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Power Notes. Introduction to Accounting and Business. 1.Nature of a Business 2.The Role of Accounting in Business 3.Business Ethics 4.Profession of Accounting 5.Generally Accepted Accounting Principles 6.Assets, Liabilities, and Owner’s Equity 7.Business Transactions

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Power Notes

Introduction to Accounting and Business

1.Nature of a Business

2.The Role of Accounting in Business

3.Business Ethics

4.Profession of Accounting

5.Generally Accepted Accounting Principles

6.Assets, Liabilities, and Owner’s Equity

7.Business Transactions

8.Financial Statements

9.Financial Analysis and Interpretation

Learning Objectives


Living in the Information Age

Data

Communication

News

Commentary

Facts

Access


Living in the Information Age

Data

Communication

News

Timeliness

Independence

Freedom-of-Expression

Commentary

Facts

Access


Products

Business

Services

Business and Investment

Goal

Profit

Sells/provides

Profit


Land and Building

Accounting Information

Labor and Equipment

Accounting Information

Factors of production are the means businesses use to make profit.


Business Profit

Amounts earned from selling products or services

Costs incurred with sales

Amounts earned from sales less expenses incurred


ServiceBusinessService

The Walt Disney CompanyEntertainment

Delta Air LinesTransportation

Marriott International HotelsHospitality and lodging

Bank of America CorporationFinancial services

XM Satellite RadioSatellite radio

0

1-1

Types of Businesses


Merchandising BusinessProduct

Wal-MartGeneral merchandise

GameStop CorporationVideo games and accessories

Best BuyConsumer electronics

Gap Inc.Apparel

Amazon.comInternet books, music, video

0

1-1

Types of Businesses


Manufacturing BusinessProduct

General Motors Corp.Cars, trucks, vans

SamsungCell phones

Dell Inc.Personal computers

NikeAthletic shoes and apparel

The Coca-Cola CompanyBeverages

Sony CorporationStereos and televisions

0

1-1

Types of Businesses


Business

Sally’s

Grocery

Proprietorship

Partnership

Corporation

Exh.

1.4

Forms of Organization

Law Offices


0

1-1

Common Forms of Business Organizations

  • Proprietorship

  • Partnership

  • Corporation

  • Limited liability company


0

1-1

A proprietorshipis owned by one individual and—

  • Comprises 70% of business organizations in the United States.

  • Requires low cost of organizing.

  • Is limited to financial resources of the owner.

  • Is used by small businesses.


0

1-1

A partnershipis similar to a proprietorship except that it is owned by two or more individuals and—

  • Comprises 10% of business organizations in the United States.

  • Combines the skills and resources of more than one person.


0

1-1

A corporationis organized under state or federal statues as a separate legal taxable entity and—

  • Generates 90% of the total dollars of business receipts received.

  • Comprises 20% of the businesses.

Continued


Owners of a corporation are called shareholders (or stockholders).

When a corporation issues only one class of stock, we call it common stock (or capital stock).

Corporation


0

1-1

  • Includes ownership divided into shares of stock, sold to shareholders (stockholders).

  • Is able to obtain large amounts of resources by issuing stock.

  • Is used by large businesses.


0

1-1

A limited liability company(LLC)combines attributes of a partnership and a corporation in that it is organized as a corporation. However, a limited liability corporation can elect to be taxed as a partnership and—

  • Is a popular alternative to a partnership.

  • Has tax and liability advantages to the owners.


Nonbusiness

Government

Nonprofit

Private

Exh.

1.4

Forms of Organization


Libraries

Army

Museums

Hospitals

Colleges

Schools

Airports

Cities

Prisons

Shelters

Nonbusiness Organization

Accounting for these organizations is usually a fund-based system, but the basic principles are similar to accounting for business organizations.


1

The Role of Accounting in Business

Accountingcan be defined as aninformation system that provides reports to users about the economic activities and condition of a business.


Focus of Accounting

  • Identifying Economic Events

  • Recording Economic Events

  • Reporting and Analyzing Economic Events


is a

system that

information

that is

Influence of Accounting

Accounting

Identifies

Records

Relevant

Communicates

Reliable

to help users make better decisions.

