Basic Financial Statements - portnet.org
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PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2012 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Basic Financial Statements Chapter 2
Transcript of Basic Financial Statements - portnet.org
Chapter TitlePowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2012 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin
Basic Financial Statements
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Balance Sheet
Presentation Notes
There are three fundamental financial statements used in accounting. The income statement shows revenues and expenses. The balance sheet is a listing of all asset, liability, and equity account balances that do not appear on the income statement. The statement of cash flows shows how the company receives and spends its cash. This chapter will look at the financial statements of a corporation.
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specific date.
Income Statement
Balance Sheet
Presentation Notes
The balance sheet (also referred to as the statement of position) describes the financial position of a company at a specific point in time. A balance sheet may be prepared monthly, quarterly, or annually depending on the needs of management and external users. The balance sheet is sometimes referred to as the statement of financial position.
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Presentation Notes
Net income is defined as the excess of revenues over expenses. Financial statements begin with a three-line title comprised of the company name, the name of the statement, and the period covered by the report. The income statement lists revenues and expenses that were incurred over a period of time. Most companies prepare monthly income statements. In the long-run, revenues will generate positive cash inflows to the company and expenses will result in negative cash flows to the company. Just remember, revenues and expenses that appear on the income statement may not always produce cash flows in the current accounting period. Net income (or net loss) is simply the difference between revenues and expenses. When revenues exceed expenses, the result is net income. When expenses exceed revenues, the result is a net loss.
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a designated period of time.
Income Statement
Balance Sheet
Presentation Notes
The statement of cash flows will be covered in detail in a later chapter. The statement of cash flows is divided into three major sections: (1) cash flows from operating activities; (2) cash flows from investing activities, and (3) cash flows from financing activities. The statement describes cash inflows and outflows over a period of time.
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December 31, 2011 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$
A Starting Point: Statement of Financial Position
Presenter
Presentation Notes
The statement of financial position, commonly referred to as the balance sheet, is an inventory of assets, liabilities, and equity at the end of the month. Our total assets are equal to $300,000. This includes cash of $22,500, notes receivable of $10,000, supplies of $2,000, and the balances in the remaining asset accounts. Liabilities include notes payable of $41,000, accounts payable of $36,000 and salaries payable of $3,000. The accounts in the owners’ equity section of the balance sheet are capital stock of $150,000 and retained earnings of $70,000. Notice that the total assets are equal to the total liabilities plus owners’ equity.
Sheet1
Vagabond Travel
owner.
Presenter
Presentation Notes
The business entity principle states that the transactions of individual owners of a business and those of the business must be separate.
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December 31, 2011 Assets Liabilities & Owners' Equity
Cash 22,500$ 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
business and are expected to benefit future operations.
Presenter
Presentation Notes
Assets are resources owned or controlled by an entity. They include such items as cash, accounts receivable (amounts owed to the company by customers), land, building and equipment, and supplies.
Sheet1
Stable-Dollar Assumption
These accounting principles support cost as the basis for asset valuation.
Presenter
Presentation Notes
The cost principle tells us that accounting information is based upon actual cost incurred. We refer to this as historical cost. The going-concern assumption states that in the absence of information to the contrary, the business entity is assumed to continue operations into the foreseeable future. The objectivity principle states that accounting information must be unbiased and based upon independent evidence. The stable-dollar assumption tells us that we will only record accounting information that can be expressed in monetary units, usually dollars in the United States.
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December 31, 2011 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
negative future cash flows for the enterprise.
Presenter
Presentation Notes
Liabilities represent the claims of creditors on an entity’s assets. Liabilities include accounts payable (amounts owed to creditors for assets purchased on account), taxes payable, and wages payable (amounts owed to our employees at the end of the accounting period).
Sheet1
December 31, 2011 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’ claims on the assets of
the business.
Presentation Notes
The equities of an entity include investments by owners, withdrawals by owners, and earnings retained by the business. Investments by owners and net income increase owners’ equity. Payments to owners and net losses decrease owners’ equity.
Sheet1
December 31, 2011 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$
The Accounting Equation Assets = Liabilities + Owners’ Equity $300,000 = $80,000 + $220,000
Presenter
Presentation Notes
The basic accounting equation states that assets are equal to liabilities plus equity of a company. The equation makes sense because it states that assets must be equal to the claims against those assets. There are two broad categories of claims against an asset: Claims by creditors (called liabilities), or after all creditor claims are satisfied, the residual owners (the stockholders) have a claim on those assets.
