during a specific period of time.
Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date.
Review
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 dressing occurs when management takes measures to make the company appear as strong as possible in it
financial statements.