Power Notes
Introduction to Accounting and Business
Learning Objectives
1.
2.
3.
4.
5.
6.
7.
8.
9.
Nature of a Business
The Role of Accounting in Business
Business Ethics
Profession of Accounting
Generally Accepted Accounting Principles
Assets, Liabilities, and Owner’s Equity
Business Transactions
Financial Statements
Financial Analysis and Interpretation
Living in the Information Age
Data
Communication
News
Commentary
Facts
Access
Living in the Information Age
Data
Communication
Timeliness
News
Independence
Commentary
Freedom-ofExpression
Access
Facts
Business and Investment
Goal
Profit
Products
Business
Sells/
provi
des
Profit
Services
Accounting Information
Factors of
production are the
means businesses
use to make profit.
Land and Building
Accounting Information
Labor and Equipment
Business Profit
Amounts earned from selling
products or services
Sales
- Expenses
Profit
Costs incurred with sales
Amounts earned
from sales less
expenses
incurred
Types of Businesses
1-1
Service Business
Service
The Walt Disney Company Entertainment
Delta Air Lines
Transportation
Marriott International Hotels Hospitality and
lodging
Bank of America Corporation Financial services
XM Satellite Radio
Satellite radio
7
1-1
Types of Businesses
Merchandising Business
Wal-Mart
GameStop Corporation
accessories
Best Buy
Gap Inc.
Amazon.com
Product
General merchandise
Video games and
Consumer electronics
Apparel
Internet books, music,
video
8
Types of Businesses
1-1
Manufacturing Business
Product
General Motors Corp.
Cars, trucks, vans
Samsung
Cell phones
Dell Inc.
Personal computers
Nike
Athletic shoes and
apparel
The Coca-Cola Company Beverages
Sony Corporation
Stereos and televisions
9
Exh.
1.4
Forms of Organization
Business
Sally’s
Grocery
Law Offices
Proprietorship
Partnership
Corporation
Common Forms of Business Organizations
1-1
 Proprietorship
 Partnership
 Corporation
 Limited liability company
11
1-1
A proprietorship is owned by one
individual and—
 Comprises 70% of business
organizations in the United States.
 Requires low cost of organizing.
 Is limited to financial resources of
the owner.
 Is used by small businesses.
12
1-1
A partnership is similar to a
proprietorship except that it is
owned by two or more individuals
and—
 Comprises 10% of business
organizations in the United States.
 Combines the skills and resources
of more than one person.
13
1-1
A corporation is organized under state
or federal statues as a separate legal
taxable entity and—
 Generates 90% of the total dollars of
business receipts received.
 Comprises 20% of the businesses.
Continued
14
Corporation
Owners of a corporation are called
shareholders (or stockholders).
When a corporation issues only
one class of stock, we call it
common stock (or capital stock).
1-1
 Includes ownership divided into
shares of stock, sold to
shareholders (stockholders).
 Is able to obtain large amounts of
resources by issuing stock.
 Is used by large businesses.
16
1-1
A limited liability company (LLC)
combines attributes of a partnership
and a corporation in that it is organized
as a corporation. However, a limited
liability corporation can elect to be
taxed as a partnership and—
 Is a popular alternative to a
partnership.
 Has tax and liability advantages to
the owners.
17
Exh.
1.4
Forms of Organization
Nonbusiness
Government
Nonprofit
Private
Nonbusiness Organization
Libraries
Army
Colleges
Airports
Cities
Museums
Hospitals
Schools
Prisons
Shelters
Accounting for these organizations is usually a fundbased system, but the basic principles are similar to
accounting for business organizations.
1
The Role of Accounting in Business
Accounting can be defined as an
information system that provides
reports to users about the economic
activities and condition of a business.
20
Focus of Accounting
 Identifying
Economic
Events
 Recording
Economic
Events
 Reporting
and
Analyzing
Economic
Events
Influence of Accounting
is a
Accounting
system that
Identifies
Records
information
Relevant
that is
Communicates
Reliable
Comparable
to help users make
better decisions.
1
The process by which accounting provides
information to users is as follows:
•
•
•
Identify users.
•
Record economic data about business
activities and events.
•
Prepare accounting reports for users.
Assess users’ informational needs.
Design the accounting information system
to meet users’ needs.
