3. 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
Now, let’s prepare the Balance Sheet for JJ’s
Lawn Care Service for May 31, 2007.
These balances will
appear on the Balance
Sheet.
These balances will
appear on the Balance
Sheet.
4. 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
These transactions
impact the Statement
of Cash Flows.
These transactions
impact the Statement
of Cash Flows.
These transactions
impact the Income
Statement.
These transactions
impact the Income
Statement.
Let’s prepare the Income Statement and
Statement of Cash Flows for JJ’s Lawn Care
Service for the month ending May 31, 2007.
5. Learning Objective
LO6
To explain how the statement of
cash flows presents the change
in cash for a period of time in
terms of the company’s
operating, investing, and
financing activities.
6. JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2007
Cash flows from operating activities:
Cash received from revenue transactions 750$
Cash paid for expenses (50)
Net cash provided by operating activities 700$
Cash flows from investing activities:
Purchase of lawn mower (2,500)$
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month 4,125$
Cash balance, May 1, 2007 -
Cash balance, May 31, 2007 4,125$
7. JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2007
Cash flows from operating activities:
Cash received from revenue transactions 750$
Cash paid for expenses (50)
Net cash provided by operating activities 700$
Cash flows from investing activities:
Purchase of lawn mower (2,500)$
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month 4,125$
Cash balance, May 1, 2007 -
Cash balance, May 31, 2007 4,125$
Operating activities include the cash effects
of revenue and expense transactions.
Operating activities include the cash effects
of revenue and expense transactions.
8. JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2007
Cash flows from operating activities:
Cash received from revenue transactions 750$
Cash paid for expenses (50)
Net cash provided by operating activities 700$
Cash flows from investing activities:
Purchase of lawn mower (2,500)$
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month 4,125$
Cash balance, May 1, 2007 -
Cash balance, May 31, 2007 4,125$
Investing activities include the cash effects
of purchasing and selling assets.
Investing activities include the cash effects
of purchasing and selling assets.
9. JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2007
Cash flows from operating activities:
Cash received from revenue transactions 750$
Cash paid for expenses (50)
Net cash provided by operating activities 700$
Cash flows from investing activities:
Purchase of lawn mower (2,500)$
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month 4,125$
Cash balance, May 1, 2007 -
Cash balance, May 31, 2007 4,125$
Financing activities include the cash effects
of transactions with the owners and
creditors.
Financing activities include the cash effects
of transactions with the owners and
creditors.
10. 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
Now, let’s prepare the Balance Sheet for JJ’s
Lawn Care Service for May 31, 2007.
These balances will
appear on the Balance
Sheet.
These balances will
appear on the Balance
Sheet.
12. Financial Statement ArticulationJJ'sLawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2007
Cash flowsfrom operating activities:
Cash received from revenue transactions 750$
Cash paid for expenses (50)
Net cash provided by operating activities 700$
Cash flowsfrom investing activities:
Purchase of lawn mower (2,500)$
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flowsfrom financing activities:
Investment by owners 8,000
Increase in cash for month 4,125$
Cash balance, May 1, 2007 -
Cash balance, May 31, 2007 4,125$
Cash 4,125$ Notes payable 13,000$
Accounts receivable 75 Accounts payable 150
Tools & equipment 2,650
Truck 15,000 Capital stock 8,000
Retained earnings 700
Total assets 21,850$ Total liabilities & equity 21,850$
Assets Liabilities
Owners' Equity
JJ's Lawn Care Service
Balance Sheet
May 31, 2007
JJ's Lawn Care Service
Income Statement
Sales Revenue 750$
Operating Expense:
Gasoline Expense 50
Net Income 700$
For the Month Ended May 31, 2007
13. FINANCIAL STATEMENTSFINANCIAL STATEMENTS
After transactions are identified, recorded, and summarized, 4
financial statements are prepared from the summarized
accounting data:
1 An income statement presents the revenues and expenses
and resulting net income or net loss for a specific period of time.
2 An owner’s equity statement/ Retained earnings summarizes the
changes in owner’s equity/ retained earnings for a specific period
of time.
3 A balance sheet reports the assets, liabilities, and owner’s
equity at a specific date.
4 A statement of cash flows summarizes information
about the cash inflows (receipts) and outflows
(payments) for a specific period of time.
14. ILLUSTRATIONILLUSTRATION 1-111-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE
Income Statement
For the Month Ended September 30, 2002
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net income 2,750
Net income of $2,750 shown on the income statement is added to the
beginning balance of owner’s capital in the owner’s equity statement.