Sheet1
Let’s analyze transactions for JJ’s Lawn Care Service.
Presenter
Presentation Notes
Let’s look at how specific business transactions impact the basic financial statement.
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May 1, 2011 Assets
Total 8,000$ Total 8,000$
Owners' Equity
On May 1, Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service
and received 800 shares of stock.
Presenter
Presentation Notes
On May 1st, Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock in return. Let’s see how the balance sheet would look immediately after this transaction. The cash account of JJ’s Lawn Care increased by eight thousand dollars and the capital stock of the company also increased by eight thousand dollars. Notice that the basic accounting equation is in balance. Total assets are equal to total liabilities plus owners’ equity.
Sheet1
May 2, 2011 Assets
Total 8,000$ Total 8,000$
Owners' Equity
On May 2, JJ’s purchased a riding lawn mower for $2,500 cash.
Presenter
Presentation Notes
On the 2nd of May, JJ’s Lawn Care purchased a riding lawn mower for $2,500 cash. Let’s see how the balance sheet looks now.The cash account has been reduced by the $2,500 spent and the tools and equipment account has been increased by the same amount. One asset, cash, was merely traded for another, the riding lawn mower. Owners’ equity is not changed by the transaction and the basic accounting equation is still in balance.
Sheet1
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On May 8, JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a
note payable for the remaining $13,000.
JJ's Lawn Care Service Balance Sheet
May 8, 2011 Assets
Cash 3,500$ Liabilities: Tools & Equipment 2,500 Notes Payable 13,000$ Truck 15,000 Owners' Equity:
Capital Stock 8,000
Presentation Notes
In the next transaction JJ’s Lawn Care purchases a truck for $15,000, paying $2,000 cash and signing a note payable for $13,000. Let’s update the balance sheet.The cash account decreased by $2,000 and the truck account increased by $15,000. There was a net increase in the asset side of the equation of $13,000. The liability account, notes payable, increased by $13,000. Total assets are now equal to $21,000. Total liabilities are equal to $13,000 and owners’ equity is equal to $8,000. The accounting equation is still in balance.
Sheet1
Assets Cash 3,500$ Liabilities: Tools & Equipment 2,800 Notes Payable 13,000$ Truck 15,000 Accounts Payable 300
Total Liabilities 13,300$ Owners' Equity: Capital Stock 8,000
Total 21,300$ Total 21,300$
Liabilities and Owners' Equity
On May 11, JJ’s purchased some repair parts for $300 on account.
Presenter
Presentation Notes
On May 11th, JJ’s Lawn Care purchases repair parts for the riding lawn mower for $300. The parts are purchased on account. JJ’s will pay the balance on the account at some point in the future. Let’s update the balance sheet. The tools and equipment account increased by $300 and the liability account, accounts payable, increased by the same amount. The balance sheet is getting progressively more complicated.
Sheet1
Assets Cash 3,500$ 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 21,300$ Total 21,300$
Liabilities and Owners' Equity
Jill realized she had purchased more repair parts than needed.
On May 18, 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.
Presenter
Presentation Notes
On May 18th, JJ’s Lawn Care sells one-half of its repair parts at cost to ABC Lawns. ABC agrees to pay for the parts in thirty days. One-half of the cost of the parts is $150. Can you update the balance sheet? Try before proceeding to the next slide. The asset account, Tools and Equipment, decreased by $150 and the asset account, accounts receivable, increased by the same amount. Once again, one asset, repair parts, has been exchanged for another asset, accounts receivable. How did you do?
Sheet1
Assets Cash 3,575$ Liabilities: Accounts Receivable 75 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 21,300$ Total 21,300$
Liabilities and Owners' Equity
On May 25, ABC Lawns pays JJ’s $75 as a partial settlement of its accounts
receivable.
Presenter
Presentation Notes
On May 25th, ABC Lawns makes a partial payment on account for $75 cash. Let’s prepare the updated balance sheet on May 25th.The cash account increases by $75 and accounts receivable decreases by the same amount. Notice that total assets are still equal to total liabilities plus owners’ equity.
Sheet1
Assets Cash 3,425$ Liabilities: Accounts Receivable 75 Notes Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150
Owners' Equity: Capital Stock 8,000
Total 21,150$ Total 21,150$
Liabilities and Owners' Equity
On May 28, JJ’s pays $150 of its accounts payable.
