ACO 201 Chapter 2, Spring 2013

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Basic Financial Statements Basic Financial Statements Chapter 2 2-2 Introduction to Financial Introduction to Financial Statements Statements 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 Statements Statements 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 Statements Statements 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 Statements Statements 2-6 Vagabond Travel Agency Balance Sheet December 31, 2009 Assets 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: Statement A Starting Point: Statement of Financial Position of Financial Position 2-7 The Concept of the Business The Concept of the Business Entity Entity Vagabond Travel Agency A business entity is separate from the personal affairs of its owner. 2-8 Vagabond Travel Agency Balance Sheet December 31, 2009 Assets 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 $ Assets Assets Assets are economic resources that are owned by the business and are expected to benefit future operations. Assets are economic resources that are owned by the business and are expected to benefit future operations. 2-9 Assets Assets Cost Principle Cost Principle Cost Principle Cost Principle Going-Concern Going-Concern Assumption Assumption Going-Concern Going-Concern Assumption Assumption Objectivity Objectivity Principle Principle Objectivity Objectivity Principle Principle Stable-Dollar Stable-Dollar Assumption Assumption Stable-Dollar Stable-Dollar Assumption Assumption These accounting principles support cost as the basis for asset valuation. 2-10 Vagabond Travel Agency Balance Sheet December 31, 2009 Assets 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 $ Liabilities Liabilities Liabilities are debts that represent negative future cash flows for the enterprise. Liabilities are debts that represent negative future cash flows for the enterprise. 2-11 Owners’ Equity Owners’ Equity Vagabond Travel Agency Balance Sheet December 31, 2009 Assets 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 $ Owners’ equity represents the owners’ claims on the assets of the business. Owners’ equity represents the owners’ claims on the assets of the business. 2-12 Vagabond Travel Agency Balance Sheet December 31, 2009 Assets 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 $ The Accounting Equation The Accounting Equation Assets = Liabilities + Owners’ Equity $300,000 = $80,000 + $220,000 Assets = Liabilities + Owners’ Equity $300,000 = $80,000 + $220,000 2-13 Let’s analyze transactions for JJ’s Lawn Care Service. 2-14 JJ's Lawn Care Service Balance Sheet May 1, 2009 Assets Cash 8,000 $ Capital Stock 8,000 $ Total 8,000 $ Total 8,000 $ Owners' Equity On May 1, Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock. 2-15 JJ's Lawn Care Service Balance Sheet May 2, 2009 Assets Cash 5,500 $ Capital Stock 8,000 $ Tools & Equipment 2,500 Total 8,000 $ Total 8,000 $ Owners' Equity On May 2, JJ’s purchased a riding lawn mower for $2,500 cash. 2-16 On May 8, JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a note payable for the remaining $13,000. JJ's Lawn Care Service Balance Sheet May 8, 2009 Assets Cash 3,500 $ Liabilities: Tools & Equipment 2,500 Notes Payable 13,000 $ Truck 15,000 Owners' Equity: Capital Stock 8,000 Total 21,000 $ Total 21,000 $ Liabilities and Owners' Equity 2-17 JJ's Lawn Care Service Balance Sheet May 11, 2009 Assets Cash 3,500 $ Liabilities: Tools & Equipment 2,800 Notes Payable 13,000 $ Truck 15,000 Accounts Payable 300 Total Liabilities 13,300 $ Owners' Equity: Capital Stock 8,000 Total 21,300 $ Total 21,300 $ Liabilities and Owners' Equity On May 11, JJ’s purchased some repair parts for $300 on account. 