CHAPTER 2 ACCOUNTING IN ACTION Financial Statements Accounting

CHAPTER 2 ACCOUNTING IN ACTION (Financial Statements) Accounting Principles, Eighth Edition Chapter 1 -1

What is a Financial Statement? l A financial statement is simply a report prepared to summarize the changes resulting from business activities. l A period of time that financial statements cover is called a fiscal period. This time period can be a month, quarter of a year, or an entire year. l Annual statement—covers 1 year Interim statement—covers periods of time less than one year Companies will have both Interim and Annual Statements l l Chapter 1 -2

Financial Statements Companies prepare four financial statements from the summarized accounting data: Income Statement Chapter 1 -3 Owners’ Equity Statement Balance Sheet Statement of Cash Flows LO 8 Understand the four financial statements and how they are prepared.

Financial Statements Income Statement Reports the revenues and expenses for a specific period of time. Net income – revenues exceed expenses. Net loss – expenses exceed revenues. Chapter 1 -4 LO 8 Understand the four financial statements and how they are prepared.

Financial Statements Review Question Net income will result during a time period when: a. assets exceed liabilities. b. assets exceed revenues. c. expenses exceed revenues. d. revenues exceed expenses. Chapter 1 -5 LO 8 Understand the four financial statements and how they are prepared.

Financial Statements Statement indicates the reasons why owner’s equity has increased or decreased during the period. Owners’ Equity Statement Increases (Add) result from: Investments Net Income Decreases (Less) result from: Drawings Net Loss Chapter 1 -6 LO 8 Understand the four financial statements and how they are prepared.

Financial Statements Income Statement Owners’ Equity Statement Net income is needed to determine the ending balance in owner’s equity. Chapter 1 -7 LO 8 Understand the four financial statements and how they are prepared.

Financial Statements Balance Sheet Reports the assets, liabilities, and owner’s equity at a specific date. Assets listed at the top, followed by liabilities and owner’s equity. Total assets must equal total liabilities and owner’s equity. Chapter 1 -8 LO 8 Understand the four financial statements and how they are prepared.

Financial Statements Balance Sheet Owners’ Equity Statement The ending balance in owner’s equity is needed in preparing the balance sheet Chapter 1 -9 LO 8 Understand the four financial statements and how they are prepared.

Financial Statements Information for a specific period of time. Statement of Cash Flows Answers the following: 1. Where did cash come from? 2. What was cash used for? 3. What was the change in the cash balance? Chapter 1 -10 LO 8 Understand the four financial statements and how they are prepared.

Financial Statements Balance Sheet Chapter 1 -11 Statement of Cash Flows LO 8 Understand the four financial statements and how they are prepared.

REMEMBER l l It is important to know how to correctly title each statement: The first two lines are always the same: Company Name of the statement l The third line is where most mistakes take place. For the balance sheet we state the date we are making the statement IE: December 31, 2009 l For all other statements it is for a period of time IE: For the year ended December 31, 2009 Chapter 1 -12

Financial Statements Review Question Which of the following financial statements is prepared as of a specific date? a. Balance sheet. b. Income statement. c. Owner's equity statement. d. Statement of cash flows. Chapter 1 -13 LO 8 Understand the four financial statements and how they are prepared.