Financial accounting These slides will help you in understanding financial statements A financial statements (or financial report) is a formal record of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form easy to understand. They typically include basic financial statements, accompanied by a management discussion and analysis. A balance sheet, also referred to as a statement of financial position, reports on a company's assets, liabilities, and owners equity at a given point in time. An income statement, also known as a statement of comprehensive income, statement of revenue & expense, P&L or profit and loss report, reports on a company's income, expenses, and profits over a period of time. A profit and loss statement provides information on the operation of the enterprise. These include sales and the various expenses incurred during the stated period. A Statement of changes in equity, also known as equity statement or statement of retained earnings, reports on the changes in equity of the company during the stated period. A cash flow statement reports on a company's cash flow activities, particularly its operating, investing and financing activities. For large corporations, these statements may be complex and may include an extensive set of footnotes to the financial statements and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.

1. Financial AFinancial Accountingccounting
Chapter 2Chapter 2
Basic Financial StatementsBasic Financial Statements
Financial AFinancial Accountingccounting
Chapter 2Chapter 2
Basic Financial StatementsBasic Financial Statements

2. TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 11
Ray Neal decides to open a computer programming
service.
On September 1, he invests $15,000 cash in the business,
which he names Softbyte.
BANK
Softbyte

3. TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 11 SOLUTIONSOLUTION
(1) +15,000 = +15,000 Investment
Assets = Liabilities + Owner’s Equity
R. Neal,
Cash Capital
There is an increase in the asset Cash,
$15,000, and an equal increase in the
owner’s equity, R. Neal, Capital, $15,000.
There is an increase in the asset Cash,
$15,000, and an equal increase in the
owner’s equity, R. Neal, Capital, $15,000.

4. TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 22
Softbyte purchases computer equipment for $7,000 cash.Softbyte purchases computer equipment for $7,000 cash.

5. TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 22 SOLUTIONSOLUTION
Cash is decreased $7,000, and the asset
Equipment is increased $7,000.
Cash is decreased $7,000, and the asset
Equipment is increased $7,000.
Assets = Liabilities + Owner’s Equity
R. Neal,
Cash + Equipment = Capital
Old Bal. $15,000 $15,000
New Bal. $ 8,000 + $7,000 = $15,000
$15,000
(2) -7,000 +$7,000

6. Softbyte purchases for $1,600 from Acme Supply
Company computer paper and other supplies expected to
last several months.
Acme agrees to allow Softbyte to pay this bill next month,
in October.
This transaction is referred to as a purchase on account
or a credit purchase.
Softbyte
Acme Supply Company
TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 33

7. TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 33 SOLUTIONSOLUTION
The asset Supplies is increased $1,600, and the liability
Accounts Payable is increased by the same amount.
The asset Supplies is increased $1,600, and the liability
Accounts Payable is increased by the same amount.
Assets = Liabilities + Owner’s Equity
Accounts R. Neal,
Cash + Supplies + Equipment = Payable + Capital
Old Bal. $8,000 $7,000 $15,000
New Bal. $8,000 + $1,600 + $7,000 = $1,600 + $15,000
$16,600 $16,600
(3) +$1,600 +$1,600

8. Softbyte receives $1,200 cash from customers for
programming services it has provided.
This transaction represents the Softbyte’s
principal revenue-producing activity.
Softbyte
TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 44

9. TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 44 SOLUTIONSOLUTION
Cash is increased $1,200, and R. Neal,
Capital is increased $1,200.
Cash is increased $1,200, and R. Neal,
Capital is increased $1,200.
Assets = Liabilities + Owner’s Equity
Accounts R. Neal,
Cash + Supplies + Equipment = Payable + Capital
Old Bal. $8,000 $1,600 $7,000 $1,600 $15,000
New Bal. $9,200 + $1,600 + $7,000 = $1,600 + $16,200
$17,800 $17,800
(4) +1,200 +1,200 Service Revenue

10. Softbyte receives a bill for $250 from the Daily News
for advertising but postpones payment of the bill
until a later date.
Softbyte receives a bill for $250 from the Daily News
for advertising but postpones payment of the bill
until a later date.
Softbyte
Daily News
Bill
TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 55

11. TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 55 SOLUTIONSOLUTION
Accounts Payable is increased $250, and
R. Neal, Capital is decreased $250.
Accounts Payable is increased $250, and
R. Neal, Capital is decreased $250.
Assets = Liabilities + Owner’s Equity
Accounts R. Neal,
Cash + Supplies + Equipment = Payable + Capital
Old Bal. $9,200 $1,600 $7,000 $1,600 $16,200
New Bal. $9,200 + $1,600 + $7,000 = $1,850 + $15,950
$17,800 $17,800
(5) +250 -250 Advertising Expense

12. Softbyte provides $3,500 of programming
services for customers.
Cash of $1,500 is received from customers, and
the balance of $2,000 is billed on account.
Softbyte
Bill
TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 66

13. TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 66 SOLUTIONSOLUTION
Cash is increased $1,500; Accounts Receivable is increased
$2,000; and R. Neal, Capital is increased $3,500.
Cash is increased $1,500; Accounts Receivable is increased
$2,000; and R. Neal, Capital is increased $3,500.
Assets = Liabilities + Owner’s Equity
Accounts Accounts R. Neal,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old Bal. $ 9,200 $1,600 $7,000 $1,850 $15,950
New Bal. $10,700 + $2,000 + $1,600 + $7,000 = $1,850 + $19,450
$21,300 $21,300
(6) +1,500 +2,000 +3,500 Service
Revenue

14. Expenses paid in cash for September are store rent
$600, salaries of employees $900, and utilities $200.
Expenses paid in cash for September are store rent
$600, salaries of employees $900, and utilities $200.
Softbyte
$600$600
$900$900
$200$200
TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 77

15. TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 77 SOLUTIONSOLUTION
Cash is decreased $1,700 and R. Neal, Capital is decreased
by the same amount.
Cash is decreased $1,700 and R. Neal, Capital is decreased
by the same amount.
Assets = Liabilities + Owner’s Equity
Accounts Accounts R. Neal,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old Bal. $10,700 $2,000 $1,600 $7,000 $1,850 $19,450
New Bal. $ 9,000 + $2,000 + $1,600 + $7,000 = $1,850 + $17,750
$19,600 $19,600
(7) -1,700 -600 Rent Exp.
-900 Salaries Exp.
-200 Salaries Exp.