Presenter
Presentation Notes
On May 28th, JJ’s Lawn Care makes a partial payment on its accounts payable of $150. Its time to update the balance sheet.The cash account decreases by $150 and accounts payable also decreases by $150. The total assets are now recorded at $21,150. Total liabilities plus owners’ equity is equal to the same amount.
Sheet1
Assets Cash 4,175$ Liabilities: Accounts Receivable 75 Notes Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150
Owners' Equity: Capital Stock 8,000 Retained Earnings 750
Total 21,900$ Total 21,900$
Liabilities and Owners' Equity
On May 29, JJ’s recorded lawn care services provided during May of $750. All
clients were paid in cash.
Presenter
Presentation Notes
On May 29th, JJ’s Lawn Care begins providing services to customers. On this date the company did work that totaled $750. All of the customers paid cash for the services rendered. Try updating the balance sheet before moving to the next slide. Be careful with this one. The cash account increases by $750 and retained earnings increases by the same amount. The monies received represent earnings of the company that have been retained. The $750 represents revenue earned by the business. How did you do?
Sheet1
Assets Cash 4,125$ Liabilities: Accounts Receivable 75 Notes Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150
Owners' Equity: Capital Stock 8,000 Retained Earnings 700
Total 21,850$ Total 21,850$
Liabilities and Owners' Equity
On May 31, JJ’s purchased gasoline for the lawn mower and the truck for $50 cash.
Presenter
Presentation Notes
In the final transaction for May, JJ’s Lawn Care purchased $50 worth of gasoline for its riding mower and truck. Let’s make the final update to the balance sheet on May 31st.The cash account decreased by $50 and so did the retained earnings of the company. JJ’s Lawn Care used $50 of its earnings to pay for the gasoline. The $50 spent is an expense of the business. Now, let’s review how JJ’s transactions affected the accounting equation.
Sheet1
May 2 (2,500) 2,500$ 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
Presentation Notes
All of these transactions have been placed on this slide, in the appropriate columns for the accounts they’ve impacted. Let’s verify the balance in each account and get ready to prepare the financial statements for JJ’s Lawn Care.
Sheet1
Assets
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
Statement.
Let’s prepare the Income Statement and Statement of Cash Flows for JJ’s Lawn Care Service for the month ending May 31, 2011.
Presenter
Presentation Notes
All of the transactions that impacted the cash account will appear on the statement of cash flows.The revenues and expenses that caused the change in retained earnings will appear on the income statement of the company.Let’s begin by preparing the income statement and statement of cash flows for JJ’s Lawn Care for the period ended May 31, 2011.
Sheet1
Assets
For the Month Ended May 31, 2011
Sales Revenue 750$ Operating Expense: Gasoline Expense 50 Net Income 700$
Investments by and payments to the owners are not included on the Income Statement.
Presenter
Presentation Notes
JJ’s Lawn care has one revenue for services for $750, and one expense for gasoline of $50. So the net income for the month of May is $700. Remember, net income is the excess of revenues over expenses incurred during the accounting period.Investments by owners and payments to owners do not appear on the income statement. These amounts appear on the company’s balance sheet.
Sheet1
Sales Revenue
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash flows from operating activities: Cash received from revenue transactions 750$ 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$
Presenter
Presentation Notes
Here is the statement of cash flows for JJ’s Lawn Care for the month ended May 31, 2011. Notice the three sections of the statement: Cash flows from operating activities, investing activities and financing activities.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash 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$
Operating activities include the cash effects of revenue and expense
transactions.
Presenter
Presentation Notes
Cash flows from operating activities include the cash received from revenue transactions and the cash paid for expenses.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash 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$
Investing activities include the cash effects of purchasing and selling
assets.
Presenter
Presentation Notes
JJ’s had a cash outflow for investing activities. The company invested in the riding lawn mower, truck, and repair parts; however, the company recovered some of the cost of repair parts by selling some excess parts to ABC Lawns.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash 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$
Financing activities include the cash effects of transactions with the owners
and creditors.
Presentation Notes
The only financing activity was the original investment by the owners of JJ’s Lawn Care.The cash inflows and outflows resulted in an increase in cash of $4,125 during the month. Because the cash account had a zero balance at the beginning of the month, the ending balance in the cash account is $4,125.Let’s finish by preparing the balance sheet for JJ’s Lawn Care.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
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, 2011.
These balances will appear on the
Balance Sheet.
