02 Basic Financial Statements

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Introduction to FinancialIntroduction to Financial

StatementsStatements

Three primary

financialstatements.

Income Statement

Balance Sheet

Statement of Cash Flows

We will use a corporation to describe thesestatements.


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Describeswhere theenterprise

stands at aspecific date.

Income Statement

Balance Sheet





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Depicts theways cash haschanged during

a designatedperiod of time.

Income Statement

Balance Sheet





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Vagabond Travel Agency

Balance Sheet

ecember 31, 2009

Assets Liabilities & Owners' EquityCash 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 ofA Starting Point: Statement of

Financial PositionFinancial Position


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The Concept of the BusinessThe Concept of the Business

EntityEntity

VagabondTravel

Agency

A business

entity isseparate fromthe personal

affairs of itsowner.


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Balance Sheet

December 31, 2009





Land 100,000 Total liabilities 80,000$

Building 90,000 Owners' Equity:



Total 300,000$ Total 300,000$

AssetsAssets

Assets areeconomic

resources that areowned by the

business and are

expected tobenefit futureoperations.


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AssetsAssets

Cost PrincipleCost Principle

GoingGoing--ConcernConcernAssumptionAssumptionObjectivityObjectivity

PrinciplePrinciple

StableStable--DollarDollarAssumptionAssumption

These accounting principles supportcost as the basis for asset valuation.


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Balance Sheet

December 31, 2009






Building 90,000 Owners' Equity:



Total 300,000$ Total 300,000$

LiabilitiesLiabilities

Liabilities aredebts thatrepresent

negative futurecash flows forthe enterprise.


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Owners EquityOwners Equity

Vagabond avel gency

Balance eet

December31, 2009

ets Liabilities & O ners' Eq ity

Cash 22,500$ Liabilities:

Notesreceivable 10,000 Notes ayable 41,000$

ccountsreceivable 60,500 ccounts ayable 36,000

upplies 2,000 alariespayable 3,000

Land 100,000 otal liabilities 80,000$

Building 90,000 O ners' Equity:

O iceequipment 15,000 Capital stock 150,000

Retainedearnings 70,000

otal 300,000$ otal 300,000$

Ownersequityrepresentstheownersclaims

ontheassetsofthebusiness.


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Balance Sheet

December 31, 2009

Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:

otes receivable 10,000 Notes payable 41,000$




Building 90,000 Owners' Equity



Total 300,000$ Total 300,000$

TheAccounting EquationTheAccounting Equation

Assets = Liabilities + wners uity

, = 8 , + ,


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Lets analyze

transactionsfor JJs LawnCare Service.


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JJ's awn Care Service

Balance Sheet

May 1, 2009Assets

Cash 8,000$ Capital Stock 8,000$

Total 8,000$ Total 8,000$

Owners' Equity

On May 1, Jill Jones and herfamilyinvested $8,000 in JJs awn Care Service

and received 800 shares ofstock.


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JJ's wn vi

l n h t

y ,

AssetsCash 5,5 Capital to ,

Tools & quipment ,5

Total , Total ,

Owners' quity

On ay , JJs purchasedariding lawn

mowerf r ,5 cash.


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On May 8, JJs purchased a , truck.JJs paid , down in cash and issued a

note payable for the remaining , .

JJ's La w n Ca re Se rvice

Ba lance Sh e e t

Ma y 8 , 9Asse ts

Ca sh , Liabilities:

Tools Equipm e nt , Note s Pa ya ble ,

Truck , Ow ne rs'Equity:

Capi ta l Stock 8,

Tota l , Tota l ,

Liabil it ies and Ow ne rs'Equity


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JJ'sLawn Care ervice

Balance he et

ay ,

AssetsCash 3,5 Lia bilitie s:

Tools & quipment , Notes Payable 13,

Truck 15, Accounts Paya ble 3

Total Lia bilitie s 13,3

Owners' quity:Capital tock 8,

Total 1,3 Total 1,3

Lia bilitiesand Owners' quity

On ay 11, JJs purchased somerepair

partsfor 3 on account.


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JJ's Lawn Care Service

Balance Sheet

May 18, 2009

AssetsCash , 00$ Liabilities:

Accounts Receivable 1 0 Notes Payable 1 ,000$

Tools Equip ent 2,6 0 Accounts Payable 00

Truck 1 ,000 Total Liabilities 1 , 00$

Owners' Equity:Capital Stock 8,000

Total 21, 00$ Total 21, 00$

Liabilities and Owners' Equity

Jill realized she had purchased ore repair parts thanneeded.

On May 18, JJs was able to sell halfofthe repair parts to

ABCLawns for $1 0, a price equal to JJs cost. JJs willreceive the cash within 0 days.


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Balance he et

ay 5,


Accounts e ceivable 75 Notes Payable 13,

Tools & quipment , 5 Accounts Paya ble 3

Truck 15, Total Lia bilitie s 13,3


Total 1,3 Total 1,3


On ay 5, ABCLawns paysJJs 75 asapartial settlement ofitsaccounts

receivable.


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Balance he et

ay 8,

AssetsCash 3,4 5 Lia bilitie s:





Total 1,15 Total 1,15


On ay 8, JJs pays 15 ofitsaccounts

payable.