16. Softbyte pays its $250 Daily News advertising bill in
cash.
Softbyte pays its $250 Daily News advertising bill in
cash.
TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 88
Softbyte
Daily News

17. TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 88 SOLUTIONSOLUTION
Cash is decreased $250 and Accounts Payable is decreased
by the same amount.
Cash is decreased $250 and Accounts Payable is decreased
by the same amount.
Assets = Liabilities + Owner’s Equity
Accounts Accounts R. Neal,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old Bal. $9,000 $2,000 $1,600 $7,000 $1,850 $17,750
New Bal. $8,750 + $2,000 + $1,600 + $7,000 = $1,600 + $17,750
$19,350 $19,350
(8) -250 -250

18. The sum of $600 in cash is received from
customers who have previously been billed
for services (in Transaction 6).
The sum of $600 in cash is received from
customers who have previously been billed
for services (in Transaction 6).
TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 99
Softbyte

19. TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 99 SOLUTIONSOLUTION
Cash is increased $600 and Accounts
Receivable is decreased by the same amount.
Cash is increased $600 and Accounts
Receivable is decreased by the same amount.
Assets = Liabilities + Owner’s Equity
Accounts Accounts R. Neal,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old Bal. $8,750 $2,000 $1,600 $7,000 $1,600 $17,750
New Bal. $9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $17,750
$19,350 $19,350
(9) +600 -600

20. Ray Neal withdraws $1,300 in cash
from the business for his personal use.
Ray Neal withdraws $1,300 in cash
from the business for his personal use.
$1,300$1,300
Softbyte
TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 1010

21. TRANSACTION ANALYSISTRANSACTION ANALYSIS
TRANSACTIONTRANSACTION 1010 SOLUTIONSOLUTION
Cash is decreased $1,300 and R. Neal, Capital is decreased
by the same amount.
Cash is decreased $1,300 and R. Neal, Capital is decreased
by the same amount.
Assets = Liabilities + Owner’s Equity
Accounts Accounts R. Neal,
Cash + Receivable + Supplies + Equipment = Payable + Capital
Old Bal. $9,350 $1,400 $1,600 $7,000 $1,600 $17,750
New Bal. $8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $16,450
$18,050 $18,050
(10) -1,300 -1,300 Drawings

22. Assets = Liabilities +
Cash +
Accts.
Rec. +
Tools &
Equip. + Truck =
Notes
Payable +
Accts.
Pay. +
Capital
Stock +
Retained
Earnings
May 1 8,000$ 8,000$
Balances 8,000$ 8,000$
May 2 (2,500) 2,500$
Balances 5,500$ 2,500$ 8,000$
May 8 (2,000) 15,000$ 13,000$
Balances 3,500$ 2,500$ 15,000$ 13,000$ 8,000$
May 11 300 300$
Balances 3,500$ 2,800$ 15,000$ 13,000$ 300$ 8,000$
May 18 150$ (150)
Balances 3,500$ 150$ 2,650$ 15,000$ 13,000$ 300$ 8,000$
May 25 75 (75)
Balances 3,575$ 75$ 2,650$ 15,000$ 13,000$ 300$ 8,000$
May 28 (150) (150)
Balances 3,425$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$
May 29 750 750
Balances 4,175$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 750$
May 31 (50) (50)
Balances 4,125$ 75$ 2,650$ 15,000$ 13,000$ 150$ 8,000$ 700$
Owners' Equity

23. Learning Objective
LO5
To explain how the income
statement reports an enterprise’s
financial performance for a
period of time in terms of the
relationship of revenues and
expenses.

24. REVENUES AS AREVENUES AS A
BUILDING BLOCKBUILDING BLOCK
Revenues are the gross increases in owner’s
equity resulting from business activities
entered into for the purpose of earning
income.
Revenues may result from sale of
merchandise, performance of services,
rental of property, or lending of money.
Revenues usually result in an increase in an
asset.

25. EXPENSES AS AEXPENSES AS A
BUILDING BLOCKBUILDING BLOCK
Expenses are the decreases in owner’s equity
that result from operating the business.
They are the cost of assets consumed or
services used in the process of earning
revenue.
Examples of expenses may be utility expense,
rent expense, supplies expense, and tax
expense.

26. Introduction to Financial Statements
Revenues
result in
positive cash
flow.
Expenses
result in
negative cash
flow.
Either in the past, present, or future.

27. ILLUSTRATIONILLUSTRATION
INCREASES AND DECREASES IN OWNER’S EQUITYINCREASES AND DECREASES IN OWNER’S EQUITY
INCREASES DECREASES
Investments
by Owner
Revenues
Owner’s
Equity
Withdrawals
by Owner
Expenses

28. JJ's Lawn Care Service
Income Statement
For the Month Ended May 31, 2007
Sales Revenue 750$
Operating Expense:
Gasoline Expense 50
Net Income 700$
Investments by and payments to the owners are
not included on the Income Statement.
Investments by and payments to the owners are
not included on the Income Statement.

29. Management’s Interest in
Financial Statements
Creditors are more likely to extend credit if financial
statements show a strong statement of financial position—
that 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.