23
Accounting — An Information Process
Identification
of Users
Users of Accounting Information
 investors
Financial Accounting
 creditors
 regulators
EXTERNAL USERS
 customers
 competitors
Users of Accounting Information
Financial Accounting
EXTERNAL USERS
•
•
•
•
•
investors
creditors
regulators
customers
competitors
Managerial Accounting
INTERNAL USERS
 owners
 managers
 employees
1
Financial Accounting
The area of accounting that provides
external users with information is
called financial accounting.
The objective of financial accounting is
to provide relevant and timely
information for the decision-making
needs of users outside of the business.
1-27
1-27
27
1
Managerial Accounting
The area of accounting that provides
internal users with information is called
managerial accounting.
The objective of managerial accounting
is to provide relevant and timely
information for managers’ and
employees’ decision-making needs.
1-28
1-28
28
Accounting — An Information Process
Identification
of Users
User
Information
Needs
Accounting
System
Accounting — An Information Process
Identification
of Users
User
Information
Needs
Economic Data
and Activities
Accounting
System
Accounting — An Information Process
Identification
of Users
User
Information
Needs
Economic Data
and Activities
Accounting
System
Reports
Accounting — An Information Process
Identification
of Users
User
Information
Needs
Economic Data
and Activities
Accounting
System
Reports
User
Decisions
1
Exhibit 1
Users of Accounting Information
33
1
Role of Ethics in Accounting
and Business
Ethics are moral principles
that guide the conduct of
individuals.
34
Ethics and Social Responsibility
Ethics
Beliefs that
separate right
from wrong
Accepted
standards of
good and
bad
behavior
Often coincide
with laws
Guidelines for Ethical Decision
Making
 Identify
Ethical Issues
 Analyze
Options
Use personal
Consider both
ethics to
the good and bad
recognize ethical consequences
issues.
for all affected.
 Make Ethical
Decision
Choose the best
option after
weighing all
consequences.
2
Business Entity Concept
Under the business entity
concept, the activities of a
business are recorded
separately from the activities
of its owners, creditors, or
other businesses.
37
2
Cost Concept
Under the cost concept,
amounts are initially recorded
in the accounting records at
their cost or purchase price.
38
2
Example Exercise 1-1
Cost Concept
On August 25, Gallatin Repair Service extended an offer of
$125,000 for land that had been priced for sale at
$150,000. On September 3, Gallatin Repair Service
accepted the seller’s counteroffer of $137,000. On October
20, the land was assessed at a value of $98,000 for
property tax purposes. On December 4, Gallatin Repair
Service was offered $160,000 for the land by a national
retail chain. At what value should the land be recorded in
Gallatin Repair Service’s records?
1-28
39
Example Exercise 1-1 (continued)
2
Follow My Example 1-1
$137,000. Under the cost concept, the land should be
recorded at the cost to Gallatin Repair Service.
For Practice: PE 1-1A, PE 1-1B
1-29
40
2
Objectivity Concept
The objectivity concept requires
that the amounts recorded in the
accounting records be based on
objective evidence.
41
2
Unit of Measure Concept
The unit of measure concept
requires that economic data
be recorded in dollars.
42
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 Accounting Equation
Resources
What are an organization’s resources called?
The Accounting Equation
1-3
Assets = Liabilities + Owner’s Equity
The resources
owned by a
business
45
The Accounting Equation
Resources
=
Sources
Assets
Cost of
resources used
in the business
What are the
sources of the
assets?
The Accounting Equation
Resources
=
Sources
Liabilities
Assets
Cost of
resources used
in the business
Owner’s
Equity
Resources
supplied by
creditors and
owners
The Accounting Equation
1-3
Assets = Liabilities + Owner’s Equity
The rights of
the creditors,
which
represent
debts of the
business
48
1-3
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of
the owners
49
3
Example Exercise 1-2
Accounting Equation
John Joos is the owner and operator of You’re A Star, a
motivational consulting business. At the end of its accounting
period, December 31, 2009, You’re A Star has assets of
$800,000 and liabilities of $350,000. Using the accounting
equation, determine the following amounts:
a. Owner’s equity, as of December 31, 2009.
b. Owner’s equity, as of December 31, 2010, assuming
that assets increased by $130,000 and liabilities
decreased by $25,000 during 2010.
1-34
50
Example Exercise 1-2 (continued)
3
Follow My Example 1-2
Assets = Liabilities + Owner’s Equity
$800,000 = $350,000 + Owner’s Equity
Owner’s Equity = $450,000
b. First, determine the change in Owner’s Equity during 2010 as follows:
a.
