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The McGraw-Hill Companies, Inc., 2002

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2 Financial Statements andBusiness transactions

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McGraw-Hill/IrwinPoint in time Point in timePeriod of time

Previewing Financial StatementsExh.

2.1

IncomeStatement

Statement ofCash Flows

Beginning

BalanceSheet

Ending

BalanceSheet

Statement of

Changes inOwnersEquity

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Revenues:

Consulting revenue 5,800$

Rental revenue 300

Total revenues 6,100$

Expenses:

Rent expense 1,000Salaries expense 700

Total expenses 1,700

Net income 4,400$

FastForward

Income Statement

For Month Ended December 31, 2001

Income Statement

Inflows of assets inexchange forproducts and

services providedto customers.

Outflows or theusing up of assets

that result fromproviding

products andservices tocustomers.

Exh.

2.2

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C. Taylor, Capital 12/1/01 -$

Add:

Investment by owner 30,000$Net income 4,400 34,400

Total 34,400$

Less: Withdrawal by owner (600)

C. Taylor, Capital 12/31/01 33,800$

FastForward

Statement of Changes in Owner's Equity


Statement of Changesin Owners Equity

For corporations, instead of Withdrawals by Ownerweuse the term Dividends. Dividends represent

distributions to the stockholders.

Exh.

2.3

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Cash 4,400$ Accounts payable 6,200$

Supplies 9,600

Equipment 26,000 Total liabilities 6,200$

C. Taylor, Capital 33,800$

Total assets 40,000$

Total liabilities and

owners' equity 40,000$

Assets

Owners' Equity

Liabilities

FastForward

Balance SheetDecember 31, 2001

Exh.

2.4

Balance SheetAssets are properties or economic

resources owned by a business. They areexpected to provide future benefits to thebusiness.

Liabilities are

obligations of thebusiness. They

are claimsagainst the

assets of the

business.

Equity is theowners claim on

the assets of thebusiness. It is theresidual interest in

the assets afterdeductingliabilities.

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Supplies 9,600

Equipment 26,000 Total liabilities 6,200$

C. Taylor, Capital 33,800$




Assets

Owners' Equity

Liabilities

FastForward

Balance SheetDecember 31, 2001

Balance Sheet

Liabilities EquityAssets = +

Rememberfrom Chapter 1that we learnedthat total assets

must equal thesum of total

liabilities andtotal equity.

Exh.

2.4

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OwnersEquity

Owners Investment

Revenues

Owners Withdrawal

Expenses

Balance Sheet

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Describes

thesourcesand usesof cash

for areportingperiod.

Cash flows from operating activities:

Cash received from clients 6,100$

Cash paid for supplies (3,400)

Cash paid for rent (1,000)

Cash paid to employee (700)

Net cash provided by operating acitivities 1,000$Cash flows from investing activities:

Purchase of equipment (26,000)$

Net cash used by investing activities (26,000)

Cash flows from financing activities:

Investment by owner 30,000$

Withdrawal by owner (600)Net cash provided by financing activities 29,400

Net increase in cash 4,400$

Cash balance, December 1, 2001 -

Cash balance, December 31, 2001 4,400$

FastForward

Statement of Cash Flows


Exh.

2.6

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Preparers

ASB

AuditorsDecision makers

GAAP

Financial Statements, Auditing andUsers

FinancialStatements

AuditReport

FASB

GAAS

Exh.

2.9

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International Accounting Principles

Despite our growing global economy,countries continue to maintain their unique

set of acceptable accounting practices.

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Fundamental Principles ofAccounting

Business Entity

Principle

Objectivity

Principle

Cost Principle

Going-Concern

Principle

Monetary Unit

Principle

A business is accounted for separatelyfrom its owner or owners.

Financial statement information issupported by independent, unbiased

evidence.

Financial statements are based on actualcosts incurred in business transactions.

A business continues operating instead of

being closed or sold.

Express transactions and events inmonetary units.

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The accounting equation must remain in

balanceafter each transaction.

Liabilities EquityAssets = +

Transactions and the AccountingEquation

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The accounts involved are:

(1) Cash (asset)

(2) Owners Equity (equity)

Owners of Scott Companycontributed

$20,000 cash to start the business.

Transaction Analysis

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Assets = Liabilities +

Owners'

Equity

Cash Supplies Equipment

Accounts

Payable

Notes

Payable

Owners'

Capital

(1) 20,000$ 20,000$

20,000$ -$ -$ -$ -$ 20,000$

20,000$ = 20,000$

Owners of Scott Companycontributed

$20,000 cash to start the business.


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Theaccounts involved are:(1) Cash (asset)

(2) Supplies (asset)


Purchased supplies paying $1,000cash.

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Owners'

Equity

Cash Supplies EquipmentAccountsPayable

NotesPayable

Owner's'Capital

(1) 20,000$ 20,000$

(2) (1,000) 1,000$

19,000$ 1,000$ -$ -$ -$ 20,000$

20,000$ = 20,000$


Purchased supplies paying $1,000cash.