2-18 JJ's Lawn Care Service Balance Sheet May 18, 2009 Assets Cash 3,500 $ Liabilities: Accounts Receivable 150 Notes Payable 13,000 $ Tools & Equipment 2,650 Accounts Payable 300 Truck 15,000 Total Liabilities 13,300 $ Owners' Equity: Capital Stock 8,000 Total 21,300 $ Total 21,300 $ Liabilities and Owners' Equity Jill realized she had purchased more repair parts than needed. On May 18, JJ’s was able to sell half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. JJ’s will receive the cash within 30 days. 2-19 JJ's Lawn Care Service Balance Sheet May 25, 2009 Assets Cash 3,575 $ Liabilities: Accounts Receivable 75 Notes Payable 13,000 $ Tools & Equipment 2,650 Accounts Payable 300 Truck 15,000 Total Liabilities 13,300 $ Owners' Equity: Capital Stock 8,000 Total 21,300 $ Total 21,300 $ Liabilities and Owners' Equity On May 25, ABC Lawns pays JJ’s $75 as a partial settlement of its accounts receivable. 2-20 JJ's Lawn Care Service Balance Sheet May 28, 2009 Assets Cash 3,425 $ Liabilities: Accounts Receivable 75 Notes Payable 13,000 $ Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150 Owners' Equity: Capital Stock 8,000 Total 21,150 $ Total 21,150 $ Liabilities and Owners' Equity On May 28, JJ’s pays $150 of its accounts payable. 2-21 JJ's Lawn Care Service Balance Sheet May 29, 2009 Assets Cash 4,175 $ Liabilities: Accounts Receivable 75 Notes Payable 13,000 $ Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150 Owners' Equity: Capital Stock 8,000 Retained Earnings 750 Total 21,900 $ Total 21,900 $ Liabilities and Owners' Equity On May 29, JJ’s recorded lawn care services provided during May of $750. All clients were paid in cash. 2-22 JJ's Lawn Care Service Balance Sheet May 31, 2009 Assets Cash 4,125 $ Liabilities: Accounts Receivable 75 Notes Payable 13,000 $ Tools & Equipment 2,650 Accounts Payable 150 Truck 15,000 Total Liabilities 13,150 Owners' Equity: Capital Stock 8,000 Retained Earnings 700 Total 21,850 $ Total 21,850 $ Liabilities and Owners' Equity Now, let’s review how JJ’s transactions affected the accounting equation. On May 31, JJ’s purchased gasoline for the lawn mower and the truck for $50 cash. 2-23 Assets = Liabilities + Cash + Accts. Rec. + Tools & Equip. + Truck = Notes Payable + Accts. Pay. + Capital Stock + Retained Earnings May 1 $ 8,000 8,000 $ Balances $ 8,000 8,000 $ May 2 (2,500) 2,500 $ Balances $ 5,500 $ 2,500 8,000 $ May 8 (2,000) $ 15,000 13,000 $ Balances $ 3,500 $ 2,500 $ 15,000 $ 13,000 8,000 $ May 11 300 300 $ Balances $ 3,500 $ 2,800 $ 15,000 $ 13,000 $ 300 8,000 $ May 18 $ 150 (150) Balances $ 3,500 $ 150 $ 2,650 $ 15,000 $ 13,000 $ 300 8,000 $ May 25 75 (75) Balances $ 3,575 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 300 8,000 $ May 28 (150) (150) Balances $ 3,425 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 8,000 $ May 29 750 750 Balances $ 4,175 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 750 $ May 31 (50) (50) Balances $ 4,125 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 700 $ Owners' Equity 2-24 Assets = Liabilities + Cash + Accts. Rec. + Tools & Equip. + Truck = Notes Payable + Accts. Pay. + Capital Stock + Retained Earnings May 1 $ 8,000 8,000 $ Balances $ 8,000 8,000 $ May 2 (2,500) 2,500 $ Balances $ 5,500 $ 2,500 8,000 $ May 8 (2,000) $ 15,000 13,000 $ Balances $ 3,500 $ 2,500 $ 15,000 $ 13,000 8,000 $ May 11 300 300 $ Balances $ 3,500 $ 2,800 $ 15,000 $ 13,000 $ 300 8,000 $ May 18 $ 150 (150) Balances $ 3,500 $ 150 $ 2,650 $ 15,000 $ 13,000 $ 300 8,000 $ May 25 75 (75) Balances $ 3,575 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 300 8,000 $ May 28 (150) (150) Balances $ 3,425 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 8,000 $ May 29 750 750 Balances $ 4,175 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 750 $ May 31 (50) (50) Balances $ 4,125 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 700 $ Owners' Equity These transactions impact the Statement of Cash Flows. These transactions impact the Statement of Cash Flows. These transactions impact the Income Statement. These transactions impact the Income Statement. Let’s prepare the Income Statement and Statement of Cash Flows for JJ’s Lawn Care Service for the month ending May 31, 2009. 