Assets = Liabilities + Owner’s Equity
$130,000 = –$25,000 + Owner’s Equity
Owner’s Equity = $155,000
Next, add the change in Owner’s Equity on December 31, 2009 to
arrive at Owner’s Equity on December 31, 2010, as shown below:
$605,000 = $450,000 + $155,000
Example
Exercise1-2 continued
1-35
For Practice: PE 1-2A, PE 1-2B
51
4
Business Transaction
A business transaction is an
economic event or condition that
directly changes an entity’s
financial condition or its results
of operations.
52
4
Transaction A
On November 1, 2009, Chris Clark
deposits $25,000 in a bank account
in the name of NetSolutions.
53
Business Transactions
a. Chris Clark deposits $25,000 in a bank account
for NetSolutions.
LIABILITIES
ASSETS
=
OWNER’S EQUITY
Business Transactions
a. Chris Clark deposits $25,000 in a bank account
for NetSolutions.
LIABILITIES
ASSETS
Cash
25,000
=
OWNER’S EQUITY
Chris Clark,
Capital
25,000
Transaction Analysis
Chris Clark deposits $25,000 in a bank
account for NetSolutions.
The accounts involved are:
(1) Cash (asset)
(2) Chris Clark, Capital (equity)
Transaction Analysis
Assets
a.
Cash
Supplies
$ 25,000
$ 25,000 $
-
$ 25,000
Land
$
Owners'
= Liabilities + Equity
Chris
Accounts
Clark
Payable
capital
$ 25,000 Investment
-
$
=
-
$ 25,000
$ 25,000
4
Transaction B
On November 5, 2009, NetSolutions
paid $20,000 for the purchase of land
as a future building site.
58
Business Transactions
b. NetSolutions buys land for $20,000.
LIABILITIES
ASSETS
=
OWNER’S EQUITY
Business Transactions
b. NetSolutions buys land for $20,000.
LIABILITIES
ASSETS
Cash
(20,000)
Land
20,000
=
OWNER’S EQUITY
Transaction Analysis
NetSolutions buys land for $20,000.
The accounts involved are:
(1) Cash (asset)
(2) Land (asset)
Transaction Analysis
Assets
a.
b.
=
Cash
Supplies
$ 25,000
(20,000)
$ 5,000 $
-
$ 25,000
Owners'
+ Equity
Chris
Clark
capital
$ 25,000
Liabilities
Accounts
Payable
Land
$20,000
$
20,000
$
=
-
$
-
$ 25,000
$ 25,000
4
Transaction C
On November 10, 2009,
NetSolutions purchased supplies
for $1,350 and agreed to pay the
supplier in the near future.
63
Business Transactions
c. NetSolutions buys supplies for $1,350, agreeing to
pay the supplier in the near future.
LIABILITIES
ASSETS
=
OWNER’S EQUITY
Business Transactions
c. NetSolutions buys supplies for $1,350, agreeing to
pay the supplier in the near future.
LIABILITIES
ASSETS
Supplies
1,350
Accounts Payable
1,350
=
OWNER’S EQUITY
Transaction Analysis
NetSolutions buys supplies for
$1,350, agreeing to pay the supplier in
the near future.
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
Transaction Analysis
Assets
Cash Supplies
a. $ 25,000
b. (20,000)
c.
$1,350
=
Liabilities
Accounts
Payable
Land
$20,000
$1,350
$ 5,000 $ 1,350 $ 20,000
$ 26,350
Owners'
+ Equity
Chris
Clark
capital
$ 25,000
$ 1,350 $
=
-
$ 26,350
$ 25,000
4
Transaction D
On November 18, 2009, NetSolutions
received cash of $7,500 for providing
services to customers. A business
earns money by selling goods or
services to its customers. This amount
is called Revenue.
68
Business Transactions
d. NetSolutions earns fees of $7,500, receiving cash.
LIABILITIES
ASSETS
=
OWNER’S EQUITY
Business Transactions
d. NetSolutions earns fees of $7,500, receiving cash.
LIABILITIES
ASSETS
Cash
7,500
=
OWNER’S EQUITY
Fees Earned
7,500
Transaction Analysis
NetSolutions earns fees of $7,500,
receiving cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Transaction Analysis
Assets
Cash Supplies Land
a.