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The accounts involved are:(1) Cash (asset)

(2) Equipment (asset)


Purchased equipment for $15,000cash.

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Owners'

Equity

Cash Supplies Equipment AccountsPayable NotesPayable Owners'Capital

(1) 20,000$ 20,000$

(2) (1,000) 1,000$

(3) (15,000) 15,000$

4,000$ 1,000$ 15,000$ -$ -$ 20,000$

20,000$ = 20,000$


Purchased equipment for $15,000cash.

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The accounts involved are:(1) Supplies (asset)

(2) Equipment (asset)

(3) Accounts Payable (liability)


Purchased Supplies of $200 andEquipment of $1,000 on account.

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Owners'

Equity


Accounts

Payable

Notes

Payable

Owners'

Capital

(1) 20,000$ 20,000$

(2) (1,000) 1,000$

(3) (15,000) 15,000$

(4) 200 1,000 1,200$4,000$ 1,200$ 16,000$ 1,200$ -$ 20,000$

21,200$ = 21,200$

Purchased Supplies of $200 andEquipment of $1,000 on account.


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Owners'

Equity


Accounts

Payable

Notes

Payable

Owners'

CapitalBal. 4,000$ 1,200$ 16,000$ 1,200$ 20,000$

4,000$ 1,200$ 16,000$ 1,200$ -$ 20,000$

21,200$ = 21,200$


The balances so far appear below. Note that the

Balance Sheet Equation is still in balance.

Now lets look at transactions

involving revenues and expenses.

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The accounts involved are:

(1) Cash (asset)

(2) Revenues (equity)


Rendered consulting servicesreceiving $3,000 cash.

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Owner's

Equity


Accounts

Payable

Notes

Payable

Owner's

Capital

Bal. 4,000$ 1,200$ 16,000$ 1,200$ 20,000$

(5) 3,000 3,000

7,000$ 1,200$ 16,000$ 1,200$ -$ 23,000$

24,200$ = 24,200$

Rendered consulting servicesreceiving $3,000 cash.


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(2) Salaries expense (equity)


Paid salaries to employees, $800cash.

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Owner's

Equity

Cash Supplies EquipmentAccountsPayable

NotesPayable

Owner'sCapital

Bal. 4,000$ 1,200$ 16,000$ 1,200$ 20,000$

(5) 3,000 3,000

(6) (800) (800)

6,200$ 1,200$ 16,000$ 1,200$ -$ 22,200$

23,400$ = 23,400$

Paid salaries to employees, $800cash.


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(2) Notes payable (liability)


Borrowed $4,000 from 1st AmericanBank.

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Owner's

Equity


Account

s

payable

Notes

Payable

Owner's

capital

Bal. 4,000$ 1,200$ 16,000$ 1,200$ 20,000$

(5) 3,000 3,000

(6) (800) (800)

(7) 4,000 4,000$10,200$ 1,200$ 16,000$ 1,200$ 4,000$ 22,200$

27,400$ = 27,400$

Borrowed $4,000 from 1st AmericanBank.


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Financial Statements

Lets prepare the Financial Statementsreflecting the transactions we have

recorded.

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Scotts net

income is thedifferencebetween

Revenues andExpenses.

The net income

of $2,200increases

Scotts equity

by $2,200.

Revenues:

Consulting revenue 3,000$

Expenses:

Salaries expense 800

Net income 2,200$

Scott Company

Income Statement


In come Statement

Owners' equity, 12/1/01 -$

Plus: Investment by owners 20,000

Net income 2,200

Owners' equity, 12/31/01 22,200$

Scott Company

Statement of Changes in Owners' Equity


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Supplies 1,200 Notes payable 4,000Equipment 16,000 Total liabilities 5,200$

Owners' equity 22,200$




Assets Liabilities & Owners' Equity

Scott CompanyBalance Sheet

December 31, 2001

#Balance Sheet

Owners' equity, 12/1/01 -$

Plus: Investment by owners 20,000

Net income 2,200

Owners' equity, 12/31/01 22,200$

Scott Company

Statement of Changes in Owners' Equity

For Month Ended December 31, 2001The balance sheet

reflects Scottsfinancial position at

12/31/01.

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Cash flows from operating activities:

Cash received from clients 3,000$

Purchase of supplies (1,000)

Cash paid to employees (800)

Net cash provided by operating activities 1,200$

Cash flows from investing activities:

Purchase of equipment (15,000)$

Net cash used in investing activities (15,000)$

Cash flows from financing activities:

Investment by owners 20,000$

Borrowed at bank 4,000

Net cash provided by financing activities 24,000

Net increase in cash $10,200

Cash balance, December 1, 2001 -

Cash balance, December 31, 2001 10,200$



Scott Company


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Return

on

Equity

Net Income

Average Equity

=

ModifiedReturn on

Equity

Net Income - Value of Owners Efforts

Average Equity=

For Corporations . . .

For Proprietorships and Partnerships . . .

Using the Information Return onEquity

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We cant wait to

start Chapter 3!

End of Chapter 2

Documents

LWC02[1].ppt