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)TrueB)False

2-2

Quick Review

A partnership is a business owned by two or more people.A)TrueB)False

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Quick Review

In the partnership form of business, the owners of a business are called shareholders. A)TrueB)False

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• 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

(LO6)

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 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

Revenues:

Teaching revenue 3,800$

Equipment rental revenue 300

Total revenues 4,100$

Operating Expenses:

Rent expense 1,000$

Salaries expense 700

Total operating expenses 1,700

Net income 2,400$

Vertically Inclined Rock Gym

Income Statement

For Month Ended March 31, 2014Inflows of assetsin exchange forproducts and

servicesprovided tocustomers.

Income Statement

2-8 LO 6

LO 6

Revenues:

Teaching revenue 3,800$

Equipment rental revenue 300

Total revenues 4,100$

Operating Expenses:

Rent expense 1,000$

Salaries expense 700

Total operating expenses 1,700

Net income 2,400$

Vertically Inclined Rock Gym

Income Statement

For Month Ended March 31, 2014

Income Statement

2-9

Costs incurred or the usingup 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

Virgil Klimb, capital, March 1 -$

Add:

Investment by owner $10,000

Net income 2,400 12,400

Total $12,400

Less: Withdrawal by owner 600

Virgil Klimb, capital, March 31 $11,800

Vertically Inclined Rock Gym

Statement of Owner's Equity

For Month Ended March 31, 2014

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.

2-12 LO 6

Cash 8,400$ Accounts payable 200$ Supplies 3,600 Notes payable 6,000 Equipment 6,000 Total liabilities 6,200$

11,800

Total assets 18,000$

Total liabilities and owner's equity 18,000$

Vertically Inclined Rock GymBalance Sheet

March 31, 2014

Virgil Klimb,capital

Assets

Owner's Equity

Liabilities

Balance Sheet

2-13

Properties or economic resources owned by abusiness

LO 6

Cash 8,400$ Accounts payable 200$ Supplies 3,600 Notes payable 6,000 Equipment 6,000 Total liabilities 6,200$

11,800

Total assets 18,000$

Total liabilities and owner's equity 18,000$

Vertically Inclined Rock GymBalance Sheet

March 31, 2014

Virgil Klimb,capital

Assets

Owner's Equity

Liabilities

Balance Sheet

2-14

Debts or Obligations

of the business

LO 6

Cash 8,400$ Accounts payable 200$ Supplies 3,600 Notes payable 6,000 Equipment 6,000 Total liabilities 6,200$

11,800

Total assets 18,000$

Total liabilities and owner's equity 18,000$

Vertically Inclined Rock GymBalance Sheet

March 31, 2014

Virgil Klimb,capital

Assets

Owner's Equity

Liabilities

Balance Sheet

2-15

Owner’s claim on theassets of abusiness

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)TrueB)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 6Cash can flow In AND Out!

From the

balance sheet

Cash Flow Statement

2-18 LO 6

Cash flows from operating activities:Cash received from clients $4,100Cash paid for supplies (3,400) Cash paid for rent (1,000) Cash paid to employee (700) Net cash used by operating acitivities ($1,000)

Cash flows from investing activities: 0Cash flows from financing activities:

Investment by owner $10,000Withdrawal by owner (600) Net cash provided by financing activities 9,400

Net increase in cash $8,400Cash balance, January 1 - Cash balance, January 31 $8,400

Vertically Inclined Rock GymCash Flow Statement

For Month Ended March 31, 2014

Financial Statement Differences Based on Type of Organization

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Difference Sole Proprietorship

Partnership Corporation

Equity on the balance sheet belongs to:

Sole owner Partners Shareholders

LO 1

Financial Statement Differences Based on Type of Organization

2-20

Difference Sole Proprietorship

Partnership Corporation

Equity on the balance sheet belongs to:

Sole owner Partners Shareholders

Distributions to owners are called:

Withdrawals Withdrawals Dividends

LO 1

Financial Statement Differences Based on Type of Organization

2-21

Difference Sole Proprietorship

Partnership Corporation

Equity on the balance sheet belongs to:

Sole owner Partners Shareholders

Distributions to owners are called:

Withdrawals Withdrawals Dividends

When managers are also owners, their salaries are:

Not an expense 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.

2-23 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 524

GAAP for Public vs. Private Enterprises

LO 5

Publicly Accountable Enterprises (PAEs)

Private Enterprises (PEs)

GAAP to be used

IFRS ASPE 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.

2-26 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.

2-27 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.

2-28 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.

2-29 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.

2-30 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) TrueB) False

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