$ 25,000
b.
(20,000)
$20,000
c.
$1,350
d.
7,500
Bal. $ 12,500 $ 1,350 $ 20,000
$ 33,850
= Liabilities Owners' Equity
Accounts
Payable
Chris Clark
capital
$
25,000
$1,350
$ 1,350
= $ 33,850
$
$
7,500 Fees earned
32,500
4
Expenses
During the month, NetSolutions
spent cash or used up other assets
in earning revenue. Assets used in
this process of earning revenue
are called expenses.
73
4
Transaction E
On November 30, 2009, NetSolutions
paid the following expenses during
the month: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous,
$275.
74
Business Transactions
e. NetSolutions paid: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
LIABILITIES
ASSETS
=
OWNER’S EQUITY
Business Transactions
e. NetSolutions paid: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
LIABILITIES
ASSETS
Cash
(3,650)
=
OWNER’S EQUITY
Expenses
(3,650)
Transaction Analysis
NetSolutions paid: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
The accounts involved are:
(1) Cash (asset)
(2) Expenses (equity)
Transaction Analysis
Assets
a.
b.
c.
d.
e.
Cash
Supplies
$ 25,000
(20,000)
$1,350
7,500
(3,650)
Bal. $ 8,850
$ 1,350
$ 30,200
Land
Owners'
= Liabilities
Equity
Accounts Chris Clark
Payable
capital
$
25,000
$20,000
$1,350
$ 20,000
$ 1,350
= $ 30,200
$
7,500
(2,125)
(800)
(450)
(275)
28,850
Fees earned
Wages expense
Rent expense
Utilities expense
Misc. expense
4
Transaction F
On November 30, 2009,
NetSolutions paid creditors on
account, $950.
79
Business Transactions
f. NetSolutions pays $950 to creditors on account.
LIABILITIES
ASSETS
=
OWNER’S EQUITY
Business Transactions
f. NetSolutions pays $950 to creditors on account.
LIABILITIES
ASSETS
Accounts Payable
(950)
Cash
(950)
=
OWNER’S EQUITY
Transaction Analysis
NetSolutions pays $950 to creditors
on account
The accounts involved are:
(1) Cash (asset)
(2) Accounts payable (liability)
Transaction Analysis
Assets
a.
b.
c.
d.
e.
Cash
Supplies
$ 25,000
(20,000)
$1,350
7,500
(3,650)
f.
(950)
Bal. $ 7,900 $ 1,350
$ 29,250
Land
Owners'
= Liabilities
Equity
Accounts Chris Clark
Payable
capital
$
25,000
$20,000
$1,350
7,500
(2,125)
(800)
(450)
(275)
$ 20,000
$
(950)
400 $
= $ 29,250
28,850
Fees earned
Wages expense
Rent expense
Utilities expense
Misc. expense
4
Transaction G
On November 30, 2009, Chris Clark
determined that the cost of supplies
on hand at the end of the period was
$550.
84
Business Transactions
g. At the end of the month, the cost of supplies on
hand is $550.
LIABILITIES
ASSETS
=
OWNER’S EQUITY
Business Transactions
g. At the end of the month, the cost of supplies on
hand is $550.
LIABILITIES
ASSETS
Supplies
(800)
=
OWNER’S EQUITY
Supplies Expense
(800)
Transaction Analysis
At the end of the month, the cost of supplies on
hand is $550.
The accounts involved are:
(1) Supplies (asset)
(2) Supplies expense (equity)
Transaction Analysis
Assets
a.
b.
c.
d.
e.
Cash
Supplies
$ 25,000
(20,000)
$1,350
7,500
(3,650)
f.
(950)
g.
Bal. $ 7,900 $
Land
Owners'
= Liabilities
Equity
Accounts Chris Clark
Payable
capital
$
25,000
$20,000
$1,350
7,500
(2,125)
(800)
(450)
(275)
Fees earned
Wages expense
Rent expense
Utilities expense
Misc. expense
(950)
(800)
550 $ 20,000
$ 28,450
$
400
= $ 28,450
$
(800) Supplies expense
28,050
4
Transaction H
On November 30, 2009, Chris Clark
withdrew $2,000 from NetSolutions
for personal use.
89
Business Transactions
h. Chris Clark withdraws $2,000 in cash.
