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1、 The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinBASIC FINANCIAL STATEMENTSChapter2 The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinLearning ObjectiveLO1To explain the nature and general purpose of financial statements. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinIncome Stateme

2、ntBalance SheetStatement of Cash FlowsIntroduction to Financial StatementsThree primary financial statements.We will use a corporation to describe these statements. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinIntroduction to Financial StatementsDescribes where the enterprise stands at a sp

3、ecific date.Income StatementBalance SheetStatement of Cash Flows The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinIntroduction to Financial StatementsDepicts the revenue and expenses for a designated period of time.Income StatementBalance SheetStatement of Cash Flows The McGraw-Hill Companies,

4、Inc., 2008McGraw-Hill/IrwinIntroduction to Financial StatementsRevenues result in positive cash flow.Expenses result in negative cash flow.Either in the past, present, or future. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinIntroduction to Financial StatementsNet income (or net loss) is sim

5、ply the difference between revenues and expenses.Income StatementBalance SheetStatement of Cash Flows The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinIntroduction to Financial StatementsDepicts the ways cash has changed during a designated period of time.Income StatementBalance SheetStatement

6、of Cash Flows The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinVagabond Travel AgencyBalance SheetDecember 31, 2007AssetsLiabilities & Owners EquityCash22,500$ Liabilities:Notes receivable10,000 Notes payable41,000$ Accounts receivable60,500 Accounts payable36,000 Supplies2,000 Salaries pay

7、able3,000 Land100,000 Total liabilities80,000$ Building90,000 Owners Equity:Office equipment15,000 Capital stock150,000 Retained earnings70,000 Total300,000$ Total300,000$ A Starting Point: Statement of Financial Position The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinLearning ObjectiveLO2To

8、explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinThe Concept of the Business EntityVagabond Travel A

9、gencyA business entity is separate from the personal affairs of its owner. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinVagabond Travel AgencyBalance SheetDecember 31, 2007AssetsLiabilities & Owners EquityCash22,500$ Liabilities:Notes receivable10,000 Notes payable41,000$ Accounts recei

10、vable60,500 Accounts payable36,000 Supplies2,000 Salaries payable3,000 Land100,000 Total liabilities80,000$ Building90,000 Owners Equity:Office equipment15,000 Capital stock150,000 Retained earnings70,000 Total300,000$ Total300,000$ AssetsAssets are economic resources that are owned by the business

11、and are expected to benefit future operations. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinAssetsThese accounting principles support cost as the basis for asset valuation. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinVagabond Travel AgencyBalance SheetDecember 31, 2007AssetsLiabil

12、ities & Owners EquityCash22,500$ Liabilities:Notes receivable10,000 Notes payable41,000$ Accounts receivable60,500 Accounts payable36,000 Supplies2,000 Salaries payable3,000 Land100,000 Total liabilities80,000$ Building90,000 Owners Equity:Office equipment15,000 Capital stock150,000 Retained ear

13、nings70,000 Total300,000$ Total300,000$ LiabilitiesLiabilities are debts that represent negative future cash flows for the enterprise. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinVagabond Travel AgencyBalance SheetDecember 31, 2007AssetsLiabilities & Owners EquityCash22,500$ Liabilitie

14、s:Notes receivable10,000 Notes payable41,000$ Accounts receivable60,500 Accounts payable36,000 Supplies2,000 Salaries payable3,000 Land100,000 Total liabilities80,000$ Building90,000 Owners Equity:Office equipment15,000 Capital stock150,000 Retained earnings70,000 Total300,000$ Total300,000$ Owners

15、EquityOwners equity represents the owners claims on the assets of the business. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinOwners EquityChanges in Owners EquityOwners InvestmentsBusiness EarningsPayments to OwnersBusiness Losses The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinLearni

16、ng ObjectiveLO3To demonstrate how certain business transactions affect the elements of the accounting equation: Assets = Liabilities + Owners Equity. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinVagabond Travel AgencyBalance SheetDecember 31, 2007AssetsLiabilities & Owners EquityCash22,

17、500$ Liabilities:Notes receivable10,000 Notes payable41,000$ Accounts receivable60,500 Accounts payable36,000 Supplies2,000 Salaries payable3,000 Land100,000 Total liabilities80,000$ Building90,000 Owners EquityOffice equipment15,000 Capital stock150,000 Retained earnings70,000 Total300,000$ Total30