Presentation Notes
Here are the account balances to use when preparing the balance sheet.
Sheet1
Assets
(50)
(50)
Balances
$ 4,125
$ 75
$ 2,650
$ 15,000
$ 13,000
$ 150
$ 8,000
$ 700
Sheet3
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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
Assets = Liabilities + Owners’ Equity $21,850 = $13,150 + $8,700
Presenter
Presentation Notes
Asset accounts are listed on the left side of the balance sheet and the liabilities and owners’ equity accounts on the right.Feel free to go back to the previous screen and see all the account balances that appear on the balance sheet.As a final check, make sure that the accounting equation is still in balance. The total assets of $21,850 is exactly equal to the total of the company’s liabilities plus owners’ equity. Notice that the balance sheet lists all assets, liabilities, and equities on a certain date. In this example, the date is May 31, 2011.
Sheet1
Balance Sheet
Balance Sheet
Presenter
Presentation Notes
All the financial statements are interrelated. We can start with the balance sheet at the beginning of an accounting period, analyze the income and cash flows of the company, and arrive at the ending balances that will appear on the balance sheet.
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JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash flows from operating activities: Cash received from revenue transactions 750$ 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 Service Income Statement
Sales Revenue 750$ Operating Expense: Gasoline Expense 50 Net Income 700$
For the Month Ended May 31, 2011
Financial Statement Articulation
Presentation Notes
This is the balance sheet for JJ’s Lawn Care at the end of May. Net income impacts the retained earnings of the company.The statement of cash flows not only provides the balance in the cash account, but also details information about the acquisition and disposition of assets and liabilities as well as changes in the owners’ equity balance. It’s clear to see how all the financial statements articulate with each other.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
Sales Revenue
Financial Reporting and Financial Statements
Financial statements are just one source of
financial accounting information.
Presentation Notes
Financial statements are only one source of information about the operations of a company. The financial statements of a company can be compared to those of other companies in the same industry, major national or international competitors, and to the norms for the national economy.
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Presentation Notes
There are three general forms of business operations. A proprietorship is a business owned by just one individual. A partnership is owned by two or more individuals. Some partnerships have several thousand partners. A corporation is owned by individuals who normally are not active in the day-to-day operations of that business. For example, you may become an owner of IBM by purchasing shares of stock on the New York Stock Exchange. While you are a part owner, you do not necessarily work for IBM nor are you active in the operations of the company.
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Owner's equity: Jill Jones, capital 8,000$
Sole Proprietorships
Partners' equity Jill Jones, capital 4,000$ Bill Jones, capital 4,000 Total partners' equity 8,000$
Partnerships
Owners' equity Capital stock 7,000$ Retained earnings 1,000 Total stockholders' equity 8,000$
Corporations
Presenter
Presentation Notes
The owners’ equity section of the balance sheet will look different for each type of business entity. For a sole proprietorship, there will be a capital account for the owner, and a drawing account to record payments to the owner. For a partnership, each partner has a separate account, where changes are tracked over time. There’s also a separate drawing account for payments made to each partner. To review, a corporation will show owners’ contributions in the capital stock account and accumulated earnings of the company in the retained earnings account. You should be able to tell the form of business by looking at the equity section of a balance sheet.
Sheet: Sheet1
Owner's equity:
Creditors
Investors
Presentation Notes
Creditors and investors have two major concerns about the operations and financial position of any company. First, the company must be liquid, that is, it must be able to pay all bills when due. Second, the company must be profitable in the long-run. Unprofitable companies drain the cash position of the company, causing concern on the part of creditors and investors.
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Income Statement
Balance Sheet
interpretation of the statements.
Presentation Notes
In addition to the basic financial statements, companies prepare notes to the financial statements. These notes are meant to provide the reader with additional insights into the operations and financial position of the company.
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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.
Presenter
Presentation Notes
Creditors and investors are more likely to be interested in financially strong companies. These companies usually have little or no debt and a significant amount of assets that can be converted into cash quickly.When management engages in measures to make the company appear financially stronger than it really is, this is referred to as window dressing. Window dressing may be legal, but it often impugns the integrity of the management team.
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The Concept of the Business Entity
Assets
Assets
Liabilities
Forms of Business Organization
The Use of Financial Statements by External Parties
The Need for Adequate Disclosure
Management’s Interest in Financial Statements
End of Chapter 2
Copyright © 2012 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin
Basic Financial Statements
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Balance Sheet
Presentation Notes
There are three fundamental financial statements used in accounting. The income statement shows revenues and expenses. The balance sheet is a listing of all asset, liability, and equity account balances that do not appear on the income statement. The statement of cash flows shows how the company receives and spends its cash. This chapter will look at the financial statements of a corporation.
