BASICFINANCIALSTATEMENTSChapter

2LearningobjectivesArticulationamongthreeprimaryfinancialstatementsRelationshipbetweenfinancialstatementsandfinancialreportAstartingpoint:StatementofFinancialPositionIntroductiontoFinancialStatementsThreeprimaryfinancialstatements.IncomeStatementBalanceSheetStatementofCashFlowsWewilluseacorporationtodescribethesestatements.IntroductiontoFinancialStatementsDescribeswheretheenterprisestandsataspecificdate.IncomeStatementBalanceSheetStatementofCashFlowsIntroductiontoFinancialStatementsDepictstherevenueandexpensesforadesignatedperiodoftime.IncomeStatementBalanceSheetStatementofCashFlowsIntroductiontoFinancialStatementsRevenuesresultinpositivecashflow.Expensesresultinnegativecashflow.Eitherinthepast,present,orfuture.IntroductiontoFinancialStatementsNetincome(ornetloss)issimplythedifferencebetweenrevenuesandexpenses.IncomeStatementBalanceSheetStatementofCashFlowsIntroductiontoFinancialStatementsDepictsthewayscashhaschangedduringadesignatedperiodoftime.IncomeStatementBalanceSheetStatementofCashFlowsAStartingPoint:StatementofFinancialPositionTheConceptoftheBusinessEntityVagabondTravelAgencyAbusinessentityisseparatefromthepersonalaffairsofitsowner.AssetsAssetsareeconomicresourcesthatareownedbythebusinessandareexpectedtoprovidepositivefuturecashflows.AssetsCostPrincipleGoing-ConcernAssumptionObjectivityPrincipleStable-DollarAssumptionTheseaccountingprinciplessupportcostasthebasisforassetvaluation.LiabilitiesLiabilitiesaredebtsthatrepresentnegativefuturecashflowsfortheenterprise.Owners’EquityOwners’equityrepresentstheowners’claimstotheassetsofthebusiness.Owners’EquityChangesinOwners’EquityOwners’InvestmentsBusinessEarningsPaymentstoOwnersBusinessLossesTheAccountingEquation

Assets=Liabilities+Owners’Equity$300,000=$80,000+$220,000Let’sanalyzesometransactionsforJJ’sLawnCareService.OnMay1,2005,JillJonesandherfamilyinvested$8,000inJJ’sLawnCareServiceandreceived800sharesofstock.OnMay2,JJ’spurchasedaridinglawnmowerfor$2,500cash.OnMay8,JJ’spurchaseda$15,000truck.JJ’spaid$2,000downincashandissuedanotepayablefortheremaining$13,000.OnMay11,JJ’spurchasedsomerepairpartsfor$300onaccount.Jillrealizedshehadpurchasedmorerepairpartsthanneeded.OnMay18,JJ’swasabletosellhalfoftherepairpartstoABCLawnsfor$150,apriceequaltoJJ’scost.JJ’swillreceivethecashwithin30days.OnMay25,ABCLawnspaysJJ’s$75asapartialsettlementofitsaccountsreceivable.OnMay28,JJ’spays$150ofitsaccountspayable.OnMay29,JJ’srecordedlawncareservicesprovidedduringMayof$750.Allclientspaidincash.Now,let’sreviewhowJJ’stransactionsaffectedtheaccountingequation.OnMay31,JJ’spurchasedgasolineforthelawnmowerandthetruckfor$50cash.ThesetransactionsimpacttheStatementofCashFlows.ThesetransactionsimpacttheIncomeStatement.Let’spreparetheIncomeStatementandStatementofCashFlowsforJJ’sLawnCareServiceforthemonthendingMay31,2005.InvestmentsbyandpaymentstotheownersarenotincludedontheIncomeStatement.Operatingactivitiesincludethecasheffectsofrevenueandexpensetransactions.Investingactivitiesincludethecasheffectsofpurchasingandsellingassets.Financingactivitiesincludethecasheffectsoftransactionswiththeownersandcreditors.Now,let’spreparetheBalanceSheetforJJ’sLawnCareServiceforMay31,2005.ThesebalanceswillappearontheBalanceSheet.

Assets=Liabilities+Owners’Equity$21,850=$13,150+$8,700RelationshipsAmongFinancialStatementsDateatbeginningofperiodDateatendofperiodBalanceSheetBalanceSheetTimeIncomeStatementStatementofCashFlowsFinancialStatementArticulation

FinancialReportingandFinancialStatementsStatementofCashFlowsBalanceSheetIncomeStatementOtherInformation:IndustryCompetitionNationaleconomyFinancialstatementsarejustonesourceoffinancialaccountinginformation.FormsofBusinessOrganizationsSoleProprietorshipPartnershipCorporationReportingOwnershipEquityintheBalanceSheetSoleProprietorshipPartnershipCorporationTheUseofFinancialStatementsbyExternalPartiesCreditorsInvestorsTwoconcerns:LiquidityProfitabilityTheNeedforAdequateDisclosureNotestothefinancialstatementsoftenprovidefactsnecessaryfortheproperinterpretationofthestatements.IncomeStatementBalanceSheetStatementofCashFlowsManagement’sInterestinFinancialStatementsCreditorsaremorelikelytoextendcreditiffinancialstatementsshowastrongstatementoffinancialposition—thatisrelativelylittledebtandlargeamountsofliquidassets.Windowdressingoccurswhenmanagementtakesmeasurestomakethecompanyappearasstrongaspossibleinitfinancialstatements.Case2.3UsingaBalanceSheet

MoonCorp.andStarCorp.areinthesamelineofbusinessandbothwererecentlyorganized,soitmaybeassumedthattherecordedcostsofassetsareclosetocurrentmarketvalues.ThebalancesheetsforthetwocompaniesareasfollowsatJuly31,2009:Mooncorporation

BalanceSheet

July31,2009AssetsLiabilitiesandOwners’EquityCash$18,000LiabilitiesAccountreceivable

26,000Notespayable(duein60days)

12,400land

37,200building

38,000Accountingpayable

9,600OfficeEquipment

1,200TotalLiabilities22,000

Stockholder’sequity:Capitalstock60,000Retainedearnings38,40098,400Total120,400Total

120,400Starcorporation

BalanceSheet

July31,2009AssetsLiabilitiesandOwners’EquityCash$4800Liabilities:Accountreceivable

9600Notespayable(duein60days)

22400land

96000building

60000Accountpayable

43200OfficeEquipment

12000TotalLiabilities65600

Stockholder’sequity:Capitalstock72000Retainedearnings44800116800Total182400Total

182400Case2.3UsingaBalanceShee