18、0,000$ The Accounting Equation Assets = Liabilities + Owners Equity$300,000 = $80,000 + $220,000 The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinLets analyze some transactions for JJs Lawn Care Service. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinJJs Lawn Care ServiceBalance SheetMay

19、 1, 2007AssetsCash8,000$ Capital Stock8,000$ Total8,000$ Total8,000$ Owners EquityOn May 1, Jill Jones and her family invested $8,000 in JJs Lawn Care Service and received 800 shares of stock. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinJJs Lawn Care ServiceBalance SheetMay 2, 2007AssetsCa

20、sh5,500$ Capital Stock8,000$ Tools & Equipment2,500 Total8,000$ Total8,000$ Owners EquityOn May 2, JJs purchased a riding lawn mower for $2,500 cash. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinOn May 8, JJs purchased a $15,000 truck.JJs paid $2,000 down in cash and issued a note payab

21、le for the remaining $13,000.JJs Lawn Care ServiceBalance SheetMay 8, 2007AssetsCash3,500$ Liabilities: Tools & Equipment2,500 Notes Payable13,000$ Truck15,000 Owners Equity:Capital Stock8,000 Total21,000$ Total21,000$ Liabilities and Owners Equity The McGraw-Hill Companies, Inc., 2008McGraw-Hil

22、l/IrwinJJs Lawn Care ServiceBalance SheetMay 11, 2007AssetsCash3,500$ Liabilities: Tools & Equipment2,800 Notes Payable13,000$ Truck15,000 Accounts Payable300 Total Liabilities13,300$ Owners Equity:Capital Stock8,000 Total21,300$ Total21,300$ Liabilities and Owners EquityOn May 11, JJs purchased

23、 some repair parts for $300 on account. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinJJs Lawn Care ServiceBalance SheetMay 18, 2007AssetsCash3,500$ Liabilities: Accounts Receivable150 Notes Payable13,000$ Tools & Equipment2,650 Accounts Payable300 Truck15,000 Total Liabilities13,300$ Ow

24、ners Equity:Capital Stock8,000 Total21,300$ Total21,300$ Liabilities and Owners EquityJill realized she had purchased 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. Th

25、e McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinJJs Lawn Care ServiceBalance SheetMay 25, 2007AssetsCash3,575$ Liabilities: Accounts Receivable75 Notes Payable13,000$ Tools & Equipment2,650 Accounts Payable300 Truck15,000 Total Liabilities13,300$ Owners Equity:Capital Stock8,000 Total21,300$

26、 Total21,300$ Liabilities and Owners EquityOn May 25, ABC Lawns pays JJs $75 as a partial settlement of its accounts receivable. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinJJs Lawn Care ServiceBalance SheetMay 28, 2007AssetsCash3,425$ Liabilities: Accounts Receivable75 Notes Payable13,000

27、$ Tools & Equipment2,650 Accounts Payable150 Truck15,000 Total Liabilities13,150 Owners Equity:Capital Stock8,000 Total21,150$ Total21,150$ Liabilities and Owners EquityOn May 28, JJs pays $150 of its accounts payable. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinJJs Lawn Care ServiceBa

28、lance SheetMay 29, 2007AssetsCash4,175$ Liabilities: Accounts Receivable75 Notes Payable13,000$ Tools & Equipment2,650 Accounts Payable150 Truck15,000 Total Liabilities13,150 Owners Equity:Capital Stock8,000 Retained Earnings750 Total21,900$ Total21,900$ Liabilities and Owners EquityOn May 29, J

29、Js recorded lawn care services provided during May of $750. All clients were paid in cash. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinLearning ObjectiveLO4To explain how the statement of financial position, often referred to as the balance sheet, is an expansion of the basic accounting eq

30、uation. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinJJs Lawn Care ServiceBalance SheetMay 31, 2007AssetsCash4,125$ Liabilities: Accounts Receivable75 Notes Payable13,000$ Tools & Equipment2,650 Accounts Payable150 Truck15,000 Total Liabilities13,150 Owners Equity:Capital Stock8,000 Ret

31、ained Earnings700 Total21,850$ Total21,850$ Liabilities and Owners EquityNow, lets review how JJs transactions affected the accounting equation.On May 31, JJs purchased gasoline for the lawn mower and the truck for $50 cash. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinAssets=Liabilities+Ca