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specific date.
Income Statement
Balance Sheet
Presentation Notes
The balance sheet (also referred to as the statement of position) describes the financial position of a company at a specific point in time. A balance sheet may be prepared monthly, quarterly, or annually depending on the needs of management and external users. The balance sheet is sometimes referred to as the statement of financial position.
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Presentation Notes
Net income is defined as the excess of revenues over expenses. Financial statements begin with a three-line title comprised of the company name, the name of the statement, and the period covered by the report. The income statement lists revenues and expenses that were incurred over a period of time. Most companies prepare monthly income statements. In the long-run, revenues will generate positive cash inflows to the company and expenses will result in negative cash flows to the company. Just remember, revenues and expenses that appear on the income statement may not always produce cash flows in the current accounting period. Net income (or net loss) is simply the difference between revenues and expenses. When revenues exceed expenses, the result is net income. When expenses exceed revenues, the result is a net loss.
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a designated period of time.
Income Statement
Balance Sheet
Presentation Notes
The statement of cash flows will be covered in detail in a later chapter. The statement of cash flows is divided into three major sections: (1) cash flows from operating activities; (2) cash flows from investing activities, and (3) cash flows from financing activities. The statement describes cash inflows and outflows over a period of time.
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December 31, 2011 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$
A Starting Point: Statement of Financial Position
Presenter
Presentation Notes
The statement of financial position, commonly referred to as the balance sheet, is an inventory of assets, liabilities, and equity at the end of the month. Our total assets are equal to $300,000. This includes cash of $22,500, notes receivable of $10,000, supplies of $2,000, and the balances in the remaining asset accounts. Liabilities include notes payable of $41,000, accounts payable of $36,000 and salaries payable of $3,000. The accounts in the owners’ equity section of the balance sheet are capital stock of $150,000 and retained earnings of $70,000. Notice that the total assets are equal to the total liabilities plus owners’ equity.
Sheet1
Vagabond Travel
owner.
Presenter
Presentation Notes
The business entity principle states that the transactions of individual owners of a business and those of the business must be separate.
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December 31, 2011 Assets Liabilities & Owners' Equity
Cash 22,500$ 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
business and are expected to benefit future operations.
Presenter
Presentation Notes
Assets are resources owned or controlled by an entity. They include such items as cash, accounts receivable (amounts owed to the company by customers), land, building and equipment, and supplies.
Sheet1
Stable-Dollar Assumption
These accounting principles support cost as the basis for asset valuation.
Presenter
Presentation Notes
The cost principle tells us that accounting information is based upon actual cost incurred. We refer to this as historical cost. The going-concern assumption states that in the absence of information to the contrary, the business entity is assumed to continue operations into the foreseeable future. The objectivity principle states that accounting information must be unbiased and based upon independent evidence. The stable-dollar assumption tells us that we will only record accounting information that can be expressed in monetary units, usually dollars in the United States.
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December 31, 2011 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
negative future cash flows for the enterprise.
Presenter
Presentation Notes
Liabilities represent the claims of creditors on an entity’s assets. Liabilities include accounts payable (amounts owed to creditors for assets purchased on account), taxes payable, and wages payable (amounts owed to our employees at the end of the accounting period).
Sheet1
December 31, 2011 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’ claims on the assets of
the business.
Presentation Notes
The equities of an entity include investments by owners, withdrawals by owners, and earnings retained by the business. Investments by owners and net income increase owners’ equity. Payments to owners and net losses decrease owners’ equity.
Sheet1
December 31, 2011 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$
The Accounting Equation Assets = Liabilities + Owners’ Equity $300,000 = $80,000 + $220,000
Presenter
Presentation Notes
The basic accounting equation states that assets are equal to liabilities plus equity of a company. The equation makes sense because it states that assets must be equal to the claims against those assets. There are two broad categories of claims against an asset: Claims by creditors (called liabilities), or after all creditor claims are satisfied, the residual owners (the stockholders) have a claim on those assets.
Sheet1
Let’s analyze transactions for JJ’s Lawn Care Service.
Presenter
Presentation Notes
Let’s look at how specific business transactions impact the basic financial statement.