Comparable


1

The process by which accounting provides information to users is as follows:

  • Identify users.

  • Assess users’ informational needs.

  • Design the accounting information system to meet users’ needs.

  • Record economic data about business activities and events.

  • Prepare accounting reports for users.


Accounting — An Information Process

Identification

of Users


Users of Accounting Information

  • investors

  • creditors

  • regulators

  • customers

  • competitors

Financial Accounting

EXTERNAL USERS


Users of Accounting Information

  • investors

  • creditors

  • regulators

  • customers

  • competitors

  • owners

  • managers

  • employees

Financial Accounting

EXTERNAL USERS

ManagerialAccounting

INTERNAL USERS


1

Financial Accounting

The area of accounting that provides external users with information is calledfinancial accounting.

The objective of financial accounting is to provide relevant and timely information for the decision-making needs of users outside of the business.


1

Managerial Accounting

The area of accounting that provides internal users with information is called managerial accounting.

The objective of managerial accounting is to provide relevant and timely information for managers’ and employees’ decision-making needs.


Accounting — An Information Process

Identification

of Users

User

Information

Needs

Accounting

System


Accounting — An Information Process

Identification

of Users

User

Information

Needs

Economic Data

and Activities

Accounting

System


Accounting — An Information Process

Identification

of Users

User

Information

Needs

Economic Data

and Activities

Accounting

System

Reports


User

Decisions

Accounting — An Information Process

Identification

of Users

User

Information

Needs

Economic Data

and Activities

Accounting

System

Reports


1

Exhibit 1

Users of Accounting Information


1

Role of Ethics in Accounting and Business

Ethicsare moral principles that guide the conduct of individuals.


Ethics

Ethics and Social Responsibility

Beliefs that separate right from wrong

Often coincide with laws

Accepted standards of good and bad behavior


Guidelines for Ethical Decision Making

  • Make Ethical Decision

  • Identify Ethical Issues

  • Analyze Options

Use personal ethics to recognize ethical issues.

Consider both the good and bad consequences for all affected.

Choose the best option after weighing all consequences.


2

Business Entity Concept

Under the business entity concept, the activities of a business are recorded separately from the activities of its owners, creditors, or other businesses.


2

Cost Concept

Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price.


2

Example Exercise 1-1

Cost Concept

On August 25, Gallatin Repair Service extended an offer of $125,000 for land that had been priced for sale at $150,000. On September 3, Gallatin Repair Service accepted the seller’s counteroffer of $137,000. On October 20, the land was assessed at a value of $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service’s records?

1-28


For Practice: PE 1-1A, PE 1-1B

Follow My Example 1-1

2

Example Exercise 1-1 (continued)

$137,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service.

1-29


2

Objectivity Concept

The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence.


2

Unit of Measure Concept

The unit of measure conceptrequires that economic data be recorded in dollars.


Fundamental Principles of Accounting

Business Entity Principle

A business is accounted for separately from its owner or owners.

Objectivity Principle

Financial statement information is supported by independent, unbiased evidence.

Cost Principle

Financial statements are based on actual costs incurred in business transactions.

Going-Concern Principle

A business continues operating instead of being closed or sold.

Monetary Unit Principle

Express transactions and events in monetary units.


The Accounting Equation

Resources

What are an organization’s resources called?


0

1-3

The Accounting Equation

Assets = Liabilities + Owner’s Equity

The resources owned by a business


The Accounting Equation

Resources = Sources

Assets

What are the sources of the assets?

Cost of

resources used

in the business


The Accounting Equation

Resources = Sources

Liabilities

Assets

Owner’s

Equity

Resources supplied by creditors and owners

Cost of

resources used

in the business


0

1-3

The Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the creditors, which represent debts of the business


0

1-3

The Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the owners


3

Example Exercise 1-2

Accounting Equation

John Joos is the owner and operator of You’re A Star, a motivational consulting business. At the end of its accounting period, December 31, 2009, You’re A Star has assets of $800,000 and liabilities of $350,000. Using the accounting equation, determine the following amounts:

  • Owner’s equity, as of December 31, 2009.

  • b.Owner’s equity, as of December 31, 2010, assuming that assets increased by $130,000 and liabilities decreased by $25,000 during 2010.

