© The McGraw-Hill Companies, Inc., 2002 Slide 2-1 McGraw-Hill/Irwin 2 Financial Statements and Business transactions

© The McGraw-Hill Companies, Inc., 2002 Slide 2-2 McGraw-Hill/Irwin Point in time Period of time Previewing Financial Statements Exh. 2.1 Income Statement Statement of Cash Flows Beginning Balance Sheet Ending Balance Sheet Statement of Changes in Owner’s Equity

© The McGraw-Hill Companies, Inc., 2002 Slide 2-3 McGraw-Hill/Irwin Income Statement Inflows of assets in exchange for products and services provided to customers. Outflows or the using up of assets that result from providing products and services to customers. Outflows or the using up of assets that result from providing products and services to customers. Exh. 2.2

© The McGraw-Hill Companies, Inc., 2002 Slide 2-4 McGraw-Hill/Irwin Statement of Changes in Owner’s Equity For corporations, instead of Withdrawals by Owner we use the term Dividends. Dividends represent distributions to the stockholders. Exh. 2.3

© The McGraw-Hill Companies, Inc., 2002 Slide 2-5 McGraw-Hill/Irwin Exh. 2.4 Balance Sheet Assets are properties or economic resources owned by a business. They are expected to provide future benefits to the business. Liabilities are obligations of the business. They are claims against the assets of the business. Equity is the owner’s claim on the assets of the business. It is the residual interest in the assets after deducting liabilities.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-6 McGraw-Hill/Irwin Balance Sheet Liabilities Equity Assets =+ Remember from Chapter 1 that we learned that total assets must equal the sum of total liabilities and total equity. Exh. 2.4

© The McGraw-Hill Companies, Inc., 2002 Slide 2-7 McGraw-Hill/Irwin Owner’s Equity Owner’s Equity Owner’s Investment Revenues Owner’s Withdrawal Expenses Balance Sheet

© The McGraw-Hill Companies, Inc., 2002 Slide 2-8 McGraw-Hill/Irwin Describes the sources and uses of cash for a reporting period. Describes the sources and uses of cash for a reporting period. Exh. 2.6

© The McGraw-Hill Companies, Inc., 2002 Slide 2-9 McGraw-Hill/Irwin Preparers ASB Auditors Decision makers GAAP Financial Statements, Auditing and Users Financial Statements Audit Report FASB GAAS Exh. 2.9

© The McGraw-Hill Companies, Inc., 2002 Slide 2-10 McGraw-Hill/Irwin International Accounting Principles Despite our growing global economy, countries continue to maintain their unique set of acceptable accounting practices.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-11 McGraw-Hill/Irwin Fundamental Principles of Accounting Business Entity Principle Objectivity Principle Cost Principle Going-Concern Principle Monetary Unit Principle A business is accounted for separately from its owner or owners. Financial statement information is supported by independent, unbiased evidence. Financial statements are based on actual costs incurred in business transactions. A business continues operating instead of being closed or sold. Express transactions and events in monetary units.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-12 McGraw-Hill/Irwin The accounting equation must remain in balance after each transaction. Liabilities Equity Assets =+ Transactions and the Accounting Equation

© The McGraw-Hill Companies, Inc., 2002 Slide 2-13 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Owner’s Equity (equity) Owners of Scott Company contributed $20,000 cash to start the business. Transaction Analysis

© The McGraw-Hill Companies, Inc., 2002 Slide 2-14 McGraw-Hill/Irwin Owners of Scott Company contributed $20,000 cash to start the business. Transaction Analysis

© The McGraw-Hill Companies, Inc., 2002 Slide 2-15 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction Analysis Purchased supplies paying $1,000 cash.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-16 McGraw-Hill/Irwin Transaction Analysis Purchased supplies paying $1,000 cash.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-17 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction Analysis Purchased equipment for $15,000 cash.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-18 McGraw-Hill/Irwin Transaction Analysis Purchased equipment for $15,000 cash.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-19 McGraw-Hill/Irwin The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability) Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-20 McGraw-Hill/Irwin Purchased Supplies of $200 and Equipment of $1,000 on account. Transaction Analysis

© The McGraw-Hill Companies, Inc., 2002 Slide 2-21 McGraw-Hill/Irwin Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance. Now let’s look at transactions involving revenues and expenses.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-22 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Transaction Analysis Rendered consulting services receiving $3,000 cash.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-23 McGraw-Hill/Irwin Rendered consulting services receiving $3,000 cash. Transaction Analysis

© The McGraw-Hill Companies, Inc., 2002 Slide 2-24 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Transaction Analysis Paid salaries to employees, $800 cash.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-25 McGraw-Hill/Irwin Paid salaries to employees, $800 cash. Transaction Analysis

© The McGraw-Hill Companies, Inc., 2002 Slide 2-26 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Notes payable (liability) Transaction Analysis Borrowed $4,000 from 1st American Bank.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-27 McGraw-Hill/Irwin Borrowed $4,000 from 1st American Bank. Transaction Analysis

© The McGraw-Hill Companies, Inc., 2002 Slide 2-28 McGraw-Hill/Irwin Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-29 McGraw-Hill/Irwin Scott’s net income is the difference between Revenues and Expenses. The net income of $2,200 increases Scott’s equity by $2,200. Income Statement

© The McGraw-Hill Companies, Inc., 2002 Slide 2-30 McGraw-Hill/Irwin Balance Sheet The balance sheet reflects Scott’s financial position at 12/31/01.

© The McGraw-Hill Companies, Inc., 2002 Slide 2-31 McGraw-Hill/Irwin Statement of Cash Flows

© The McGraw-Hill Companies, Inc., 2002 Slide 2-32 McGraw-Hill/Irwin Return on Equity Net Income Average Equity = Modified Return on Equity Net Income - Value of Owners’ Efforts Average Equity = For Corporations... For Proprietorships and Partnerships... Using the Information Return on Equity

© The McGraw-Hill Companies, Inc., 2002 Slide 2-33 McGraw-Hill/Irwin We can’t wait to start Chapter 3! We can’t wait to start Chapter 3! End of Chapter 2