LIABILITIES
ASSETS
=
OWNER’S EQUITY
Business Transactions
h. Chris Clark withdraws $2,000 in cash.
LIABILITIES
ASSETS
Cash
(2,000)
=
OWNER’S EQUITY
Chris Clark,
Drawing
(2,000)
Transaction Analysis
Chris Clark withdraws $2,000 in cash
The accounts involved are:
(1) Cash (asset)
(2) Chris Clark, Drawing (equity)
Transaction Analysis
Assets
a.
b.
c.
d.
e.
Supplies
Cash
$ 25,000
(20,000)
$1,350
7,500
(3,650)
Land
Owners'
Equity
= Liabilities
Accounts Chris Clark
capital
Payable
25,000 Investment
$
$20,000
$1,350
(950)
(950)
f.
(800)
g.
(2,000)
h.
400 $
$
550 $ 20,000
Bal. $ 5,900 $
= $ 26,450
$ 26,450
7,500
(2,125)
(800)
(450)
(275)
Fees earned
Wages expense
Rent expense
Utilities expense
Misc. expense
(800) Supplies expense
(2,000) Withdrawal
26,050
Transaction Summary
LIABILITIES
ASSETS
Cash
Supplies
Land
5,900
550
20,000
=
OWNER’S EQUITY
Transaction Summary
LIABILITIES
Accts. Payable 400
ASSETS
Cash
Supplies
Land
5,900
550
20,000
=
OWNER’S EQUITY
Transaction Summary
LIABILITIES
Accts. Payable 400
ASSETS
Cash
Supplies
Land
5,900
550
20,000
=
OWNER’S EQUITY
C. Clark, Capital
25,000
C. Clark, Drawing (2,000)
Fees Earned
7,500
Wages Expense
(2,125)
Rent Expense
(800)
Supplies Expense
(800)
Utilities Expense
(450)
Misc. Expense
(275)
Effects of Transactions on Owner’s Equity
OWNER’S EQUITY
decreased by
Owner’s withdrawals
Expenses
Effects of Transactions on Owner’s Equity
OWNER’S EQUITY
increased by
Owner’s investments
Revenues
Effects of Transactions on Owner’s Equity
OWNER’S EQUITY
decreased by
increased by
Owner’s withdrawals
Owner’s investments
Expenses
Revenues
Effects of Transactions on Owner’s Equity
OWNER’S EQUITY
decreased by
increased by
Owner’s withdrawals
Owner’s investments
Expenses
Revenues
NET INCOME
4
Exhibit 5
Effects of Transactions on Owner’s Equity
101
4
Example Exercise 1-3
Transactions
Salvo Delivery Service is owned and operated by Joel
Salvo. The following selected transactions were completed
by Salvo Delivery Service during February:
1. Received cash from owner as additional investment,
$35,000.
2. Paid creditors on account, $1,800.
3. Billed customers for delivery services on account,
$11,250.
4. Received cash from customers on account, $6,740.
5. Paid cash to owner for personal use, $1,000.
1-63
(Continued)
102
Example Exercise 1-3 (continued)
4
Indicate the effect of each transaction on the accounting
equation elements (Assets, Liabilities, Owner’s Equity,
Drawing, Revenue, and Expense) by listing the numbers
identifying the transactions, (1) through (5). Also, indicate
the specific item within the accounting equation element
that is affected. To illustrate, the answer to (1) is shown
below.
(1) Asset (Cash) increases by $35,000; Owner’s Equity
(Joel Salvo, Capital) increases by $35,000.
1-64
103
Example Exercise 1-3 (continued)
4
Follow My Example 1-3
Follow My Example 1-3
(2) Asset (Cash) decreases by $1,800; Liability (Accounts
Payable) decreases by $1,800.
(3) Asset (Accounts Receivable) increases by $11,250;
Revenue (Delivery Service Fees) increases by
$11,250.
(4) Asset (Cash) increases by $6,740; Asset (Accounts
Receivable) decreases by $6,740.
(5) Asset (Cash) decreases by $1,000; Drawing (Joel
Salvo, Drawing) increases by $1,000.
For Practice: PE 1-3A, PE 1-3B
1-65
104
5
Financial Statements
After transactions have been recorded
and summarized, reports are prepared for
users. The accounting reports providing
this information are called financial
statements.
105
5
Income Statement
The income statement reports
the revenues and expenses for
a period of time, based on the
matching concept.