1-34


a.Assets = Liabilities + Owner’s Equity $800,000 = $350,000 + Owner’s Equity

Owner’s Equity =$450,000

b.First, determine the change in Owner’s Equity during 2010 as follows:

Assets = Liabilities + Owner’s Equity $130,000 = –$25,000 + Owner’s Equity

Owner’s Equity =$155,000

Next, add the change in Owner’s Equity on December 31, 2009 to arrive at Owner’s Equity on December 31, 2010, as shown below:

Example Exercise1-2 continued

For Practice: PE 1-2A, PE 1-2B

Follow My Example 1-2

$605,000 = $450,000 + $155,000

3

Example Exercise 1-2 (continued)

1-35


4

Business Transaction

A business transaction is an economic event or condition that directly changes an entity’s financial condition or its results of operations.


4

Transaction A

On November 1, 2009, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.


Business Transactions

a.Chris Clark deposits $25,000 in a bank account for NetSolutions.

LIABILITIES

ASSETS

=

OWNER’S EQUITY


Business Transactions

a.Chris Clark deposits $25,000 in a bank account for NetSolutions.

LIABILITIES

ASSETS

Cash

25,000

=

OWNER’S EQUITY

Chris Clark, Capital

25,000


Chris Clark deposits $25,000 in a bank account for NetSolutions.

The accounts involved are:

(1) Cash (asset)

(2) Chris Clark, Capital (equity)

Transaction Analysis


Transaction Analysis


4

Transaction B

On November 5, 2009, NetSolutions paid $20,000 for the purchase of land as a future building site.


Business Transactions

b.NetSolutions buys land for $20,000.

LIABILITIES

ASSETS

=

OWNER’S EQUITY


Business Transactions

b.NetSolutions buys land for $20,000.

LIABILITIES

ASSETS

Cash

(20,000)

=

OWNER’S EQUITY

Land

20,000


Theaccounts involved are:

(1) Cash (asset)

(2) Land (asset)

Transaction Analysis

NetSolutions buys land for $20,000.


Transaction Analysis


4

Transaction C

On November 10, 2009, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future.


Business Transactions

c.NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.

LIABILITIES

ASSETS

=

OWNER’S EQUITY


Business Transactions

c.NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.

LIABILITIES

ASSETS

Accounts Payable

1,350

Supplies

1,350

=

OWNER’S EQUITY


Transaction Analysis

NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.

The accounts involved are:

(1) Supplies (asset)

(2) Accounts Payable (liability)


Transaction Analysis


4

Transaction D

On November 18, 2009, NetSolutions received cash of $7,500 for providing services to customers. A business earns money by selling goods or services to its customers. This amount is called Revenue.


Business Transactions

d.NetSolutions earns fees of $7,500, receiving cash.

LIABILITIES

ASSETS

=

OWNER’S EQUITY


Business Transactions

d.NetSolutions earns fees of $7,500, receiving cash.

LIABILITIES

ASSETS

Cash

7,500

=

OWNER’S EQUITY

Fees Earned 7,500


Transaction Analysis

NetSolutions earns fees of $7,500, receiving cash.

The accounts involved are:

(1) Cash (asset)

(2) Revenues (equity)


Transaction Analysis


4

Expenses

During the month, NetSolutions spent cash or used up other assets in earning revenue. Assets used in this process of earning revenue are called expenses.


4

Transaction E

On November 30, 2009, NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800; utilities, $450; and miscellaneous,$275.


Business Transactions

e.NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

LIABILITIES

ASSETS

=

OWNER’S EQUITY


Business Transactions

e.NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

LIABILITIES

ASSETS

Cash

(3,650)

=

OWNER’S EQUITY

Expenses

(3,650)


Transaction Analysis

NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

The accounts involved are:

(1) Cash (asset)

(2) Expenses (equity)


Transaction Analysis


4

Transaction F

On November 30, 2009, NetSolutions paid creditors on account, $950.


Business Transactions

f.NetSolutions pays $950 to creditors on account.

LIABILITIES

ASSETS

=

OWNER’S EQUITY


Business Transactions

f.NetSolutions pays $950 to creditors on account.

