1、,BASIC FINANCIAL STATEMENTS,Chapter 2,Learning Objective,LO1,To explain the nature and general purpose of financial statements.,Introduction to Financial Statements,Three primary financial statements.,Introduction to Financial Statements,Introduction to Financial Statements,Introduction to Financial
2、 Statements,Revenues result in positive cash flow.,Expenses result in negative cash flow.,Either in the past, present, or future.,Introduction to Financial Statements,Introduction to Financial Statements,A Starting Point: Statement of Financial Position,Learning Objective,LO2,To explain certain acco
3、unting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.,The Concept of the Business Entity,Vagabond Travel Agency,A business entity is separate from the personal affairs of its owne
4、r.,Assets,Assets are economic resources that are owned by the business and are expected to benefit future operations.,Assets,Cost Principle,Going-Concern Assumption,Objectivity Principle,Stable-Dollar Assumption,These accounting principles support cost as the basis for asset valuation.,Liabilities,L
5、iabilities are debts that represent negative future cash flows for the enterprise.,Owners Equity,Owners equity represents the owners claims on the assets of the business.,Owners Equity,Changes in Owners Equity,Learning Objective,LO3,To demonstrate how certain business transactions affect the element
6、s of the accounting equation: Assets = Liabilities + Owners Equity.,The Accounting Equation,Assets = Liabilities + Owners Equity$300,000 = $80,000 + $220,000,Lets analyze some transactions for JJs Lawn Care Service.,On May 1, Jill Jones and her family invested $8,000 in JJs Lawn Care Service and rec
7、eived 800 shares of stock.,On May 2, JJs purchased a riding lawn mower for $2,500 cash.,On May 8, JJs purchased a $15,000 truck. JJs paid $2,000 down in cash and issued a note payable for the remaining $13,000.,On May 11, JJs purchased some repair parts for $300 on account.,Jill realized she had pur
8、chased more repair parts than needed. On May 18, JJs was able to sell half of the repair parts to ABC Lawns for $150, a price equal to JJs cost. JJs will receive the cash within 30 days.,On May 25, ABC Lawns pays JJs $75 as a partial settlement of its accounts receivable.,On May 28, JJs pays $150 of
9、 its accounts payable.,On May 29, JJs recorded lawn care services provided during May of $750. All clients were paid in cash.,Learning Objective,LO4,To explain how the statement of financial position, often referred to as the balance sheet, is an expansion of the basic accounting equation.,Now, lets
10、 review how JJs transactions affected the accounting equation.,On May 31, JJs purchased gasoline for the lawn mower and the truck for $50 cash.,These transactions impact the Statement of Cash Flows.,Lets prepare the Income Statement and Statement of Cash Flows for JJs Lawn Care Service for the month
11、 ending May 31, 2007.,Learning Objective,LO5,To explain how the income statement reports an enterprises financial performance for a period of time in terms of the relationship of revenues and expenses.,Investments by and payments to the owners are not included on the Income Statement.,Learning Objec
12、tive,LO6,To explain how the statement of cash flows presents the change in cash for a period of time in terms of the companys operating, investing, and financing activities.,Operating activities include the cash effects of revenue and expense transactions.,Investing activities include the cash effec
13、ts of purchasing and selling assets.,Financing activities include the cash effects of transactions with the owners and creditors.,Now, lets prepare the Balance Sheet for JJs Lawn Care Service for May 31, 2007.,These balances will appear on the Balance Sheet.,Assets = Liabilities + Owners Equity$21,8
14、50 = $13,150 + $8,700,Learning Objective,LO7,To explain the important relationships among the statement of financial position, income statement, and statement of cash flows, and how these statements relate to each other.,Relationships Among Financial Statements,Date at beginning of period,Date at en
15、d of period,Balance Sheet,Balance Sheet,Time,Income Statement Statement of Cash Flows,Financial Statement Articulation,Financial Reporting and Financial Statements,Financial statements are just one source of financial accounting information.,Learning Objective,LO8,To explain common forms of business
16、 ownershipsole proprietorship, partnership, and corporationand demonstrate how they differ in terms of their presentation in the statement of financial position.,Forms of Business Organization,Sole Proprietorships,Partnerships,Corporations,Reporting Ownership Equity in the Statement of Financial Pos
17、ition,The Use of Financial Statements by External Parties,Creditors,Investors,Two concerns: Liquidity Profitability,The Need for Adequate Disclosure,Notes to the financial statements often provide facts necessary for the proper interpretation of the statements.,Learning Objective,LO9,To discuss the
18、importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements.,Managements Interest in Financial Statements,Creditors are more likely to extend credit if financial statements show a strong statement of financial positionthat 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.,End of Chapter 2,