106
5
Matching Concept
The matching concept is
applied by matching the
expenses with the revenue
generated during a period
by those expenses.
107
5
The excess of revenue over the
expenses is called net income
or net profit. If the expenses
exceed the revenue, the excess
is a net loss.
108
5
Exhibit 6
Financial Statements for NetSolutions
Net income is carried
to the statement of
owner’s equity.
109
Financial Statements
NetSolutions
Income Statement
For the Month Ended November 30, 2009
Fees earned
Operating expenses:
Wages expense
Rent expense
Supplies expense
Utilities expense
Miscellaneous expense
Total operating expenses
Net income
$7,500
$2,125
800
800
450
275
4,450
$3,050
Financial Statements
NetSolutions
Income Statement
For the Month Ended November 30, 2009
Fees earned
Operating expenses:
Wages expense
Rent expense
Supplies expense
Utilities expense
Miscellaneous expense
Total operating expenses
Net income
$7,500
$2,125
800
800
450
275
4,450
$3,050
Financial Statements
NetSolutions
Income Statement
For the Month Ended November 30, 2009
Fees earned
Operating expenses:
Wages expense
Rent expense
Supplies expense
Utilities expense
Miscellaneous expense
Total operating expenses
Net income
$7,500
$2,125
800
800
450
275
4,450
$3,050
5
Example Exercise 1-4
Income Statement
The assets and liabilities of Chickadee Travel Service at April 30,
2010, the end of the current year, and its revenue and expenses
for the year are listed below. The capital of the owner, Adam
Cellini, was $80,000 at May 1, 2009, the beginning of the current
year.
Accounts payable
Accounts receivable
Cash
Fees earned
Land
$ 12,200
31,350
53,050
263,200
80,000
Miscellaneous expense
Office expense
Supplies
Wages expense
$ 12,950
63,000
3,350
131,700
Prepare an income statement for the current year ended April
30, 2010.
1-72
113
Example Exercise 1-4 (continued)
5
Follow My Example 1-3
Follow My Example 1-4
CHICKADEE TRAVEL SERVICE
INCOME STATEMENT
For the Year Ended April 30, 2010
Fees earned
Expenses:
Wages expense
Office expense
Miscellaneous expense
Total expenses
Net income
$263,200
$131,700
63,000
12,950
207,650
$ 55,550
For Practice: PE 1-4A, PE 1-4B
1-73
114
5
Statement of Owner’s Equity
The statement of owner’s equity
reports the changes in the
owner’s equity for a period of
time.
1-1115
115
115
5
Exhibit 6
Financial Statements for NetSolutions (continued)
From the income statement
To the balance sheet
1-1116
116
116
Financial Statements
NetSolutions
Statement of Owner’s Equity
For the Month Ended November 30, 2009
Chris Clark, capital, November 1, 2009
$
0
Investment on November 1, 2009
$25,000
Net income for November
3,050
$28,050
Less withdrawals
2,000
Increase in owner’s equity
26,050
Chris Clark, capital, November 30, 2009
$26,050
Financial Statements
NetSolutions
Statement of Owner’s Equity
For the Month Ended November 30, 2009
Chris Clark, capital, November 1, 2009
$
0
Investment on November 1, 2002
$25,000
Net income for November
3,050
$28,050
Less withdrawals
2,000
Increase in owner’s equity
26,050
Chris Clark, capital, November 30, 2009
$26,050
Financial Statements
NetSolutions
Statement of Owner’s Equity
For the Month Ended November 30, 2009
Chris Clark, capital, November 1, 2009
$
0
Investment on November 1, 2009
$25,000
Net income for November
3,050
$28,050
Less withdrawals
2,000
Increase in owner’s equity
26,050
Chris Clark, capital, November 30, 2009
$26,050
Financial Statements
NetSolutions
Statement of Owner’s Equity
For the Month Ended November 30, 2009
Chris Clark, capital, November 1, 2009
$
0
Investment on November 1, 2009
$25,000
Net income for November
3,050
$28,050
Less withdrawals
2,000
Increase in owner’s equity
26,050
Chris Clark, capital, November 30, 2009
$26,050
5
Example Exercise 1-5
Statement of Owner’s Equity
Using the data for Chickadee Travel Service shown in Example Exercise
1-4, prepare a statement of owner’s equity for the current year ended
April 30, 2010. Adam Cellini invested an additional $50,000 in the
business during the year and withdrew cash of $30,000 for personal use.