32、sh+Accts. Rec.+Tools & Equip.+Truck=Notes Payable +Accts. Pay.+Capital Stock+Retained EarningsMay 18,000$ 8,000$ Balances8,000$ 8,000$ May 2(2,500) 2,500$ Balances5,500$ 2,500$ 8,000$ May 8(2,000) 15,000$ 13,000$ Balances3,500$ 2,500$ 15,000$ 13,000$ 8,000$ May 11300 300$ Balances3,500$ 2,800$ 1

33、5,000$ 13,000$ 300$ 8,000$ May 18150$ (150) Balances3,500$ 150$ 2,650$ 15,000$ 13,000$ 300$ 8,000$ May 2575 (75) Balances3,575$ 75$ 2,650$ 15,000$ 13,000$ 300$ 8,000$ May 28(150) (150) Balances3,425$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ May 29750 750 Balances4,175$ 75$ 2,650$ 15,000$ 13,000$ 150$

34、8,000$ 750$ May 31(50) (50) Balances4,125$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 700$ Owners Equity The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinAssets=Liabilities+Cash+Accts. Rec.+Tools & Equip.+Truck=Notes Payable +Accts. Pay.+Capital Stock+Retained EarningsMay 18,000$ 8,000$ Balance

35、s8,000$ 8,000$ May 2(2,500) 2,500$ Balances5,500$ 2,500$ 8,000$ May 8(2,000) 15,000$ 13,000$ Balances3,500$ 2,500$ 15,000$ 13,000$ 8,000$ May 11300 300$ Balances3,500$ 2,800$ 15,000$ 13,000$ 300$ 8,000$ May 18150$ (150) Balances3,500$ 150$ 2,650$ 15,000$ 13,000$ 300$ 8,000$ May 2575 (75) Balances3,5

36、75$ 75$ 2,650$ 15,000$ 13,000$ 300$ 8,000$ May 28(150) (150) Balances3,425$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ May 29750 750 Balances4,175$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 750$ May 31(50) (50) Balances4,125$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 700$ Owners EquityThese transactions impac

37、t the Statement of Cash Flows.These transactions impact the Income Statement.Lets prepare the Income Statement and Statement of Cash Flows for JJs Lawn Care Service for the month ending May 31, 2007. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinLearning ObjectiveLO5To explain how the income

38、 statement reports an enterprises financial performance for a period of time in terms of the relationship of revenues and expenses. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinJJs Lawn Care ServiceIncome StatementFor the Month Ended May 31, 2007Sales Revenue750$ Operating Expense: Gasoline

39、 Expense50 Net Income700$ Investments by and payments to the owners are not included on the Income Statement. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinLearning ObjectiveLO6To explain how the statement of cash flows presents the change in cash for a period of time in terms of the company

40、s operating, investing, and financing activities. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinJJs Lawn Care ServiceStatement of Cash FlowsFor the Month Ended May 31, 2007Cash flows from operating activities: Cash received from revenue transactions750$ Cash paid for expenses(50) Net cash pr

41、ovided by operating activities700$ Cash flows from investing activities: Purchase of lawn mower(2,500)$ Purchase of truck(2,000) Collection for sale of repair parts75 Payment for repair parts(150) Net cash used by investing activities(4,575) Cash flows from financing activities: Investment by owners

42、8,000 Increase in cash for month4,125$ Cash balance, May 1, 2007- Cash balance, May 31, 20074,125$ The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinJJs Lawn Care ServiceStatement of Cash FlowsFor the Month Ended May 31, 2007Cash flows from operating activities: Cash received from revenue transa

43、ctions750$ Cash paid for expenses(50) Net cash provided by operating activities700$ Cash flows from investing activities: Purchase of lawn mower(2,500)$ Purchase of truck(2,000) Collection for sale of repair parts75 Payment for repair parts(150) Net cash used by investing activities(4,575) Cash flow

44、s from financing activities: Investment by owners8,000 Increase in cash for month4,125$ Cash balance, May 1, 2007- Cash balance, May 31, 20074,125$ Operating activities include the cash effects of revenue and expense transactions. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinJJs Lawn Care S

45、erviceStatement of Cash FlowsFor the Month Ended May 31, 2007Cash flows from operating activities: Cash received from revenue transactions750$ Cash paid for expenses(50) Net cash provided by operating activities700$ Cash flows from investing activities: Purchase of lawn mower(2,500)$ Purchase of tru

