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Basic Financial Basic Financial StatementsStatements

Chapter 2

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Introduction to Financial Introduction to Financial StatementsStatements

Three primary financial

statements.Income Statement

Balance Sheet

Statement of Cash Flows

We will use a corporation to describe these statements.

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Describes where the enterprise stands at a

specific date.

Income Statement

Balance Sheet

Statement of Cash Flows

Introduction to Financial Introduction to Financial StatementsStatements

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Depicts the revenue and

expenses for a designated

period of time.

Income Statement

Balance Sheet

Statement of Cash Flows

Introduction to Financial Introduction to Financial StatementsStatements

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Depicts the ways cash has changed during

a designated period of time.

Income Statement

Balance Sheet

Statement of Cash Flows

Introduction to Financial Introduction to Financial StatementsStatements

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Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

A Starting Point: A Starting Point: Statement of Financial Statement of Financial PositionPosition

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The Concept of the The Concept of the Business EntityBusiness Entity

Vagabond Travel

Agency

A business entity is

separate from the personal affairs of its

owner.

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Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

AssetsAssets

Assets are economic

resources that are owned by the

business and are expected to benefit future operations.

Assets are economic

resources that are owned by the

business and are expected to benefit future operations.

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AssetsAssets

Cost PrincipleCost PrincipleCost PrincipleCost Principle

Going-ConcernGoing-ConcernAssumptionAssumption

Going-ConcernGoing-ConcernAssumptionAssumptionObjectivity Objectivity

PrinciplePrincipleObjectivity Objectivity PrinciplePrinciple

Stable-DollarStable-DollarAssumptionAssumption

Stable-DollarStable-DollarAssumptionAssumption

These accounting principles support cost as the basis for asset valuation.

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Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

LiabilitiesLiabilities

Liabilities are debts that represent

negative future cash flows for the

enterprise.

Liabilities are debts that represent

negative future cash flows for the

enterprise.

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Owners’ EquityOwners’ Equity

Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

Owners’ equity represents the owners’ claims on the assets of the business.

Owners’ equity represents the owners’ claims on the assets of the business.

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Vagabond Travel AgencyBalance Sheet

December 31, 2009Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' EquityOffice equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

The Accounting EquationThe Accounting Equation Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

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Statement of Cash Flows

Balance Sheet

Income Statement

Other Information:•Industry•Competitors•National economy

Financial Reporting and Financial Reporting and Financial StatementsFinancial Statements

Financial statements are just one source of

financial accounting information.

Financial statements are just one source of

financial accounting information.

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End of Chapter 2End of Chapter 2