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Financial A ccounting Chapter 2 Basic Financial Statements

Financial A ccounting Chapter 2 Basic Financial Statements. STUDY OBJECTIVE . Understand what the four financial statements are and how they are prepared. FINANCIAL STATEMENTS.

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Financial A ccounting Chapter 2 Basic Financial Statements

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  1. Financial Accounting Chapter 2 Basic Financial Statements

  2. STUDY OBJECTIVE Understand what the four financial statements are and how they are prepared.

  3. FINANCIAL STATEMENTS After transactions are identified, recorded, and summarized, 4 financial statements are prepared from the summarized accounting data: 1 An income statement presents the revenues and expenses and resulting net income or net loss for a specific period of time. 2 An owner’s equity statement summarizes the changes in owner’s equity for a specific period of time. 3 A balance sheet reports the assets, liabilities, and owner’s equity at a specific date. 4A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time.

  4. ILLUSTRATION 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS 2,750 Net income of $2,750 shown on the income statement is added to the beginning balance of owner’s capital in the owner’s equity statement.

  5. ILLUSTRATION 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS 2,750 Net income of $2,750 is determined from the information in the owner’s equity column of the Summary of Transactions (Illustration 1-7).

  6. ILLUSTRATION 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS $16,450 Net income of $2,750 carried forward from the income statement to the owner’s equity statement. The owner’s capital of $16,450 at the end of the reporting period is shown as the final total of the owner’s equity column of the Summary of Transactions (Illustration 1-7).

  7. ILLUSTRATION 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS 16,450 Owner’s capital of $16,450 at the end of the reporting period shown in the owner’s equity statement is shown on the balance sheet.

  8. ILLUSTRATION 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS Cash of $8,050 on the balance sheet is reported on the statement of cash flows.

  9. ILLUSTRATION 1-11 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS $ 8,050 Cash of $8,050 on the balance sheet and statement of cash flows is shown as the final total of the cash column of the Summary of Transactions (Illustration 1-7).

  10. These transactions impact the Income Statement. Let’s prepare the Income Statement and Statement of Cash Flows for JJ’s Lawn Care Service for the month ending May 31, 2007. These transactions impact the Statement of Cash Flows.

  11. Investments by and payments to the owners are not included on the Income Statement.

  12. Operating activities include the cash effects of revenue and expense transactions.

  13. Investing activities include the cash effects of purchasing and selling assets.

  14. Financing activities include the cash effects of transactions with the owners and creditors.

  15. Now, let’s prepare the Balance Sheet for JJ’s Lawn Care Service for May 31, 2007. These balances will appear on the Balance Sheet.

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

  17. Financial Statement Articulation

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