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McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Basic Financial Basic Financial StatementsStatementsotaleem.blogspot.comotaleem.blogspot.comfor more presentation(follow me)for more presentation(follow me)
Chapter 2
2-2
Introduction to Financial Introduction to Financial StatementsStatements
Three primary financial
statements.Income Statement
Balance Sheet
Statement of Cash Flows
We will use a corporation to describe these statements.
2-3
Describes where the enterprise stands at a
specific date.
Income Statement
Balance Sheet
Statement of Cash Flows
Introduction to Financial Introduction to Financial StatementsStatements
2-4
Depicts the revenue and
expenses for a designated
period of time.
Income Statement
Balance Sheet
Statement of Cash Flows
Introduction to Financial Introduction to Financial StatementsStatements
2-5
Depicts the ways cash has changed during
a designated period of time.
Income Statement
Balance Sheet
Statement of Cash Flows
Introduction to Financial Introduction to Financial StatementsStatements
2-6
Basic Financial Basic Financial StatementsStatements Three types of financial statements are mandated
by the accounting and financial regulatory authorities:1. Income statement – how much money you made last
year? Revenue, expense, profits over a year or quarter.
2. Balance sheet – What’s your current financial situation?
a snap shot on a specific date of Assets (value of what the firm owns), Liabilities (value of firm’s debts), and Shareholder’s equity (the money invested by the company
owners)3. Cash flow statement – How did the cash come and go?
cash received and cash spent by the firm over a period of time
2-7
Vagabond Travel AgencyBalance Sheet
December 31, 2009Assets 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: A Starting Point: Statement of Financial Statement of Financial PositionPosition
2-8
The Concept of the The Concept of the Business EntityBusiness Entity
Vagabond Travel
Agency
A business entity is
separate from the personal affairs of its
owner.
2-9
Vagabond Travel AgencyBalance Sheet
December 31, 2009Assets 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$
AssetsAssets
Assets are economic
resources that are owned by the
business and are expected to benefit future operations.
2-10
AssetsAssets
Cost PrincipleCost Principle
Going-ConcernGoing-ConcernAssumptionAssumptionObjectivity Objectivity
PrinciplePrinciple
Stable-DollarStable-DollarAssumptionAssumption
These accounting principles support cost as the basis for asset valuation.
2-11
Vagabond Travel AgencyBalance Sheet
December 31, 2009Assets 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$
LiabilitiesLiabilities
Liabilities are debts that represent
negative future cash flows for the
enterprise.
2-12
Owners’ EquityOwners’ EquityVagabond Travel Agency
Balance SheetDecember 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$
Owners’ equity represents the owners’ claims on the assets of the business.
2-13
Vagabond Travel AgencyBalance Sheet
December 31, 2009Assets 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' EquityOffice equipment 15,000 Capital stock 150,000
Retained earnings 70,000 Total 300,000$ Total 300,000$
The Accounting EquationThe Accounting Equation Assets = Liabilities + Owners’ Equity
$300,000 = $80,000 + $220,000
2-14
An Income StatementAn Income Statement SalesSales
Minus Cost of Goods SoldMinus Cost of Goods Sold = Gross Profit= Gross Profit Minus Operating ExpensesMinus Operating Expenses
Selling expensesSelling expensesGeneral and Administrative expensesGeneral and Administrative expensesDepreciation and Amortization ExpenseDepreciation and Amortization Expense
= Operating income (EBIT)= Operating income (EBIT) Minus Interest ExpenseMinus Interest Expense = Earnings before taxes (EBT)= Earnings before taxes (EBT) Minus Income taxesMinus Income taxes = Net income (EAT)= Net income (EAT)
2-15
Sample Income StatementSample Income Statement
2-16
The Cash Flow StatementThe Cash Flow StatementThe Cash Flow Statement is used by firms to
explain changes in their cash balances over a period of time by identifying all of the sources and uses of cash.Source of cash is any activity that brings cash
into the firm. For example, sale of equipment.Use of cash is any activity that causes cash to
leave the firm. For example, payment of taxes.
2-17
Cash Flow StatementCash Flow Statement The format for a traditional cash flow statement is as
follows:Beginning Cash Balance
Plus: Cash Flow from Operating ActivitiesPlus: Cash Flow from Investing ActivitiesPlus: Cash Flow from Financing Activities
Equals: Ending Cash Balance Operating activities represent the company’s core
business including sales and expenses. Basically any activity that affects net income for the period.
Investing activities include the cash flows that arise out of the purchase and sale of long-term assets such as plant and equipment.
Financing activities represent changes in the firm’s use of debt and equity such as issue of new shares, payment of dividends.
2-19
Statement of Cash Flows
Balance Sheet
Income Statement
Other Information:•Industry•Competitors•National economy
Financial Reporting and Financial Reporting and Financial StatementsFinancial Statements
Financial statements are just one source of
financial accounting information.
2-20
End of Chapter 2End of Chapter 2