Basic Financial

Statements
Chapter 2

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All

 Introduction to Financial
Statements
Balance Sheet
Three primary
Income Statement financial
Statement of Cash Flows statements.

We will use a corporation to describe these

statements.
2-2
 Introduction to Financial
Statements
Balance Sheet
Describes
where the
Income Statement enterprise
stands at a
Statement of Cash Flows
specific date.

2-3
 Introduction to Financial
Statements
Balance Sheet

Income Statement
Depicts the
revenue and
Statement of Cash Flows expenses for a
designated
period of time.

2-4
 Introduction to Financial
Statements
Balance Sheet

Income Statement

Statement of Cash Flows

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

2-5
 A Starting Point:
Statement of Financial
Position
Vagabond Travel Agency
Balance Sheet
December 31, 2009
Assets 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

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The Concept of the
Business Entity

A business
entity is
Vagabond separate from
Travel the personal
Agency
affairs of its
owner.

2-7
 Assets
Vagabond Travel Agency
Balance Sheet
December 31, 2009
Assets Liabilities & Owners' Equity
Cash $ 22,500 Liabilities:Assets are
Notes receivable 10,000 Notes payable $ 41,000
Accounts receivable 60,500 economic
Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 resources that are
Total liabilities $ 80,000
Building
Office equipment 15,000
owned by the
90,000 Ow ners' Equity:
Capital stock 150,000
business and are
Retained earnings 70,000
Total $ 300,000 Total $ 300,000
expected to benefit
future operations.
2-8
Assets
These accounting principles support
cost as the basis for asset valuation.

Cost Principle
Stable-Dollar
Assumption

Going-Concern
Objectivity Assumption
Principle

2-9
 Liabilities
Vagabond Travel Agency
Balance Sheet
December 31, 2009
Assets Liabilities & Ow ners' Equity
Liabilities are
Cash
Notes receivable
$ 22,500 Liabilities:
10,000 Notes payable $ 41,000
debts that
Accounts receivable
Supplies
60,500
2,000
Accounts payable
Salaries payable
36,000
3,000
Landrepresent 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity:
negative future
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
cash flows for the
Total $ 300,000 Total $ 300,000

enterprise.
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 Owners’ Equity
Vagabond Travel Agency
Balance Sheet
December 31, 2009
Assets Liabilities & Owners' Equity

Owners’ equity
Cash
Notes receivable
$ 22,500 Liabilities:
10,000 Notes payable $ 41,000
represents the
Accounts receivable
Supplies
60,500
2,000
Accounts payable
Salaries payable
36,000
3,000
owners’ claims
Land
Building
100,000 Total liabilities
90,000 Owners' Equity:
$ 80,000

on the assets of
Office equipment 15,000 Capital stock
Retained earnings
150,000
70,000
the business.
Total $ 300,000 Total $ 300,000

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

$300,000
$300,000 == $80,000
$80,000 ++ $220,000
$220,000
Vagabond Travel Agency
Balance Sheet
December 31, 2009
Assets Liabilities & Ow ners' 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 Ow ners' Equity
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000

2-12
 Financial Reporting and
Financial Statements
Financial statements are
just one source of
financial accounting Income
Statement
information. Balance
Sheet
Statement
of Cash
Flows

Other Information:
•Industry
•Competitors
•National economy

2-13
End of Chapter 2

2-14