Financial Statements
and Accounting
Transactions
More of
CHAPTER 1
2-1
Quick Review
“Bookkeeping” is another term for
“accounting.”
A)True
B)False
2-2
Quick Review
A partnership is a business owned
by two or more people.
A)True
B)False
2-3
Quick Review
In the partnership form of
business, the owners of a business
are called shareholders.
A)True
B)False
2-4
Communicating
Through Financial Statements
• 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
LO 6
Financial Statements
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
6
Period of time
Point in time
(LO6)
Income Statement
• 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
LO 6
Income Statement
Inflows of assets
in exchange for
products and
services
provided to
customers.
2-8
Vertically Inclined Rock Gym
Income S tatement
For Month Ended March 31, 2014
Revenues:
Teaching revenue
$3,800
Equipment rental revenue
300
Total revenues
Operating Expenses:
Rent expense
$1,000
S alaries expense
700
Total operating expenses
Net income
$ 4,100
1,700
$ 2,400
LO 6
Income Statement
Vertically Inclined Rock Gym
Income S tatement
For Month Ended March 31, 2014
Costs incurred
or the using
up of assets
from generating
revenue
2-9
Revenues:
Teaching revenue
$3,800
Equipment rental revenue
300
Total revenues
Operating Expenses:
Rent expense
$1,000
S alaries expense
700
Total operating expenses
Net income
$ 4,100
1,700
$ 2,400
LO 6
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
Statement Of Owner’s Equity
Covers a
period
of time.
From the
Income
statement.
2-11
Vertically Inclined Rock Gym
S tatement of Owner's Equity
For Month Ended March 31, 2014
Virgil Klimb, capital, March 1
Add:
Investment by owner
Net income
Total
Less: Withdrawal by owner
Virgil Klimb, capital, March 31
$
$10,000
2,400
-
12,400
$12,400
600
$11,800
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
Balance Sheet
Vertically Inclined Rock Gym
Balance Sheet
March 31, 2014
Properties or
economic
resources
owned by a
business
Assets
Cash
$ 8,400
Supplies
3,600
Equipment
6,000
Total assets $ 18,000
2-13
Liabilities
Accounts payable $ 200
Notes payable
6,000
Total liabilities
$ 6,200
Owner's Equity
Virgil Klimb,capital 11,800
Total liabilities
and owner's
equity
$ 18,000
LO 6
Balance Sheet
Debts or
Obligations
of the
business
Vertically Inclined Rock Gym
Balance Sheet
March 31, 2014
Assets
Cash
$ 8,400
Supplies
3,600
Equipment
6,000
Total assets $ 18,000
2-14
Liabilities
Accounts payable $ 200
Notes payable
6,000
Total liabilities
$ 6,200
Owner's Equity
Virgil Klimb,capital 11,800
Total liabilities
and owner's
equity
$ 18,000
LO 6
Balance Sheet
Owner’s
claim on the
assets of a
business
Vertically Inclined Rock Gym
Balance Sheet
March 31, 2014
Assets
Cash
$ 8,400
Supplies
3,600
Equipment
6,000
From the
Statement
Of Owner’s
Equity
Total assets $ 18,000
2-15
Liabilities
Accounts payable $ 200
Notes payable
6,000
Total liabilities
$ 6,200
Owner's Equity
Virgil Klimb,capital 11,800
Total liabilities
and owner's
equity
$ 18,000
LO 6
Quick Check
The balance sheet shows whether
or not the firm achieved its
primary objective of earning a
profit.
A)True
B)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
Cash can flow In AND Out!LO 6
Cash Flow Statement
Vertically Inclined Rock Gym
Cash Flow Statement
For Month Ended March 31, 2014
From
the
balance
sheet
2-18
Cash flows from operating activities:
Cash received from clients
Cash paid for supplies
Cash paid for rent
Cash paid to employee
Net cash used by operating acitivities
Cash flows from investing activities:
Cash flows from financing activities:
Investment by owner
Withdrawal by owner
Net cash provided by financing activities
Net increase in cash
Cash balance, January 1
Cash balance, January 31
$4,100
(3,400)
(1,000)
(700)
($1,000)
0
$10,000
(600)
9,400
$8,400
$8,400
LO 6
Financial Statement Differences Based on
Type of Organization
2-19
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
ASPE
• 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.
24
LO 5
GAAP for Public vs. Private
Enterprises
GAAP to be
used
25
Publicly Accountable
Enterprises (PAEs)
Private Enterprises
(PEs)
IFRS
ASPE or IFRS
LO 5
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.
Is it acceptable for managers to use
their own estimate of an asset's value
when recording the purchase?
2-27
LO 5
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) True
B) False
2-31