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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
For Month Ended December 31, 2001
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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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
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
For Month Ended December 31, 2001
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.
Transaction Analysis
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Theaccounts involved are:(1) Cash (asset)
(2) Supplies (asset)
Transaction Analysis
Purchased supplies paying $1,000cash.
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Assets = Liabilities +
Owners'
Equity
Cash Supplies EquipmentAccountsPayable
NotesPayable
Owner's'Capital
(1) 20,000$ 20,000$
(2) (1,000) 1,000$
19,000$ 1,000$ -$ -$ -$ 20,000$
20,000$ = 20,000$
Transaction Analysis
Purchased supplies paying $1,000cash.
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The accounts involved are:(1) Cash (asset)
(2) Equipment (asset)
Transaction Analysis
Purchased equipment for $15,000cash.
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Assets = Liabilities +
Owners'
Equity
Cash Supplies Equipment AccountsPayable NotesPayable Owners'Capital
(1) 20,000$ 20,000$
(2) (1,000) 1,000$
(3) (15,000) 15,000$
4,000$ 1,000$ 15,000$ -$ -$ 20,000$
20,000$ = 20,000$
Transaction Analysis
Purchased equipment for $15,000cash.
Slid
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The accounts involved are:(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Transaction Analysis
Purchased Supplies of $200 andEquipment of $1,000 on account.
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Assets = Liabilities +
Owners'
Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
Owners'
Capital
(1) 20,000$ 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 $1,000 on account.
Transaction Analysis
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Assets = Liabilities +
Owners'
Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
Owners'
CapitalBal. 4,000$ 1,200$ 16,000$ 1,200$ 20,000$
4,000$ 1,200$ 16,000$ 1,200$ -$ 20,000$
21,200$ = 21,200$
Transaction Analysis
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)
Transaction Analysis
Rendered consulting servicesreceiving $3,000 cash.
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Assets = Liabilities +
Owner's
Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable
Owner's
Capital
Bal. 4,000$ 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.
Transaction Analysis
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The accounts involved are:(1) Cash (asset)
(2) Salaries expense (equity)
Transaction Analysis
Paid salaries to employees, $800cash.
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Assets = Liabilities +
Owner's
Equity
Cash Supplies EquipmentAccountsPayable
NotesPayable
Owner'sCapital
Bal. 4,000$ 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.
Transaction Analysis
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The accounts involved are:(1) Cash (asset)
(2) Notes payable (liability)
Transaction Analysis
Borrowed $4,000 from 1st AmericanBank.
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Assets = Liabilities +
Owner's
Equity
Cash Supplies Equipment
Account
s
payable
Notes
Payable
Owner's
capital
Bal. 4,000$ 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.
Transaction Analysis
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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
For Month Ended December 31, 2001
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
For Month Ended December 31, 2001
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Cash 10,200$ Accounts payable 1,200$
Supplies 1,200 Notes payable 4,000Equipment 16,000 Total liabilities 5,200$
Owners' equity 22,200$
Total assets 27,400$
Total liabilities and
owners' equity 27,400$
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 $10,200
Cash balance, December 1, 2001 -
Cash balance, December 31, 2001 10,200$
Statement of Cash Flows
For Month Ended December 31, 2001
Scott Company
Statement of Cash Flows
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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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2-33
We cant wait to
start Chapter 3!
End of Chapter 2
Recommended