Net income of $2,750 shown on the income statement is added to the
beginning balance of owner’s capital in the owner’s equity statement.
15. ILLUSTRATIONILLUSTRATION 1-111-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE
Owner’s Equity/ Retained Earnings Statement
For the Month Ended September 30, 2002
Capital/ Retained earnings, September 1 $ –0–
Add: Investments/ $ 15,000
Net income 17,750
17,750
Less: Drawings/ Dividends (1,300)
Capital/ Retained earnings , September 30 $ 16,450
2,750
Net income of $2,750 is determined from the information in the
owner’s equity column of the Summary of Transactions (Illustration 1-
7).
Net income of $2,750 is determined from the information in the
owner’s equity column of the Summary of Transactions (Illustration 1-
7).
16. ILLUSTRATIONILLUSTRATION 1-111-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2002
Capital, September 1 $ –0–
Add: Investments $ 15,000
Net income 2,750 17,750
17,750
Less: Drawings 1,300
Capital, September 30 $16,450
Net income of $2,750 carried forward from the income statement to the
owner’s equity statement. The owner’s capital of $16,450 at the end of the
reporting period is shown as the final total of the owner’s equity column of the
Summary of Transactions (Illustration 1-7).
Net income of $2,750 carried forward from the income statement to the
owner’s equity statement. The owner’s capital of $16,450 at the end of the
reporting period is shown as the final total of the owner’s equity column of the
Summary of Transactions (Illustration 1-7).
17. ILLUSTRATIONILLUSTRATION 1-111-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
Owner’s capital of $16,450 at the end of the reporting period shown
in the owner’s equity statement is shown on the balance sheet.
Owner’s capital of $16,450 at the end of the reporting period shown
in the owner’s equity statement is shown on the balance sheet.
SOFTBYTE
Balance Sheet
September 30, 2002
Assets
Cash $ 8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets $ 18,050
Liabilities and Owner’s Equity
Liabilities
Accounts payable $ 1,600
Owner’s equity
R. Neal, capital
Total liabilities and owner’s equity $ 18,050
16,450
18. ILLUSTRATIONILLUSTRATION 1-111-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
Cash of $8,050 on the balance sheet is reported on the statement of cash flows.Cash of $8,050 on the balance sheet is reported on the statement of cash flows.
SOFTBYTE
Balance Sheet
September 30, 2002
Assets
Cash $ 8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets $ 18,050
Liabilities and Owner’s Equity
Liabilities
Accounts payable $ 1,600
Owner’s equity
R. Neal, capital
Total liabilities and owner’s equity $ 18,050
19. ILLUSTRATIONILLUSTRATION 1-111-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPSFINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE
Statement of Cash Flows
For the Month Ended September 30, 2002
Cash flows from operating activities
Cash receipts from revenues $ 3,300
Cash payments for expenses (1,950)
Net cash provided by operating activities 1,350
Cash flows from investing activities
Purchase of equipment (7,000)
Cash flows from financing activities
Investment by owners $ 15,000
Withdraws by owners (1,300)
Net cash provided by financing activities 13,700
Net increase in cash 8,050
Cash at the beginning of the period –0–
Cash at the end of the period $ 8,050
Cash of $8,050 on the balance sheet and statement of cash flows is shown as the
final total of the cash column of the Summary of Transactions (Illustration 1-7).
Cash of $8,050 on the balance sheet and statement of cash flows is shown as the
final total of the cash column of the Summary of Transactions (Illustration 1-7).
20. Forms of Business Organization
Sole
Proprietorships
Sole
Proprietorships PartnershipsPartnerships CorporationsCorporations
21. Reporting Ownership Equity in
the Statement of Financial
PositionOwner's equity:
Jill Jones, capital 8,000$
Sole
Proprietorships
Sole
Proprietorships
Partners' equity
Jill Jones, capital 4,000$
Bill Jones, capital 4,000
Total partners' equity 8,000$
PartnershipsPartnerships
Owners' equity
Capital stock 7,000$
Retained earnings 1,000
Total stockholders' equity 8,000$
CorporationsCorporations
22. The Use of Financial Statements
by External Parties
Creditors
Investors
Two concerns:
Liquidity
Profitability
Two concerns:
Liquidity
Profitability
23. The Need for Adequate
Disclosure
Notes to the financial
statements often
provide facts
necessary for the
proper
interpretation of the
statements.
Notes to the financial
statements often
provide facts
necessary for the
proper
interpretation of the
statements.