2-25 JJ's Lawn Care Service Income Statement For the Month Ended May 31, 2009 Sales Revenue 750 $ Operating Expense: Gasoline Expense 50 Net Income 700 $ Investments by and payments to the owners are not included on the Income Statement. Investments by and payments to the owners are not included on the Income Statement. 2-26 JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2009 Cash flows from operating activities: Cash received from revenue transactions 750 $ Cash paid for expenses (50) Net cash provided by operating activities 700 $ Cash flows from investing activities: Purchase of lawn mower (2,500) $ Purchase of truck (2,000) Collection for sale of repair parts 75 Payment for repair parts (150) Net cash used by investing activities (4,575) Cash flows from financing activities: Investment by owners 8,000 Increase in cash for month 4,125 $ Cash balance, May 1, 2009 - Cash balance, May 31, 2009 $ 4,125 2-27 JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2009 Cash flows from operating activities: Cash received from revenue transactions 750 $ Cash paid for expenses (50) Net cash provided by operating activities 700 $ Cash flows from investing activities: Purchase of lawn mower (2,500) $ Purchase of truck (2,000) Collection for sale of repair parts 75 Payment for repair parts (150) Net cash used by investing activities (4,575) Cash flows from financing activities: Investment by owners 8,000 Increase in cash for month 4,125 $ Cash balance, May 1, 2009 - Cash balance, May 31, 2009 4,125 $ Operating activities include the cash effects of revenue and expense transactions. Operating activities include the cash effects of revenue and expense transactions. 2-28 JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2009 Cash flows from operating activities: Cash received from revenue transactions 750 $ Cash paid for expenses (50) Net cash provided by operating activities 700 $ Cash flows from investing activities: Purchase of lawn mower (2,500) $ Purchase of truck (2,000) Collection for sale of repair parts 75 Payment for repair parts (150) Net cash used by investing activities (4,575) Cash flows from financing activities: Investment by owners 8,000 Increase in cash for month 4,125 $ Cash balance, May 1, 2009 - Cash balance, May 31, 2009 4,125 $ Investing activities include the cash effects of purchasing and selling assets. Investing activities include the cash effects of purchasing and selling assets. 2-29 JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2009 Cash flows from operating activities: Cash received from revenue transactions 750 $ Cash paid for expenses (50) Net cash provided by operating activities 700 $ Cash flows from investing activities: Purchase of lawn mower (2,500) $ Purchase of truck (2,000) Collection for sale of repair parts 75 Payment for repair parts (150) Net cash used by investing activities (4,575) Cash flows from financing activities: Investment by owners 8,000 Increase in cash for month 4,125 $ Cash balance, May 1, 2009 - Cash balance, May 31, 2009 4,125 $ Financing activities include the cash effects of transactions with the owners and creditors. Financing activities include the cash effects of transactions with the owners and creditors. 2-30 Assets = Liabilities + Cash + Accts. Rec. + Tools & Equip. + Truck = Notes Payable + Accts. Pay. + Capital Stock + Retained Earnings May 1 $ 8,000 8,000 $ Balances $ 8,000 8,000 $ May 2 (2,500) 2,500 $ Balances $ 5,500 $ 2,500 8,000 $ May 8 (2,000) $ 15,000 13,000 $ Balances $ 3,500 $ 2,500 $ 15,000 $ 13,000 8,000 $ May 11 300 300 $ Balances $ 3,500 $ 2,800 $ 15,000 $ 13,000 $ 300 8,000 $ May 18 $ 150 (150) Balances $ 3,500 $ 150 $ 2,650 $ 15,000 $ 13,000 $ 300 8,000 $ May 25 75 (75) Balances $ 3,575 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 300 8,000 $ May 28 (150) (150) Balances $ 3,425 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 8,000 $ May 29 750 750 Balances $ 4,175 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 750 $ May 31 (50) (50) Balances $ 4,125 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 700 $ Owners' Equity Now, let’s prepare the Balance Sheet for JJ’s Lawn Care Service for May 31, 2009. These balances will appear on the Balance Sheet. These balances will appear on the Balance Sheet. 