CHAPTER 2 FINANCIAL STATEMENTS Objective 1 Introduction 2

CHAPTER 2 FINANCIAL STATEMENTS

Objective 1 Introduction 2

Accounting reports, called financial statements (재무제표 ), provide a summary of financial information to the owners.

§ The income statement is designed to provide information on a company’s operating performance during the current accounting period. § The statement of financial position is designed to provide information on a company’s financial position at a point in time. § The statement of changes in owners’ equity shows changes in various components of owners’ equity during the current accounting period. § The statement of cash flows shows changes in cash from three business activities(operating activities, investing activities, and financing activities) during the current accounting period.

Net income(or loss)＝Ending balance of owners’ equity －Beginning balance of owners’ equity －Investments by owners during the period ＋Distributions to owners during the period

Example 2 -1 Relationship between Income Statement and Statement of Financial Position At the end of September 20× 1, the accounting records of Zinnia Company show the following account balances(see Example 1 -1 of Chapter 1). ACCOUNTS Cash Accounts Receivable Office Supplies Office Equipment Accounts Payable Owners’ Equity Total ASSETS LIABILITIES AND OWNERS’ EQUITY $9, 700 600 5, 500 $500 16, 000 $16, 500 Zinnia’s assets increased from the original investment of $15, 000 to the ending balance of $16, 500. However, the increase of $1, 500 does not reflect the net income for the period because consideration must be given to any change in liabilities as well as any withdrawals made by the owner (representing a distribution to the owner). The initial net assets(assets less liabilities) were $15, 000, representing the original investment. The net assets at month’s end were $16, 000(total assets of $16, 500 less liabilities of $500). The net assets for the month thus increased by $1, 000. However, there was a withdrawal of $100 during the month. Hence, Zinnia must have made a net profit of $1, 100, which is the increase of $1, 000 in net assets for the period plus the $100 withdrawal by the owner.

Example 2 -1 Relationship between Income Statement and Statement of Financial Position Ending balance of owners’ equity $16, 000 Less: Beginning balance of owners’ equity (15, 000) Add: Investments by owners 0 Less: Distributions to owners (100) Net income $1, 100

Objective 2 Cash Basis Versus Accrual Basis of Accounting 8

Accrual Accounting �Recognizes revenue when earned (가득되었을 때) �(and not when cash received) �Recognizes expenses when incurred (발생하였을 때) �(and not when cash disbursed)

Example 2 -2 Accrual Basis Accounting For the month of January, employees who are paid bi-weekly were last paid on January 28. They have since worked three additional days(January 29～January 31) but will not be paid until the next pay day, which is in early February. Assuming that the wage for the three days totals $200, what should be done to properly reflect the wage expense for the month of January? According to the accrual basis of accounting, the company should accrue an additional wage expense of $200 for the month of January to properly reflect the total wage expense for that month.

Objective 3 Income Statement 11

The income statement (손익계산서) shows the revenue, expenses, and net income(or net loss) for a period of time.

Revenue (수익) is the increase in owner’s equity arising from sale of merchandise (as by a retail business) or rendering of services (as by a doctor). When revenue is earned, it results in an increase in either Cash (현금) or Accounts Receivable (외상매출금) depending on whether it is a cash sale (현금판매) or credit sale ( 신용판매). Expenses (비용) decrease owners’ equity and result from performing those functions necessary to generate revenue. The amount of an expense is either equal to the cost of goods sold, the value of services rendered (e. g. , salary expense), or the expenditures for conducting business operations(e. g. , rent expense) during the period.

Net income or net profit (당기순이익) is the amount by which total revenues exceed total expenses for the reporting period. Net income is added to the owners’ equity. However, if total expenses are greater than total revenues, a net loss (당기순손실) ensues and decreases the owners’ equity.

Example 2 -3 Income Statement During the month of October 20× 1, Alyssum Company earned $10, 000 from services rendered. Business expenses incurred during the period were: salary $2, 300, rent $2, 000, utilities(telephone and electricity) $1, 500, and office supplies used $400. follows: Alyssum Company Income Statement For the Month Ended October 31, 20× 1 Service Revenue $10, 000 Less: Operating Expenses Salary Expense $2, 300 Rent Expense 2, 000 Utilities Expense 1, 500 Office Supplies Expense Total Operating Expenses Net Income 400 6, 200 $3, 800

Objective 4 Statement of Financial Position 16

The statement of financial position (재무 상태표) portrays the financial position of a business entity by listing the balances of assets, liabilities, and owners’ equity at the end of the reporting period. Assets＝Liabilities＋Equity

Two forms of the statement of financial position The account form (계정식) lists the assets on the left and the liabilities and owner’s equity on the right. The report form (보고식) presents the liabilities and owners’ equity sections below the assets section.