Income Statement
Balance Sheet
Statement of Cash Flows
24. Income
Statement
Net income
Income
Statement
Net income
Statement of Retained
Earnings
Beginning Retained
Earnings
+ Net income
– Dividends
Ending retained earnings
Statement of Retained
Earnings
Beginning Retained
Earnings
+ Net income
– Dividends
Ending retained earnings
Balance Sheet
Ending Balance
Retained
Earnings
Balance Sheet
Ending Balance
Retained
Earnings
Order of Preparation
25. Income statement—A summary of the revenue and
expenses for a specific period of time.
Statement of retained earnings – a summary of the
changes in the retained earnings that have occurred
during a specific period of time.
Balance sheet—A list of the assets, liabilities, and
owner’s equity as of a specific date.
Review
26. 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.
Editor's Notes
3 All of these transactions have been placed on this slide, in the appropriate columns for the accounts they’ve impacted. Let’s verify the balance in each account and get ready to prepare the financial statements for JJ’s Lawn Care.
3 Here are the account balances to use when preparing the balance sheet.
3 Part I All of the transactions that impacted the cash account will appear on the statement of cash flows. Part II The revenues and expenses that caused the change in retained earnings will appear on the income statement of the company. Part II Let’s begin by preparing the income statement and statement of cash flows for JJ’s Lawn Care for the period ended May 31, 2007.
Learning objective number 6 is to explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating, investing, and financing activities.
3 Here is the statement of cash flows for JJ’s Lawn Care for the month ended May 31, 2007. Notice the three sections of the statement.
3 Cash flows from operating activities include the $700 in net income calculated on the previous screen.
3 JJ’s had a cash outflow for investing activities. The company invested in the riding lawn mower, truck, and repair parts; however, the company recovered some of the cost of repair parts by selling them to ABC Lawns.
3 The only financing activity was the original investment by the owners of JJ’s Lawn Care. The cash inflows and outflows resulted in an increase in cash of $4,125 during the month. Because the cash account had a zero balance at the beginning of the month, the ending balance in the cash account is $4,125. Let’s finish by preparing the balance sheet for JJ’s Lawn Care.
3 Here are the account balances to use when preparing the balance sheet.
3 Part I Asset accounts are listed on the left side of the balance sheet and the liabilities and owners’ equity accounts on the right. Feel free to go back to the previous screen and see all the account balances that appear on the balance sheet. Part II As a final check, make sure that the accounting equation is still in balance. The total assets of $21,850 is exactly equal to the total of the company’s liabilities plus owners’ equity. Notice that the balance sheet lists all assets, liabilities, and equities on a certain date. In this example, the date is May 31, 2007.
3 Part I This is the balance sheet for JJ’s Lawn Care at the end of May. Part II Net income impacts the retained earnings of the company. Part III The statement of cash flows not only provides the balance in the cash account, but also details information about the acquisition and disposition of assets and liabilities as well as changes in the owners’ equity balance. It’s clear to see how all the financial statements articulate with each other.
There are three general forms of business operations. A proprietorship is a business owned by just one individual. A partnership is owned by two or more individuals. Some partnerships have several thousand partners. A corporation is owned by individuals who normally are not active in the day-to-day operations of that business. For example, you may become an owner of IBM by purchasing shares of stock on the New York Stock Exchange. While you are a part owner, you do not necessarily work for IBM nor are you active in the operations of the company.
Part I The owners’ equity section of the balance sheet will look different for each type of business entity. For a sole proprietorship , there will be a capital account for the owner, and a drawing account to record payments to the owner. Part II For a partnership , each partner has a separate account, where changes are tracked over time. There’s also a separate drawing account for payments made to each partner. Part II To review, a corporation will show owners’ contributions in the capital stock account and accumulated earnings of the company in the retained earnings account. You should be able to tell the form of business by looking at the equity section of a balance sheet.
Creditors and investors have two major concerns about the operations and financial position of any company. First, the company must be liquid, that is, it must be able to pay all bills when due. Second, the company must be profitable in the long-run. Unprofitable companies drain the cash position of the company, causing concern on the part of creditors and investors.
In addition to the basic financial statements, companies prepare notes to the financial statements. These notes are meant to provide the reader with additional insights into the operations and financial position of the company.
Part I Creditors and investors are more likely to be interested in financially strong companies. These companies usually have little or no debt and a significant amount of assets that can be converted into cash quickly. Part II When management engages in measures to make the company appear financially stronger than it really is, this is referred to as window dressing . Window dressing may be legal, but it often impugns the integrity of the management team.