2-31 Cash $ 4,125 Notes payable 13,000 $ Accounts receivable 75 Accounts payable 150 Tools & equipment 2,650 Truck 15,000 Capital stock 8,000 Retained earnings 700 Total assets 21,850 $ Total liabilities & equity 21,850 $ Assets Liabilities Owners' Equity JJ's Lawn Care Service Balance Sheet May 31, 2009 Assets = Liabilities + Owners’ Equity $21,850 = $13,150 + $8,700 Assets = Liabilities + Owners’ Equity $21,850 = $13,150 + $8,700 2-32 Relationships Among Relationships Among Financial Statements Financial Statements Date at beginning of period Date at end of period Balance Sheet Balance Sheet Time Income Statement Statement of Cash Flows 2-33 JJ's Lawn Care Service Statement of Cash Flows For the Month Ended May 31, 2009 Cash flows from operating activities: Cash received from revenue transactions 750 $ Cash paid for expenses (50) Net cash provided by operating activities 700 $ Cash flows from investing activities: Purchase of lawn mower (2,500) $ Purchase of truck (2,000) Collection for sale of repair parts 75 Payment for repair parts (150) Net cash used by investing activities (4,575) Cash flows from financing activities: Investment by owners 8,000 Increase in cash for month 4,125 $ Cash balance, May 1, 2009 - Cash balance, May 31, 2009 4,125 $ Cash $ 4,125 Notes payable 13,000 $ Accounts receivable 75 Accounts payable 150 Tools & equipment 2,650 Truck 15,000 Capital stock 8,000 Retained earnings 700 Total assets 21,850 $ Total liabilities & equity 21,850 $ Assets Liabilities Owners' Equity JJ's Lawn Care Service Balance Sheet May 31, 2009 JJ's Lawn Care Service Income Statement Sales Revenue 750 $ Operating Expense: Gasoline Expense 50 Net Income 700 $ For the Month Ended May 31, 2009 Financial Statement Financial Statement Articulation Articulation 2-34 Statement of Cash Flows Balance Sheet Income Statement Other Information: •Industry •Competitors •National economy Financial Reporting and Financial Reporting and Financial Statements Financial Statements Financial statements are just one source of financial accounting information. Financial statements are just one source of financial accounting information. 2-35 Forms of Business Forms of Business Organization Organization Sole Proprietorships Sole Proprietorships Partnerships Partnerships Corporations Corporations 2-36 Reporting Ownership Equity in Reporting Ownership Equity in the Statement of Financial the Statement of Financial Position Position Owner's equity: Jill Jones, capital 8,000 $ Sole Proprietorships Sole Proprietorships Partners' equity Jill Jones, capital 4,000 $ Bill Jones, capital 4,000 Total partners' equity 8,000 $ Partnerships Partnerships Owners' equity Capital stock 7,000 $ Retained earnings 1,000 Total stockholders' equity 8,000 $ Corporations Corporations 2-37 The Use of Financial The Use of Financial Statements by External Statements by External Parties Parties Creditors Investors Two concerns: Liquidity Profitability Two concerns: Liquidity Profitability 2-38 The Need for Adequate The Need for Adequate Disclosure Disclosure Income Statement Balance Sheet Statement of Cash Flows Notes to the financial statements often provide facts necessary for the proper interpretation of the statements. Notes to the financial statements often provide facts necessary for the proper interpretation of the statements. 2-39 Management’s Interest in Management’s Interest in Financial Statements Financial Statements Creditors are more likely to extend credit if financial statements show a strong statement of financial position—that 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. 2-40 End of Chapter 2 End of Chapter 2