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May 1, 2011 Assets
Total 8,000$ Total 8,000$
Owners' Equity
On May 1, Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service
and received 800 shares of stock.
Presenter
Presentation Notes
On May 1st, Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock in return. Let’s see how the balance sheet would look immediately after this transaction. The cash account of JJ’s Lawn Care increased by eight thousand dollars and the capital stock of the company also increased by eight thousand dollars. Notice that the basic accounting equation is in balance. Total assets are equal to total liabilities plus owners’ equity.
Sheet1
May 2, 2011 Assets
Total 8,000$ Total 8,000$
Owners' Equity
On May 2, JJ’s purchased a riding lawn mower for $2,500 cash.
Presenter
Presentation Notes
On the 2nd of May, JJ’s Lawn Care purchased a riding lawn mower for $2,500 cash. Let’s see how the balance sheet looks now.The cash account has been reduced by the $2,500 spent and the tools and equipment account has been increased by the same amount. One asset, cash, was merely traded for another, the riding lawn mower. Owners’ equity is not changed by the transaction and the basic accounting equation is still in balance.
Sheet1
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On May 8, JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a
note payable for the remaining $13,000.
JJ's Lawn Care Service Balance Sheet
May 8, 2011 Assets
Cash 3,500$ Liabilities: Tools & Equipment 2,500 Notes Payable 13,000$ Truck 15,000 Owners' Equity:
Capital Stock 8,000
Presentation Notes
In the next transaction JJ’s Lawn Care purchases a truck for $15,000, paying $2,000 cash and signing a note payable for $13,000. Let’s update the balance sheet.The cash account decreased by $2,000 and the truck account increased by $15,000. There was a net increase in the asset side of the equation of $13,000. The liability account, notes payable, increased by $13,000. Total assets are now equal to $21,000. Total liabilities are equal to $13,000 and owners’ equity is equal to $8,000. The accounting equation is still in balance.
Sheet1
Assets Cash 3,500$ Liabilities: Tools & Equipment 2,800 Notes Payable 13,000$ Truck 15,000 Accounts Payable 300
Total Liabilities 13,300$ Owners' Equity: Capital Stock 8,000
Total 21,300$ Total 21,300$
Liabilities and Owners' Equity
On May 11, JJ’s purchased some repair parts for $300 on account.
Presenter
Presentation Notes
On May 11th, JJ’s Lawn Care purchases repair parts for the riding lawn mower for $300. The parts are purchased on account. JJ’s will pay the balance on the account at some point in the future. Let’s update the balance sheet. The tools and equipment account increased by $300 and the liability account, accounts payable, increased by the same amount. The balance sheet is getting progressively more complicated.
Sheet1
Assets Cash 3,500$ 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 21,300$ Total 21,300$
Liabilities and Owners' Equity
Jill realized she had purchased more repair parts than needed.
On May 18, 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.
Presenter
Presentation Notes
On May 18th, JJ’s Lawn Care sells one-half of its repair parts at cost to ABC Lawns. ABC agrees to pay for the parts in thirty days. One-half of the cost of the parts is $150. Can you update the balance sheet? Try before proceeding to the next slide. The asset account, Tools and Equipment, decreased by $150 and the asset account, accounts receivable, increased by the same amount. Once again, one asset, repair parts, has been exchanged for another asset, accounts receivable. How did you do?
Sheet1
Assets Cash 3,575$ Liabilities: Accounts Receivable 75 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 21,300$ Total 21,300$
Liabilities and Owners' Equity
On May 25, ABC Lawns pays JJ’s $75 as a partial settlement of its accounts
receivable.
Presenter
Presentation Notes
On May 25th, ABC Lawns makes a partial payment on account for $75 cash. Let’s prepare the updated balance sheet on May 25th.The cash account increases by $75 and accounts receivable decreases by the same amount. Notice that total assets are still equal to total liabilities plus owners’ equity.
Sheet1
Assets Cash 3,425$ Liabilities: Accounts Receivable 75 Notes Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150
Owners' Equity: Capital Stock 8,000
Total 21,150$ Total 21,150$
Liabilities and Owners' Equity
On May 28, JJ’s pays $150 of its accounts payable.
Presenter
Presentation Notes
On May 28th, JJ’s Lawn Care makes a partial payment on its accounts payable of $150. Its time to update the balance sheet.The cash account decreases by $150 and accounts payable also decreases by $150. The total assets are now recorded at $21,150. Total liabilities plus owners’ equity is equal to the same amount.
