© the mcgraw-hill companies, inc., 2002 mcgraw-hill/irwin basic financial statements chapter 2
TRANSCRIPT
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
BASIC FINANCIAL STATEMENTS
Chapter
2
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Previous Lecture
• Accounting information is for decision maker which enable them to make economic activities.
• Types of business• Types of organizations & theirs plus & minus• Business Stakeholders
Internal : Owners, managers, employees External: Customers, creditors, government
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• Types of Accounting InformationFinancial, Managerial, Tax
• Types of Business ActivitiesFinancing, Investing, Operating
• Types of Financial Statement Statement of earnings Statement of retained earningsBalance sheetCash flow statement
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Conceptual Framework of Accounting
• Guides choices about– what to present in financial statements– decisions about alternative ways of reporting
economic events– the selection of appropriate ways of
communicating such information
Chapter 2 4
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Conceptual Framework of Accounting
• Four main sections– Objective of financial reporting– Qualitative characteristics of accounting
information– Elements of financial statements– Recognition and measurement criteria
Chapter 2 5
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Objective of Financial Reporting
• To provide information that is useful to individuals who are making investment and credit decisions
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Qualitative Characteristics
• To be useful for decision-making, information should have these qualitative characteristics– Relevance– Faithful representation – Comparability – Understandability
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• Relevance– Information is relevant if it makes a difference in a
decision. It is said to have predictive value, feedback value, and timeliness
• Faithful representation– Information should reflect economic reality. It
must be verifiable, neutral, and complete
Qualitative Characteristics of Accounting Information
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Qualitative Characteristics of Accounting Information
• Comparability– Accounting information can be compared when
companies with similar circumstances use the same accounting standards consistently from year to year
• Understandability– Average user is assumed to understand the
accounting information
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Elements of Financial Statements
• Assets• Liabilities• Equity• Revenues• Expenses
Chapter 2 10
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Recognition and Measurement Criteria
• Accountants need detailed criteria to help them decide when and where an item is included in the financial statements.
• Includes– Assumptions– Principles– Constraints
Chapter 2 11
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Assumptions
• Monetary unit• Economic entity• Time period• Going concern
Chapter 2 12
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Monetary Unit Assumption
• Only those things that can be expressed in terms of money should be included in the accounting records
• Important presumption is that the monetary unit remains stable over time and the effects of inflation are nominal
Chapter 2 13
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Economic Entity
• Every economic entity can be separately identified and accounted for
• Personal items relating to shareholders are not accounted for by the business
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Time Period Assumption
• The economic life of a business can be divided into artificial time periods
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Going Concern Assumption
• The business will continue operating in the foreseeable future
• Justifies the use of the cost principle
Chapter 2 16
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Introduction to Financial Statements
Companies prepare interim financial statements and annual
financial statements
2000
X
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Introduction to Financial Statements
Three primary financial
statements.Income Statement
Balance Sheet
Statement of Cash FlowsWe will use a corporation
to describe these statements.
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Introduction to Financial Statements
Describes where the enterprise stands at a
specific date.
Income Statement
Balance Sheet
Statement of Cash Flows
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Introduction to Financial Statements
Depicts the revenue and
expenses for a designated
period of time.
Income Statement
Balance Sheet
Statement of Cash Flows
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Introduction to Financial Statements
Revenues result in positive
cash flow.
Expenses result in negative
cash flow.
Either in the past, present, or future.
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Introduction to Financial Statements
Net income (or net loss) is simply the difference between
revenues and expenses.
Income Statement
Balance Sheet
Statement of Cash Flows
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Introduction to Financial Statements
Depicts the ways cash has changed during
a designated period of time.
Income Statement
Balance Sheet
Statement of Cash Flows
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The Concept of the Business 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, 2002Assets 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: Statement of Financial Position
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Vagabond Travel AgencyBalance Sheet
December 31, 2002Assets 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$
Assets
Assets are economic resources
that are owned by the business and are expected to provide positive
future cash flows.
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Assets
Cost Principle
Going-ConcernAssumption
Objectivity Principle
Stable-DollarAssumption
These accounting principles support cost as the basis
for asset valuation.
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Vagabond Travel AgencyBalance Sheet
December 31, 2002Assets 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$
Liabilities
Liabilities are debts that
represent negative future cash flows
for the enterprise.
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Vagabond Travel AgencyBalance Sheet
December 31, 2002Assets 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
Owners’ equity represents the
owner’s claim to the assets of the
business.
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Owners’ Equity
Changes in Owners’ Equity
•Owners’ Investments
•Business Earnings
•Payments to Owners
•Business Losses
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End of Todays session