46、ck(2,000) Collection for sale of repair parts75 Payment for repair parts(150) Net cash used by investing activities(4,575) Cash flows from financing activities: Investment by owners8,000 Increase in cash for month4,125$ Cash balance, May 1, 2007- Cash balance, May 31, 20074,125$ Investing activities

47、 include the cash effects of purchasing and selling assets. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinJJs Lawn Care ServiceStatement of Cash FlowsFor the Month Ended May 31, 2007Cash flows from operating activities: Cash received from revenue transactions750$ Cash paid for expenses(50) N

48、et cash provided by operating activities700$ Cash flows from investing activities: Purchase of lawn mower(2,500)$ Purchase of truck(2,000) Collection for sale of repair parts75 Payment for repair parts(150) Net cash used by investing activities(4,575) Cash flows from financing activities: Investment

49、 by owners8,000 Increase in cash for month4,125$ Cash balance, May 1, 2007- Cash balance, May 31, 20074,125$ Financing activities include the cash effects of transactions with the owners and creditors. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinAssets=Liabilities+Cash+Accts. Rec.+Tools &a

50、mp; Equip.+Truck=Notes Payable +Accts. Pay.+Capital Stock+Retained EarningsMay 18,000$ 8,000$ Balances8,000$ 8,000$ May 2(2,500) 2,500$ Balances5,500$ 2,500$ 8,000$ May 8(2,000) 15,000$ 13,000$ Balances3,500$ 2,500$ 15,000$ 13,000$ 8,000$ May 11300 300$ Balances3,500$ 2,800$ 15,000$ 13,000$ 300$ 8,0

51、00$ May 18150$ (150) Balances3,500$ 150$ 2,650$ 15,000$ 13,000$ 300$ 8,000$ May 2575 (75) Balances3,575$ 75$ 2,650$ 15,000$ 13,000$ 300$ 8,000$ May 28(150) (150) Balances3,425$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ May 29750 750 Balances4,175$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 750$ May 31(50)

52、(50) Balances4,125$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 700$ Owners EquityNow, lets prepare the Balance Sheet for JJs Lawn Care Service for May 31, 2007. These balances will appear on the Balance Sheet. The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinCash4,125$ Notes payable13,000$ Accounts

53、 receivable75 Accounts payable150 Tools & equipment2,650 Truck15,000 Capital stock8,000 Retained earnings700 Total assets21,850$ Total liabilities & equity21,850$ AssetsLiabilitiesOwners EquityJJs Lawn Care ServiceBalance SheetMay 31, 2007 Assets = Liabilities + Owners Equity$21,850 = $13,15

54、0 + $8,700 The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinLearning ObjectiveLO7To 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. The McGraw-Hill Companies, Inc., 2008M

55、cGraw-Hill/IrwinRelationships Among Financial StatementsDate at beginning of periodDate at end of periodBalance SheetBalance SheetTimeIncome StatementStatement of Cash Flows The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinFinancial Statement Articulation JJs Lawn Care ServiceStatement of Cash

56、FlowsFor the Month Ended May 31, 2007Cash flows from operating activities: Cash received from revenue transactions750$ Cash paid for expenses(50) Net cash provided by operating activities700$ Cash flows from investing activities: Purchase of lawn mower(2,500)$ Purchase of truck(2,000) Collection for

57、 sale of repair parts75 Payment for repair parts(150) Net cash used by investing activities(4,575) Cash flows from financing activities: Investment by owners8,000 Increase in cash for month4,125$ Cash balance, May 1, 2007- Cash balance, May 31, 20074,125$ Cash4,125$ Notes payable13,000$ Accounts rec

58、eivable75 Accounts payable150 Tools & equipment2,650 Truck15,000 Capital stock8,000 Retained earnings700 Total assets21,850$ Total liabilities & equity21,850$ AssetsLiabilitiesOwners EquityJJs Lawn Care ServiceBalance SheetMay 31, 2007JJs Lawn Care ServiceIncome StatementSales Revenue750$ Op

59、erating Expense: Gasoline Expense50 Net Income700$ For the Month Ended May 31, 2007 The McGraw-Hill Companies, Inc., 2008McGraw-Hill/IrwinStatement of Cash FlowsBalance SheetIncome StatementOther Information:IndustryCompetitorsNational economyFinancial Reporting and Financial StatementsFinancial statements are just one source of financial accoun