Sheet1
Assets Cash 4,175$ Liabilities: Accounts Receivable 75 Notes Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150
Owners' Equity: Capital Stock 8,000 Retained Earnings 750
Total 21,900$ Total 21,900$
Liabilities and Owners' Equity
On May 29, JJ’s recorded lawn care services provided during May of $750. All
clients were paid in cash.
Presenter
Presentation Notes
On May 29th, JJ’s Lawn Care begins providing services to customers. On this date the company did work that totaled $750. All of the customers paid cash for the services rendered. Try updating the balance sheet before moving to the next slide. Be careful with this one. The cash account increases by $750 and retained earnings increases by the same amount. The monies received represent earnings of the company that have been retained. The $750 represents revenue earned by the business. How did you do?
Sheet1
Assets Cash 4,125$ Liabilities: Accounts Receivable 75 Notes Payable 13,000$ Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150
Owners' Equity: Capital Stock 8,000 Retained Earnings 700
Total 21,850$ Total 21,850$
Liabilities and Owners' Equity
On May 31, JJ’s purchased gasoline for the lawn mower and the truck for $50 cash.
Presenter
Presentation Notes
In the final transaction for May, JJ’s Lawn Care purchased $50 worth of gasoline for its riding mower and truck. Let’s make the final update to the balance sheet on May 31st.The cash account decreased by $50 and so did the retained earnings of the company. JJ’s Lawn Care used $50 of its earnings to pay for the gasoline. The $50 spent is an expense of the business. Now, let’s review how JJ’s transactions affected the accounting equation.
Sheet1
May 2 (2,500) 2,500$ 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
Presentation Notes
All of these transactions have been placed on this slide, in the appropriate columns for the accounts they’ve impacted. Let’s verify the balance in each account and get ready to prepare the financial statements for JJ’s Lawn Care.
Sheet1
Assets
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
Statement.
Let’s prepare the Income Statement and Statement of Cash Flows for JJ’s Lawn Care Service for the month ending May 31, 2011.
Presenter
Presentation Notes
All of the transactions that impacted the cash account will appear on the statement of cash flows.The revenues and expenses that caused the change in retained earnings will appear on the income statement of the company.Let’s begin by preparing the income statement and statement of cash flows for JJ’s Lawn Care for the period ended May 31, 2011.
Sheet1
Assets
For the Month Ended May 31, 2011
Sales Revenue 750$ Operating Expense: Gasoline Expense 50 Net Income 700$
Investments by and payments to the owners are not included on the Income Statement.
Presenter
Presentation Notes
JJ’s Lawn care has one revenue for services for $750, and one expense for gasoline of $50. So the net income for the month of May is $700. Remember, net income is the excess of revenues over expenses incurred during the accounting period.Investments by owners and payments to owners do not appear on the income statement. These amounts appear on the company’s balance sheet.
Sheet1
Sales Revenue
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash flows from operating activities: Cash received from revenue transactions 750$ 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$
Presenter
Presentation Notes
Here is the statement of cash flows for JJ’s Lawn Care for the month ended May 31, 2011. Notice the three sections of the statement: Cash flows from operating activities, investing activities and financing activities.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash 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$
Operating activities include the cash effects of revenue and expense
transactions.
Presenter
Presentation Notes
Cash flows from operating activities include the cash received from revenue transactions and the cash paid for expenses.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash 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$
Investing activities include the cash effects of purchasing and selling
assets.
Presenter
Presentation Notes
JJ’s had a cash outflow for investing activities. The company invested in the riding lawn mower, truck, and repair parts; however, the company recovered some of the cost of repair parts by selling some excess parts to ABC Lawns.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash 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$
Financing activities include the cash effects of transactions with the owners
and creditors.
Presentation Notes
The only financing activity was the original investment by the owners of JJ’s Lawn Care.The cash inflows and outflows resulted in an increase in cash of $4,125 during the month. Because the cash account had a zero balance at the beginning of the month, the ending balance in the cash account is $4,125.Let’s finish by preparing the balance sheet for JJ’s Lawn Care.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
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, 2011.
These balances will appear on the
Balance Sheet.
Presentation Notes
Here are the account balances to use when preparing the balance sheet.
