Financial Statements and Accounting Transactions More of C H A P T E R 1 2-1

Quick Review “Bookkeeping” is another term for “accounting.” A)True B)False 2-2

Quick Review A partnership is a business owned by two or more people. A)True B)False 2-3

Quick Review In the partnership form of business, the owners of a business are called shareholders. A)True B)False 2-4

Provide useful information to help users make decisions. The major statements are the: Income statement Statement of owner’s equity Balance sheet Cash flow statement 2-5 Communicating Through Financial Statements LO 6

Financial Statements (LO 6 ) Balance Sheet (at the beginning of the period) Income Statement Statement of Changes in Equity Balance Sheet (at the end of the period) Statement of Cash Flows Point in time 6 Period of time

The income statement reports: – Revenues of the organization. – Expenses (costs incurred in earning the revenues). – Net income or loss. (Revenues minus Expenses) The income statement covers a period of time. 2-7 Income Statement LO 6 EARNINGS

Inflows of assets in exchange for products and services provided to customers. Income Statement 2-8 LO 6

Income Statement 2-9 Costs incurred or the using up of assets from generating revenue

Statement of Owner’s Equity Reports on changes in equity over a period of time. Equity is affected by: – Owner investments and withdrawals – Net income or net losses Linked to the income statement 2-10 LO 6

Statement Of Owner’s Equity 2-11 Covers a period of time. From the Income statement. LO 6

Balance Sheet The balance sheet reports the: Assets (things we own) Liabilities (things we borrowed - owe) Owner’s equity (how much has been contributed) of an organization at a point in time. Linked to the Statement of Owner’s Equity LO 6

Balance Sheet 2-13 Properties or economic resources owned by a business LO 6

Balance Sheet 2-14 Debts or Obligations of the business LO 6

Balance Sheet 2-15 Owner’s claim on the assets of a business From the Statement Of Owner’s Equity LO 6

Quick Check The balance sheet shows whether or not the firm achieved its primary objective of earning a profit. A)True B)False 2-16

Cash Flow Statement Reports the sources and uses of cash for a period of time. Organized by the company’s major activities: Operating Investing Financing 2-17 LO 6 Cash can flow In AND Out!

From the balance sheet Cash Flow Statement 2-18 LO 6

Financial Statement Differences Based on Type of Organization 2-19 DifferenceSole Proprietorship PartnershipCorporation Equity on the balance sheet belongs to: Sole ownerPartnersShareholders LO 1

Financial Statement Differences Based on Type of Organization 2-20 DifferenceSole Proprietorship PartnershipCorporation Equity on the balance sheet belongs to: Sole ownerPartnersShareholders Distributions to owners are called: Withdrawals Dividends LO 1

Financial Statement Differences Based on Type of Organization 2-21 DifferenceSole Proprietorship PartnershipCorporation Equity on the balance sheet belongs to: Sole ownerPartnersShareholders Distributions to owners are called: Withdrawals Dividends When managers are also owners, their salaries are: Not an expense An expense LO 1

Generally Accepted Accounting Principles (GAAP) GAAP are rules that make up acceptable accounting practices. The primary purpose of GAAP is to make information in financial statements: Understandable Relevant Reliable Comparable 2-22 LO 5

Generally Accepted Accounting Principles (GAAP) Canadian GAAP are being replaced by International Financial Reporting Standards (IFRS). The long-term goal is to have all countries using the same set of standards-IFRS. Adoption of IFRS will improve comparability of accounting information so users can make more informed decisions LO 5

Private enterprises are privately owned so they have some different reporting needs than public enterprises. ASPE have significant parallels to IFRS but there are some differences. ASPE LO 5 24

GAAP for Public vs. Private Enterprises LO 5 Publicly Accountable Enterprises (PAEs) Private Enterprises (PEs) GAAP to be used IFRSASPE or IFRS 25

Business Entity Principle Every business is to be accounted for separately from its owner(s) or any other economic entity of the owner LO 5

Cost Principle All transactions are recorded based on the actual cash amount received or paid. In absence of cash, the cash equivalent amount of the exchange is recorded LO 5 Is it acceptable for managers to use their own estimate of an asset's value when recording the purchase?

Going Concern Principle Financial statements reflect the assumption that the business will continue operating instead of being closed or sold LO 5

Monetary Unit Principle Transactions are expressed using units of money as the common denominator. It is assumed that the monetary unit is stable. Adjustments are not made for changes in exchange rates or inflation LO 2

Revenue Recognition Principle Revenue is recorded at the time it is earned regardless of whether cash or another asset has been exchanged. The amount of revenue to be recorded is measured by the cash plus the cash equivalent of any other assets received or that will be received LO 5

Quick Check! On May 15, Exe Company received $1,000 cash in advance from a customer for a job to be completed in June. Exe should not record the receipt of the cash until the work is done in June. A)True B)False 2-31