1-76
121
Example Exercise 1-5 continued
5
Follow My Example 1-5
CHICKADEE TRAVEL SERVICE
STATEMENT OF OWNER’S EQUITY
For the Year Ended April 30, 2010
Adam Cellini, capital, May 1, 2009
$ 80,000
Additional investment by owner during year
$ 50,000
Net income for the year
55,550
$105,550
Less withdrawals
30,000
Increase in owner’s equity
75,550
Adam Cellini, capital, April 30, 2010
$155,550
For Practice: PE 1-5A, PE 1-5B
1-77
122
5
Balance Sheet
A balance sheet is a list of
the assets, liabilities, and
owner’s equity as of a
specific date.
123
5
Account Form
The account form of a balance
sheet lists the assets on the left and
the liabilities and owner’s equity on
the right—similar to the design of
an account.
124
5
Exhibit 6
Financial Statements for NetSolutions (continued)
This amount is compared to
the net cash flow on the
statement of cash flows.
From the statement
of owner’s equity
125
5
Example Exercise 1-6
Balance Sheet
Using the data for Chickadee Travel Service shown in Example Exercises 1-4
and 1-5, prepare the balance sheet as of April 30, 2010.
1-81
126
Example Exercise 1-6 (continued)
5
Follow My Example 1-3
Follow My Example 1-6
Assets
Cash
Accounts receivable
Supplies
Land
Total assets
CHICKADEE TRAVEL SERVICE
BALANCE SHEET
April 30, 2010
Liabilities
$ 53,050 Accounts payable
31,350
3,350
Owner’s Equity
80,000 Adam Cellini, capital
$167,750 Total liab. & owner’s eq.
$ 12,200
155,550
$167,750
For Practice: PE 1-6A, PE 1-6B
1-82
127
Financial Statements
NetSolutions
Balance Sheet
November 30, 2009
Assets
Cash
Supplies
Land
Total assets
Liabilities
Accounts payable
Owner’s Equity
Chris Clark, capital
Total liabilities and
owner’s equity
$5,900
550
20,000
$26,450
$ 400
26,050
$26,450
Financial Statements
NetSolutions
Balance Sheet
November 30, 2009
Assets
Cash
Supplies
Land
Total assets
Liabilities
Accounts payable
Owner’s Equity
Chris Clark, capital
Total liabilities and
owner’s equity
$5,900
550
20,000
$26,450
$ 400
26,050
$26,450
Financial Statements
NetSolutions
Balance Sheet
November 30, 2009
Assets
Cash
Supplies
Land
Total assets
Liabilities
Accounts payable
Owner’s Equity
Chris Clark, capital
Total liabilities and
owner’s equity
$5,900
550
20,000
$26,450
$ 400
26,050
$26,450
Financial Statements
NetSolutions
Balance Sheet
November 30, 2009
Assets
Cash
Supplies
Land
Total assets
Liabilities
Accounts payable
Owner’s Equity
Chris Clark, capital
Total liabilities and
owner’s equity
$5,900
550
20,000
$26,450
$ 400
26,050
$26,450
5
Statement of Cash Flows
A statement of cash flows is a
summary of the cash receipts and
payments for a specific period of time.
It consists of three sections: (1)
operating activities, (2) investing
activities, and (3) financing activities.
132
5
Operating Activities
The cash flows from operating
activities section reports a
summary of cash receipts and
cash payments from operations.
133
5
Investing Activities
The cash flows from investing activities
section reports the cash transactions for
the acquisition and sale of relatively
permanent assets.
134
5
Financing Activities
The cash flows from financing
activities section reports the cash
transactions related to cash
investments by the owner,
borrowings, and withdrawals by the
owner.
135
Transaction Analysis
Assets
a.
b.
c.
d.
e.
Supplies
Cash
$ 25,000
(20,000)
$1,350
7,500
(3,650)
Land
Owners'
Equity
= Liabilities
Accounts Chris Clark
capital
Payable
25,000 Investment
$
$20,000
$1,350
(950)
(950)
f.
(800)
g.
(2,000)
h.