Sheet1
Assets
(50)
(50)
Balances
$ 4,125
$ 75
$ 2,650
$ 15,000
$ 13,000
$ 150
$ 8,000
$ 700
Sheet3
2-31
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
Assets = Liabilities + Owners’ Equity $21,850 = $13,150 + $8,700
Presenter
Presentation Notes
Asset accounts are listed on the left side of the balance sheet and the liabilities and owners’ equity accounts on the right.Feel free to go back to the previous screen and see all the account balances that appear on the balance sheet.As a final check, make sure that the accounting equation is still in balance. The total assets of $21,850 is exactly equal to the total of the company’s liabilities plus owners’ equity. Notice that the balance sheet lists all assets, liabilities, and equities on a certain date. In this example, the date is May 31, 2011.
Sheet1
Balance Sheet
Balance Sheet
Presenter
Presentation Notes
All the financial statements are interrelated. We can start with the balance sheet at the beginning of an accounting period, analyze the income and cash flows of the company, and arrive at the ending balances that will appear on the balance sheet.
2-33
JJ's Lawn Care Service Statement of Cash Flows
For the Month Ended May 31, 2011 Cash flows from operating activities: Cash received from revenue transactions 750$ 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 Service Income Statement
Sales Revenue 750$ Operating Expense: Gasoline Expense 50 Net Income 700$
For the Month Ended May 31, 2011
Financial Statement Articulation
Presentation Notes
This is the balance sheet for JJ’s Lawn Care at the end of May. Net income impacts the retained earnings of the company.The statement of cash flows not only provides the balance in the cash account, but also details information about the acquisition and disposition of assets and liabilities as well as changes in the owners’ equity balance. It’s clear to see how all the financial statements articulate with each other.
Sheet1
Cash flows from operating activities:
Cash received from revenue transactions
$ 750
$ 700
Purchase of lawn mower
75
(4,575)
Investment by owners
$ 4,125
- 0
$ 4,125
&A
Sales Revenue
Financial Reporting and Financial Statements
Financial statements are just one source of
financial accounting information.
Presentation Notes
Financial statements are only one source of information about the operations of a company. The financial statements of a company can be compared to those of other companies in the same industry, major national or international competitors, and to the norms for the national economy.
2-35
Presentation Notes
There are three general forms of business operations. A proprietorship is a business owned by just one individual. A partnership is owned by two or more individuals. Some partnerships have several thousand partners. A corporation is owned by individuals who normally are not active in the day-to-day operations of that business. For example, you may become an owner of IBM by purchasing shares of stock on the New York Stock Exchange. While you are a part owner, you do not necessarily work for IBM nor are you active in the operations of the company.
2-36
Owner's equity: Jill Jones, capital 8,000$
Sole Proprietorships
Partners' equity Jill Jones, capital 4,000$ Bill Jones, capital 4,000 Total partners' equity 8,000$
Partnerships
Owners' equity Capital stock 7,000$ Retained earnings 1,000 Total stockholders' equity 8,000$
Corporations
Presenter
Presentation Notes
The owners’ equity section of the balance sheet will look different for each type of business entity. For a sole proprietorship, there will be a capital account for the owner, and a drawing account to record payments to the owner. For a partnership, each partner has a separate account, where changes are tracked over time. There’s also a separate drawing account for payments made to each partner. To review, a corporation will show owners’ contributions in the capital stock account and accumulated earnings of the company in the retained earnings account. You should be able to tell the form of business by looking at the equity section of a balance sheet.
Sheet: Sheet1
Owner's equity:
Creditors
Investors
Presentation Notes
Creditors and investors have two major concerns about the operations and financial position of any company. First, the company must be liquid, that is, it must be able to pay all bills when due. Second, the company must be profitable in the long-run. Unprofitable companies drain the cash position of the company, causing concern on the part of creditors and investors.
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Income Statement
Balance Sheet
interpretation of the statements.
Presentation Notes
In addition to the basic financial statements, companies prepare notes to the financial statements. These notes are meant to provide the reader with additional insights into the operations and financial position of the company.
2-39
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.
Presenter
Presentation Notes
Creditors and investors are more likely to be interested in financially strong companies. These companies usually have little or no debt and a significant amount of assets that can be converted into cash quickly.When management engages in measures to make the company appear financially stronger than it really is, this is referred to as window dressing. Window dressing may be legal, but it often impugns the integrity of the management team.
2-40
The Concept of the Business Entity
Assets
Assets
Liabilities
Forms of Business Organization
The Use of Financial Statements by External Parties
The Need for Adequate Disclosure
Management’s Interest in Financial Statements
End of Chapter 2