Example 2 -4 (A) Report Form The Statement of Financial Position Alyssum Company Statement of Financial Position October 31, 20× 1 Assets Cash $10, 000 Accounts Receivable 50, 500 Office Supplies 10, 500 Office Equipment 30, 000 Total Assets $101, 000 Liabilities and Equity Liabilities Accounts Payable $30, 000 Owners’ Equity Balance, October 1, 20× 1 Net Income for October Less: Withdrawals Total Owners’ Equity Total Liabilities & Equity $67, 600 $3, 800 400 3, 400 71, 000 $101, 000

Example 2 -4 (B) Account Form Alyssum Company Statement of Financial Position October 31, 20× 1 Assets Cash Liabilities and Equity $10, 000 Liabilities Accounts Receivable 50, 500 Accounts Payable Office Supplies 10, 500 Owners’ Equity Office Equipment 30, 000 Bal. , Oct. 1, 20× 1 Net Income Less: Withdrawals Total Owners’ Equity Total Assets $101, 000 Total Liabilities and Equity $30, 000 $67, 600 $3, 800 400 3, 400 71, 000 $101, 000

Objective 5 Classified Financial Statements 21

Example 2 -5 Classified Income Statement Clematis Company Income Statement For the Year Ended December 31, 20× 1 Net Sales $38, 500 Cost of Goods Sold Inventory, January 1 $1, 000 Add: Purchases 15, 000 Cost of Goods Available for Sale 16, 000 Less: Inventory, December 31 5, 000 Gross Profit 11, 000 27, 500 Operating Expenses Selling Expenses Advertising and Promotion Expense $3, 000 Salespeople’s Salaries Expense 2, 000 Distribution Expense 1, 000 Depreciation Expense 500 6, 500 Administrative Expenses Office Salaries Expense 5, 000 Rent Expense 2, 000 Insurance Expense 1, 000 Total Operating Expenses Operating Income 8, 000 14, 500 13, 000 Other Expenses Interest Expense Net Income 500 $12, 500

The statement of changes in owners’ equity (소유주지분변동표, 자본변동표) acts as a bridge that connects between the income statement and statement of financial position.

Example 2 -6 Statement of Changes in Owners’ Equity Clematis Company Statement of Changes in Owners’ Equity For the Year Ended December 31, 20× 1 Share Capital, January 1 Retained Earnings, January 1 $15, 000 $15, 500 Add: Net Income for the year 12, 500 Less: Dividends (4, 000) Owners’ Equity, December 31 24, 000 $39, 000

Example 2 -7 Classified Statement of Financial Position Clematis Company Statement of Financial Position December 31, 20× 1 ASSETS Current Assets Cash $3, 000 Accounts Receivable 6, 000 Inventory 5, 000 Office Supplies 1, 000 Total Current Assets $15, 000 Long-Term Investments in Other Companies’ Shares 2, 000 Property, Plant, and Equipment Land Building $20, 000 30, 000 Machinery 7, 000 Delivery Truck 5, 000 Total Property, Plant, and Equipment 62, 000 Intangible Assets Patents $4, 000 Total Assets $83, 000

Example 2 -7 LIABILITIES AND OWNERS’ EQUITY Current Liabilities Accounts Payable $8, 000 Notes Payable 4, 000 Accrued Liabilities 2, 000 Total Current Liabilities $14, 000 Non-current Liabilities Mortgage Payable Total Liabilities Owners’ equity, December 31(see Example 2 -6) Total Liabilities and Owners’ equity 30, 000 $44, 000 39, 000 $83, 000

Accounting Terminologies in Chapter 2 account form accounts payable accounts receivable accrual basis accrued liabilities adjustments administrative expenses amortization expense balance sheet bonds payable cash basis 계정식 외상매입금 외상매출금 발생주의 미지급부채 수정 관리비 상각비 대차대조표 사채 사채 현금주의

Accounting Terminologies in Chapter 2 classified balance sheet 분류형대차대조표 classified financial statements 분류형재무제표 classified income statement consumables copyright cost of goods sold current assets current liabilities current maturities of long-term liabilities depreciation expense dividend income employee benefits expense 분류형손익계산서 소모품 저작권 매출원가 유동자산 유동부채 유동성장기부채 감가상각비 배당수익 종업원급여비용

Accounting Terminologies in Chapter 2 expense function of expense method 비용 기능별비용법 generally accepted accounting principles 일반적으로 인정된 회계원칙 goodwill gross sales income statement insurance policy intangible assets interest income interst expense inventory investments in securities 영업권 총매출액 손익계산서 보험증권 무형자산 이자수익 이자비용 재고자산 투자증권

Accounting Terminologies in Chapter 2 liabilities long-term investments long-term liabilities long-term notes payable matching principle mortgage payable nature of expense method net income net sales nonoperating cycle operating expenses 부채 장기투자자산 장기부채 장기지급어음 대응원칙 저당부채 성격별비용법 당기순이익 순매출액 비영업 영업주기 영업비

Accounting Terminologies in Chapter 2 other expense other revenue owners' equity patent prepaid expense prepaid insurance profit and loss statement 기타비용 기타수익 소유주지분 특허권 선급비용 선급보험료 손익계산서 property, plant and equipment raw materials report form revenue recognition principle 유형자산 원재료 보고식 수익 수익인식원칙

Accounting Terminologies in Chapter 2 sales discounts sales returns and allowances 매출할인 매출환입 및 에누리 selling expenses 판매비 short-term financial assets 단기금융자산 short-term notes payable 단기지급어음 statement of changes in owners' equity 자본변동표 statement of financial position stocks total liabilities total revenues trademark 재무상태표 주식 총부채 총수익 상표권

Chapter 2 �The end