Chapter 2

Copyright 2015 by McGraw-Hill Education (Asia).

All rights reserved.

Statement of Financial
Position
Income Statement

Three primary
financial
statements.

Statement of Cash Flows

We will use a
corporation to
describe
these
statements.
2-2

Statement of Financial
Position
Income Statement
Statement of Cash Flows

Describes
where the
enterprise
stands at a
specific date.

2-3

Statement of Financial
Position
Income Statement
Statement of Cash Flows

Depicts the
revenue and
expenses for a
designated
period of time.

2-4

Statement of Financial
Position
Income Statement
Statement of Cash Flows

Depicts the
ways cash has
changed during
a designated
period of time.

2-5

2-6

Vagabond
Travel
Agency

A business
entity is
separate from
the personal
affairs of its
owner.
2-7

Assets are
resources that are
controlled the
business and are
expected to have
future economic
benefits flowed to
the business.
2-8

These accounting principles support

cost as the basis for asset valuation.
Stable-Dollar
Assumption

Cost Principle

Objectivity
Principle

Going-Concern
Assumption
2-9

Liabilities are
debts that
represent
negative future
cash flows for
the enterprise.
2-10

Equity
represents
the owners
claims on the
assets of the
business.
2-11

Assets
Assets == Liabilities
Liabilities
$300,000
$300,000 ==

$80,000
$80,000

++

Equity
Equity

++ $220,000
$220,000

2-12

Lets analyze
transactions
for JJs Lawn
Care Service.

2-13

On 1 May, Jill Jones and her family

invested $8,000 in JJs Lawn Care Service
and received 800 shares of the company.

2-14

On 2 May, JJs purchased a riding lawn

mower for $2,500 cash.

2-15

On 8 May, JJs purchased a $15,000 truck.

JJs paid $2,000 down in cash and issued
a note payable for the remaining $13,000.

2-16

On 11 May, JJs purchased some repair

parts for $300 on account.

2-17

Jill realized she had purchased more repair parts

than needed. On 18 May, JJs was able to sell half
of the repair parts to ABC Lawns for $150, a price
equal to JJs cost. JJs will receive the cash
within 30 days.

2-18

On 25 May, ABC Lawns pays JJs $75 as a

partial settlement of its accounts
receivable.

2-19

On 28 May, JJs pays $150 of its accounts

payable.

2-20

On 29 May, JJs recorded lawn care

services provided during May of $750. All
clients were paid in cash.

2-21

On 31 May, JJs purchased gasoline for the

lawn mower and the truck for $50 cash.

Now, lets review how JJs transactions

affected the accounting equation.
2-22

2-23

Lets prepare the Income Statement and

Statement of Cash Flows for JJs Lawn Care
Service for the month ending 31 May 2013.

These
These transactions
transactions
impact
impact the
the
Statement
Statement of
of Cash
Cash
Flows.
Flows.

These
These transactions
transactions
impact
impact the
the Income
Income
Statement.
Statement.
2-24

Investments
Investments by
by and
and payments
payments to
to the
the owners
owners
are
are not
not included
included on
on the
the Income
Income Statement.
Statement.
2-25

2-26

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

2-27

Investing
Investing activities
activities include
include the
the cash
cash
effects
effects of
of purchasing
purchasing and
and selling
selling
assets.
assets.
2-28

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

2-29

Now, lets prepare the Statement of Financial

Position for JJs Lawn Care Service for May 31, 2013

These
These balances
balances will
will appear
appear
on
on the
the Statement
Statement of
of
Financial
Financial Position.
Position.

2-30

Assets
Assets == Liabilities
Liabilities ++
$21,850
$21,850 ==

$13,150
$13,150 ++

Equity
Equity
$8,700
$8,700
2-31

Date at
beginning of
period

Time

Statement of
Financial Position

Date at
end of
period

Statement of
Financial Position

Income Statement
Statement of Cash Flows

2-32

Financial Statement Articulation

2-33

Financial statements are

just one source of
financial accounting
information.
Statement
of Cash
Flows

Income
Statement
Statement
of
Financial
Position

Other Information:
Industry
Competitors
National economy
2-34

Sole
Sole
Proprietorships
Proprietorships

Partnerships
Partnerships

Corporations
Corporations

2-35

Sole
Sole
Proprietorships
Proprietorships

Partnerships
Partnerships

Partners' equity
Jill Jones, capital $ 4,000
Bill Jones, capital
4,000
Total partners' equity

$ 8,000

Corporations
Corporations

2-36

Creditors

Two
Two concerns:
concerns:
Liquidity
Liquidity
Profitability
Profitability

Investors
2-37

Statement of Financial
Position
Income Statement
Statement of Cash Flows

Notes
Notes to
to the
the
financial
financial
statements
statements
often
often provide
provide
facts
facts necessary
necessary
for
for the
the proper
proper
interpretation
interpretation of
of
the
the statements.
statements.
2-38

Creditors are more likely to extend credit if

financial statements show a strong statement
of financial positionthat is, relatively little
debt and large amounts of liquid assets.

Window dressing occurs when management

takes measures to make the company appear
as strong as possible in it financial statements.
2-39

2-40