LIABILITIES

ASSETS

Accounts Payable

(950)

Cash

(950)

=

OWNER’S EQUITY


Transaction Analysis

NetSolutions pays $950 to creditors on account

The accounts involved are:

(1) Cash (asset)

(2) Accounts payable (liability)


Transaction Analysis


4

Transaction G

On November 30, 2009, Chris Clark determined that the cost of supplies on hand at the end of the period was $550.


Business Transactions

g.At the end of the month, the cost of supplies on hand is $550.

LIABILITIES

ASSETS

=

OWNER’S EQUITY


Business Transactions

g.At the end of the month, the cost of supplies on hand is $550.

LIABILITIES

ASSETS

Supplies

(800)

=

OWNER’S EQUITY

Supplies Expense

(800)


Transaction Analysis

At the end of the month, the cost of supplies on hand is $550.

The accounts involved are:

(1) Supplies (asset)

(2) Supplies expense (equity)


Transaction Analysis


4

Transaction H

On November 30, 2009, Chris Clark withdrew $2,000 from NetSolutions for personal use.


Business Transactions

h.Chris Clark withdraws $2,000 in cash.

LIABILITIES

ASSETS

=

OWNER’S EQUITY


Business Transactions

h.Chris Clark withdraws $2,000 in cash.

LIABILITIES

ASSETS

Cash

(2,000)

=

OWNER’S EQUITY

Chris Clark, Drawing

(2,000)


Transaction Analysis

Chris Clark withdraws $2,000 in cash

The accounts involved are:

(1) Cash (asset)

(2) Chris Clark, Drawing (equity)


Transaction Analysis


Transaction Summary

LIABILITIES

ASSETS

Cash5,900

Supplies550

Land20,000

OWNER’S EQUITY

=


Transaction Summary

LIABILITIES

ASSETS

Accts. Payable400

Cash5,900

Supplies550

Land20,000

OWNER’S EQUITY

=


Transaction Summary

LIABILITIES

ASSETS

Accts. Payable400

Cash5,900

Supplies550

Land20,000

OWNER’S EQUITY

=

C. Clark, Capital25,000

C. Clark, Drawing(2,000)

Fees Earned7,500

Wages Expense(2,125)

Rent Expense(800)

Supplies Expense(800)

Utilities Expense(450)

Misc. Expense(275)


OWNER’S EQUITY

Effects of Transactions on Owner’s Equity

decreased by

Owner’s withdrawals

Expenses


OWNER’S EQUITY

Effects of Transactions on Owner’s Equity

increased by

Owner’s investments

Revenues


OWNER’S EQUITY

Effects of Transactions on Owner’s Equity

decreased by

increased by

Owner’s withdrawals

Expenses

Owner’s investments

Revenues


OWNER’S EQUITY

Effects of Transactions on Owner’s Equity

decreased by

increased by

Owner’s withdrawals

Expenses

Owner’s investments

Revenues

NET INCOME


4

Exhibit 5

Effects of Transactions on Owner’s Equity


4

Example Exercise 1-3

Transactions

Salvo Delivery Service is owned and operated by Joel Salvo. The following selected transactions were completed by Salvo Delivery Service during February:

Received cash from owner as additional investment, $35,000.

Paid creditors on account, $1,800.

Billed customers for delivery services on account, $11,250.

Received cash from customers on account, $6,740.

Paid cash to owner for personal use, $1,000.

1-63

(Continued)


4

Example Exercise 1-3 (continued)

Indicate the effect of each transaction on the accounting equation elements (Assets, Liabilities, Owner’s Equity, Drawing, Revenue, and Expense) by listing the numbers identifying the transactions, (1) through (5). Also, indicate the specific item within the accounting equation element that is affected. To illustrate, the answer to (1) is shown below.

(1) Asset (Cash) increases by $35,000; Owner’s Equity (Joel Salvo, Capital) increases by $35,000.

1-64


Follow My Example 1-3

For Practice: PE 1-3A, PE 1-3B

4

Example Exercise 1-3 (continued)

Follow My Example 1-3

  • Asset (Cash) decreases by $1,800; Liability (Accounts Payable) decreases by $1,800.