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Balance he et

ay ,






etained a rnings 75

Total 1, Total 1,


On ay , JJsrecorded lawn careservices provided during ay of 75 . All

clients were paid in cash.


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Balance Sheet

May 1, 2009

Assets

Cash ,12$ Liabilities:Accounts Receivable Notes Payable 1 ,000$

Tools Equip ent 2,6 0 Accounts Payable 1 0

Truck 1 ,000 Total Liabilities 1 ,1 0

Owners' Equity:

Capital Stock 8,000

Retained Earnings 00

Total 21,8 0$ Total 21,8 0$

Liabilities and Owners' Equity

Now, lets review how JJs transactionsaffected the accounting equation.

On May 1, JJs purchased gasoline for thelawn ower and the truck for $ 0 cash.


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Assets = L b ties +

Cash +

Accts.

Rec. +

Tools &

Equip. + Tr uck =

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$

wners' Equity


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Assets = Liabilities +

Cash +

Accts.

Rec. +

Tools &

Equip. + Tr uck =

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$

wners' Equity

These transactionsimpact the

Statement ofCashFlows.

These transactionsimpact the Income

Statement.

Lets prepare the Income Statement andStatement ofCashFlows forJJs Lawn CareService for the month ending May 31, 2009.


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Income Statement

For the Month Ended May 31, 2009

Sales Revenue 750$Operating Expense:

Gasoline Expense 50

Net Income 700$

Investments by and payments to the ownersare not included on the Income Statement.


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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, 2009 -

Cash balance, May 31, 2009 4,125$


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Purchase of lawn mower (2,500)$Purchase of truck (2,000)








Operating activities include the casheffects of revenue and expense

transactions.


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For the Month Ended May 31, 2009Cash flows from operating activities:





Purchase of lawn mower (2,500)$

Purchase of truck (2,000)








Investing activities include the casheffects of purchasing and selling

assets.


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For the Month Ended May 31, 2009Cash flows from operating activities:






Purchase of truck (2,000)








Financing activities include the casheffects of transactions with the owners

and creditors.


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Assets = L b ties +

C sh +

Accts.

Rec. +

Too s &

Equip. + T uck =

Notes

P y b e +

Accts.

P y. +

C pital

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$

O ners'Equity

No , lets prepare the Balance Sheet forJJsLawnCare Service forMay 31, 2009.

These balances willappearon the

Balance Sheet.


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,12$ N l 13,$

i l l 1T l & q i 2,

T k 1 , i l k ,

R i d i

T l 21,$ T l li ili i & q i 21,$

Assets Liabilities

Owners' E ity


Balance Sheet

May 31, 2009

Assets = Liabilities + OwnersE ity

$21,850 = $13,150 + $8,700


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RelationshipsAmong FinancialRelationshipsAmong Financial


Date atbeginning of

period

Date atend of

period

BalanceSheet

BalanceSheet

Time

Income StatementStatement of Cash Flows


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JJ's Lawn Care ServiceStatement of Cash Flows





Ne t ca sh provide d by ope ra ting a ctivitie s 700$



Purchase of truck (2,000)Colle ction for sa le of re pa ir pa rts 75



Cash flows from financing activities:

Investment by owners 8,000




2$ 3$

q 2

d

2$ q 2$

Asse ts L i a b i l i t i e s

Ow n e rs' Equity

JJ 's L a w n Ca re S e rvi ce

Ba la nc e S h e e t

M a y 31, 200 9

JJ 's L aw n C are S erv ice

In c o m e S tate m en t

S a le s Re v e n u e 7 5 0$

Op e ra tin g E x p e n s e :

Ga s o lin e E x p e n s e 5 0N e t In c o m e 7 0 0$

F o r th e M o n th E n d e d M a y 3 1 , 2 0 0 9

Financial StatementArticulationFinancial StatementArticulation


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Statementof CashFlows

BalanceSheet

IncomeStatement

Other InformationIndustryCompetitorsNational economy

Financial Reporting and FinancialFinancial Reporting and Financial

StatementsStatementsFinancial statements are

just one source offinancial accounting

information.


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Reporting Ownership Equity in theReporting Ownership Equity in the

Statement of Financial PositionStatement of Financial Position

Ow ne r ' e qu it

Jill Jones , cap ital ,000Sole

roprietor hips

Partner ' equit Jill Jones, capital 4,000

ill Jones, capital 4,000

otal partner ' equit ,000

Partner hips

Owner ' equit

apital tock ,000

etainedearnings ,000

otal tockholder ' equit ,000

orporations


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The Use of Financial StatementsThe Use of Financial Statements

by External Partiesby External Parties

Creditors

Investors

Two concernsLiquidity

Profitability


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The Need forAdequateThe Need forAdequate

DisclosureDisclosure

Income Statement

Balance Sheet


Notes to thefinancial

statementsoften providefacts necessaryfor the proper

interpretation ofthe statements.


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Managements Interest inManagements Interest in

Financial StatementsFinancial StatementsCreditors are more likely to extend credit iffinancial statements show a strong statement of

financial positionthat is, relatively little debtand large amounts of liquid assets.

Window dressing occurs when managementtakes measures to make the company appear

as strong as possible in it financial statements.


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02 Basic Financial Statements