400 $
$
550 $ 20,000
Bal. $ 5,900 $
= $ 26,450
$ 26,450
7,500
(2,125)
(800)
(450)
(275)
Fees earned
Wages expense
Rent expense
Utilities expense
Misc. expense
(800) Supplies expense
(2,000) Withdrawal
26,050
Financial Statements
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2009
Cash flows from operating activities:
Cash received from customers
$ 7,500
Deduct cash payments for expenses
and payments to creditors
4,600
Net cash flow from operating activities
Cash flows from investing activities:
Cash payments for acquisition of land
Cash flows from financing activities:
Cash received as owner’s investment
$25,000
Deduct cash withdrawal by owner
2,000
Net cash flow from financing activities
Net cash flow and Nov. 30, 2002 cash balance
$ 2,900
(20,000)
23,000
$5,900
Financial Statements
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2002
Cash flows from operating activities:
Cash received from customers
$ 7,500
Deduct cash payments for expenses
and payments to creditors
4,600
Net cash flow from operating activities
Cash flows from investing activities:
Cash payments for acquisition of land
Cash flows from financing activities:
Cash received as owner’s investment
$25,000
Deduct cash withdrawal by owner
2,000
Net cash flow from financing activities
Net cash flow and Nov. 30, 2002 cash balance
$ 2,900
(20,000 )
23,000
$5,900
Financial Statements
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2002
Cash flows from operating activities:
Cash received from customers
$ 7,500
Deduct cash payments for expenses
and payments to creditors
4,600
Net cash flow from operating activities
Cash flows from investing activities:
Cash payments for acquisition of land
Cash flows from financing activities:
Cash received as owner’s investment
$25,000
Deduct cash withdrawal by owner
2,000
Net cash flow from financing activities
Net cash flow and Nov. 30, 2002 cash balance
$ 2,900
(20,000))
23,000
$5,900
Financial Statements
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2002
Cash flows from operating activities:
Cash received from customers
$ 7,500
Deduct cash payments for expenses
and payments to creditors
4,600
Net cash flow from operating activities
Cash flows from investing activities:
Cash payments for acquisition of land
Cash flows from financing activities:
Cash received as owner’s investment
$25,000
Deduct cash withdrawal by owner
2,000
Net cash flow from financing activities
Net cash flow and Nov. 30, 2002 cash balance
$ 2,900
(20,000 )
23,000
$5,900
5
Example Exercise 1-7
Statement of Cash Flows
A summary of cash flows for Chickadee Travel Service for the year
ended April 30, 2010, is shown below.
Cash receipts:
Cash received from customers
Cash received from additional
investment of owner
Cash payments:
Cash paid for expenses
Cash paid for land
Cash paid to owner for personal use
$251,000
50,000
210,000
80,000
30,000
The cash balance as of May 1, 2009, was $72,050.
Prepare a statement of cash flows for Chickadee Travel Service for
1-88 the year ended April 30, 2010.
141
Example Exercise 1-7 (continued)
5
Follow My Example 1-3
Follow My Example 1-7
Cash flows from operating activities:
Cash received from customers
$251,000
Deduct cash payments for expenses
210,000
Net cash flows from operating activities
Cash flows from investing activities:
Cash payments for purchase of land
Cash flows from financing activities:
Cash received from owner as investment $ 50,000
Deduct cash withdrawals by owner
30,000
Net cash flows from financing activities
Net decrease in cash during year
Cash as of May 1, 2009
Cash as of April 30, 2010
$ 41,000
(80,000)
20,000
$(19,000)
72,050
$ 53,050
For Practice: PE 1-7A, PE 1-7B
1-89
142
5
Interrelationships Among
Financial Statements
• The income statement and the statement of
owner’s equity are interrelated.
Net income or net loss
appears on both
statements.
143
5
Interrelationships Among
Financial Statements
• The statement of owner’s equity and the
balance sheet are interrelated.
The owner’s capital at the end of the
period on the statement of owner’s
equity also appears on the balance
sheet as owner’s capital.
144
5
Interrelationships Among
Financial Statements
• The balance sheet and the statement of
cash flows are interrelated.
The cash reported on the balance
sheet is also reported as the endof-period cash on the statement of
cash flows.
145
5
Financial Analysis and
Interpretation
Ratio of Liabilities to
Owner’s Equity
Total Liabilities
=
Total Owner’s Equity (or
Total Stockholders’ Equity)
For NetSolutions:
Ratio of Liabilities to
Owner’s Equity
$400
=
$26,050
= 0.015
146
147