  • Asset (Accounts Receivable) increases by $11,250; Revenue (Delivery Service Fees) increases by $11,250.

  • Asset (Cash) increases by $6,740; Asset (Accounts Receivable) decreases by $6,740.

  • Asset (Cash) decreases by $1,000; Drawing (Joel Salvo, Drawing) increases by $1,000.

1-65


5

Financial Statements

After transactions have been recorded and summarized, reports are prepared for users. The accounting reports providing this information are called financial statements.


5

Income Statement

The income statement reports the revenues and expenses for a period of time, based on the matching concept.


5

Matching Concept

The matching concept is applied by matching the expenses with the revenue generated during a period by those expenses.


5

The excess of revenue over the expenses is called net income or net profit. If the expenses exceed the revenue, the excess is a net loss.


5

Exhibit 6

Financial Statements for NetSolutions

Net income is carried to the statement of owner’s equity.


Financial Statements

NetSolutions

Income Statement

For the Month Ended November 30, 2009

Fees earned$7,500

Operating expenses:

Wages expense$2,125

Rent expense800

Supplies expense800

Utilities expense450

Miscellaneous expense275

Total operating expenses4,450

Net income$3,050


Financial Statements

NetSolutions

Income Statement

For the Month Ended November 30, 2009

Fees earned$7,500

Operating expenses:

Wages expense$2,125

Rent expense800

Supplies expense800

Utilities expense450

Miscellaneous expense275

Total operating expenses4,450

Net income$3,050


Financial Statements

NetSolutions

Income Statement

For the Month Ended November 30, 2009

Fees earned$7,500

Operating expenses:

Wages expense$2,125

Rent expense800

Supplies expense800

Utilities expense450

Miscellaneous expense275

Total operating expenses4,450

Net income$3,050


5

Example Exercise 1-4

Income Statement

The assets and liabilities of Chickadee Travel Service at April 30, 2010, the end of the current year, and its revenue and expenses for the year are listed below. The capital of the owner, Adam Cellini, was $80,000 at May 1, 2009, the beginning of the current year.

Accounts payable$ 12,200Miscellaneous expense $ 12,950

Accounts receivable31,350Office expense 63,000

Cash53,050Supplies3,350

Fees earned 263,200Wages expense131,700

Land80,000

Prepare an income statement for the current year ended April 30, 2010.

1-72


Follow My Example 1-4

For Practice: PE 1-4A, PE 1-4B

5

Example Exercise 1-4 (continued)

Follow My Example 1-3

CHICKADEE TRAVEL SERVICE

INCOME STATEMENT

For the Year Ended April 30, 2010

Fees earned$263,200

Expenses:

Wages expense$131,700

Office expense63,000

Miscellaneous expense 12,950

Total expenses 207,650

Net income$ 55,550

1-73


5

Statement of Owner’s Equity

The statement of owner’s equity reports the changes in the owner’s equity for a period of time.


5

Exhibit 6

Financial Statements for NetSolutions (continued)

From the income statement

To the balance sheet


Financial Statements

NetSolutions

Statement of Owner’s Equity

For the Month Ended November 30, 2009

Chris Clark, capital, November 1, 2009$ 0

Investment on November 1, 2009$25,000

Net income for November 3,050

$28,050

Less withdrawals2,000

Increase in owner’s equity26,050

Chris Clark, capital, November 30, 2009$26,050


Financial Statements

NetSolutions

Statement of Owner’s Equity

For the Month Ended November 30, 2009

Chris Clark, capital, November 1, 2009$ 0

Investment on November 1, 2002$25,000

Net income for November3,050

$28,050

Less withdrawals2,000

Increase in owner’s equity26,050

Chris Clark, capital, November 30, 2009$26,050


Financial Statements

NetSolutions

Statement of Owner’s Equity

For the Month Ended November 30, 2009

Chris Clark, capital, November 1, 2009$ 0

Investment on November 1, 2009$25,000

Net income for November3,050

$28,050

Less withdrawals2,000

Increase in owner’s equity26,050

Chris Clark, capital, November 30, 2009$26,050


Financial Statements

NetSolutions

Statement of Owner’s Equity

For the Month Ended November 30, 2009

Chris Clark, capital, November 1, 2009$ 0

Investment on November 1, 2009$25,000

Net income for November3,050

$28,050

Less withdrawals2,000

Increase in owner’s equity26,050

Chris Clark, capital, November 30, 2009$26,050


5

Example Exercise 1-5

Statement of Owner’s Equity

Using the data for Chickadee Travel Service shown in Example Exercise 1-4, prepare a statement of owner’s equity for the current year ended April 30, 2010. Adam Cellini invested an additional $50,000 in the business during the year and withdrew cash of $30,000 for personal use.

1-76


For Practice: PE 1-5A, PE 1-5B

5

Example Exercise 1-5 continued

Follow My Example 1-5

CHICKADEE TRAVEL SERVICE

STATEMENT OF OWNER’S EQUITY

For the Year Ended April 30, 2010

Adam Cellini, capital, May 1, 2009$ 80,000 Additional investment by owner during year$ 50,000

Net income for the year 55,550

$105,550

Less withdrawals 30,000

Increase in owner’s equity 75,550

Adam Cellini, capital, April 30, 2010$155,550

1-77


5

Balance Sheet

A balance sheet is a list of the assets, liabilities, and owner’s equity as of a specific date.


5

Account Form

The account form of a balance sheet lists the assets on the left and the liabilities and owner’s equity on the right—similar to the design of an account.


5

Exhibit 6

Financial Statements for NetSolutions (continued)

This amount is compared to the net cash flow on the statement of cash flows.

From the statement of owner’s equity


5

Example Exercise 1-6

Balance Sheet

Using the data for Chickadee Travel Service shown in Example Exercises 1-4 and 1-5, prepare the balance sheet as of April 30, 2010.

1-81


Follow My Example 1-6

For Practice: PE 1-6A, PE 1-6B

5

Example Exercise 1-6 (continued)

Follow My Example 1-3

CHICKADEE TRAVEL SERVICE

BALANCE SHEET

April 30, 2010

Assets Liabilities

Cash$ 53,050Accounts payable $ 12,200

Accounts receivable31,350

Supplies3,350 Owner’s Equity

Land 80,000Adam Cellini, capital 155,550

Total assets$167,750Total liab. & owner’s eq.$167,750

1-82


Financial Statements

NetSolutions

Balance Sheet

November 30, 2009

Assets

Cash$5,900

Supplies550

Land20,000

Total assets$26,450

Liabilities

Accounts payable$ 400

Owner’s Equity

Chris Clark, capital26,050

Total liabilities and

owner’s equity$26,450


Financial Statements

NetSolutions

Balance Sheet

November 30, 2009

Assets

Cash$5,900

Supplies550

Land20,000

Total assets$26,450

Liabilities

Accounts payable$ 400

Owner’s Equity

Chris Clark, capital26,050

Total liabilities and

owner’s equity$26,450


Financial Statements

NetSolutions

Balance Sheet

November 30, 2009

Assets

Cash$5,900

Supplies550

Land20,000

Total assets$26,450

Liabilities

Accounts payable$ 400

Owner’s Equity

Chris Clark, capital26,050

Total liabilities and

owner’s equity$26,450


Financial Statements

NetSolutions

Balance Sheet

November 30, 2009

Assets

Cash$5,900

Supplies550

Land20,000

Total assets $26,450

Liabilities

Accounts payable$ 400

Owner’s Equity

Chris Clark, capital26,050

Total liabilities and

owner’s equity$26,450


5

Statement of Cash Flows

A statement of cash flows is a summary of the cash receipts and payments for a specific period of time. It consists of three sections: (1) operating activities, (2) investing activities, and (3) financing activities.


5

Operating Activities

The cash flows from operating activities section reports a summary of cash receipts and cash payments from operations.


5

Investing Activities

The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively permanent assets.


5

Financing Activities

The cash flows from financing activities section reports the cash transactions related to cash investments by the owner, borrowings, and withdrawals by the owner.


Transaction Analysis


Financial Statements

NetSolutions

Statement of Cash Flows

For the Month Ended November 30, 2009

Cash flows from operating activities:

Cash received from customers$ 7,500

Deduct cash payments for expenses

and payments to creditors4,600

Net cash flow from operating activities$ 2,900

Cash flows from investing activities:

Cash payments for acquisition of land(20,000)

Cash flows from financing activities:

Cash received as owner’s investment$25,000

Deduct cash withdrawal by owner2,000

Net cash flow from financing activities23,000

Net cash flow and Nov. 30, 2002 cash balance$5,900


Financial Statements

NetSolutions

Statement of Cash Flows

For the Month Ended November 30, 2002

Cash flows from operating activities:

Cash received from customers$ 7,500

Deduct cash payments for expenses

and payments to creditors4,600

Net cash flow from operating activities$ 2,900

Cash flows from investing activities:

Cash payments for acquisition of land(20,000

Cash flows from financing activities:

Cash received as owner’s investment$25,000

Deduct cash withdrawal by owner2,000

Net cash flow from financing activities23,000

Net cash flow and Nov. 30, 2002 cash balance$5,900

)


Financial Statements

NetSolutions

Statement of Cash Flows

For the Month Ended November 30, 2002

Cash flows from operating activities:

Cash received from customers$ 7,500

Deduct cash payments for expenses

and payments to creditors4,600

Net cash flow from operating activities$ 2,900

Cash flows from investing activities:

Cash payments for acquisition of land(20,000)

Cash flows from financing activities:

Cash received as owner’s investment$25,000

Deduct cash withdrawal by owner2,000

Net cash flow from financing activities23,000

Net cash flow and Nov. 30, 2002 cash balance$5,900

)


Financial Statements

NetSolutions

Statement of Cash Flows

For the Month Ended November 30, 2002

Cash flows from operating activities:

Cash received from customers$ 7,500

Deduct cash payments for expenses

and payments to creditors4,600

Net cash flow from operating activities$ 2,900

Cash flows from investing activities:

Cash payments for acquisition of land(20,000

Cash flows from financing activities:

Cash received as owner’s investment$25,000

Deduct cash withdrawal by owner2,000

Net cash flow from financing activities23,000

Net cash flow and Nov. 30, 2002 cash balance$5,900

)


5

Example Exercise 1-7

Statement of Cash Flows

A summary of cash flows for Chickadee Travel Service for the year ended April 30, 2010, is shown below.

Cash receipts:

Cash received from customers$251,000

Cash received from additional

investment of owner50,000

Cash payments:

Cash paid for expenses210,000

Cash paid for land80,000

Cash paid to owner for personal use30,000

The cash balance as of May 1, 2009, was $72,050.

Prepare a statement of cash flows for Chickadee Travel Service for the year ended April 30, 2010.

1-88


Follow My Example 1-7

For Practice: PE 1-7A, PE 1-7B

5

Example Exercise 1-7 (continued)

Follow My Example 1-3

Cash flows from operating activities:

Cash received from customers $251,000

Deduct cash payments for expenses 210,000

Net cash flows from operating activities$ 41,000

Cash flows from investing activities:

Cash payments for purchase of land(80,000)

Cash flows from financing activities:

Cash received from owner as investment $ 50,000

Deduct cash withdrawals by owner 30,000

Net cash flows from financing activities 20,000

Net decrease in cash during year$(19,000)

Cash as of May 1, 2009 72,050

Cash as of April 30, 2010 $ 53,050

1-89


5

Interrelationships Among Financial Statements

  • The income statement and the statement of owner’s equity are interrelated.

Net income or net loss appears on both statements.


5

Interrelationships Among Financial Statements

  • The statement of owner’s equity and the balance sheet are interrelated.

The owner’s capital at the end of the period on the statement of owner’s equity also appears on the balance sheet as owner’s capital.


5

Interrelationships Among Financial Statements

  • The balance sheet and the statement of cash flows are interrelated.

The cash reported on the balance sheet is also reported as the end-of-period cash on the statement of cash flows.


Ratio of Liabilities to Owner’s Equity

$400

$26,050

=

5

Financial Analysis and Interpretation

Ratio of Liabilities to Owner’s Equity

Total Liabilities

Total Owner’s Equity (or Total Stockholders’ Equity)

=

For NetSolutions:

= 0.015


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