What is accounting?

• What does accounting information describe?

Chapter 1: Accounting: • Who are the users of accounting information?

Information for Decision Making – Internal and external

• Why do they need the information?

Accounting, Fall 2013 Accounting, Fall 2013

Corporate Governance Accounting – A Means to an End

It relates to the ways in which suppliers of finance to
corporations assures themselves of getting a return • The language of business.
on their investment (Shleifer and Vishny 1997)
Board
• The nature of economic activities that accounting
information describes.
Management

• The assumptions and measurement techniques

Operation/Decisions
involved in developing accounting information.

Investment Financing Dividend

• The information relevant for various types of
decision making.
Accounting, Fall 2013 Shareholders Accounting, Fall 2013

1
 The
Accounting
Process
Types of Accounting Information
• For external users, like
Accounting links investors and creditors
Financial • “General-purpose”
decision makers with accounting information
economic activities Accounting
Economic  and with the Information
Activities
results of their • For internal users, like
Management management.
decisions.

Reported • For tax

Decision Results of Tax authorities
Actions Actions
(decisions)
Makers (decisions)
Accounting, Fall 2013 Accounting, Fall 2013

Information System Basic Functions of an Accounting

An accounting system consists of the personnel, procedures,
technology, and records used by an organization to develop System
accounting information and to communicate this information to  Interpret  Classify
decision makers.
and record similar
Decisions business transactions
Information Users
Supported transactions.
Investors
Performance
into useful
Creditors Financial Information
Provided evaluations reports.
Managers
Profitability Stock
Owners
investments  Summarize
Customers Financial
Employees position Tax strategies and
Cash flows Labor relations
Regulators
Resource
communicate
-SEC information to
allocations
-IRS
Lending decision makers.
-FTC
decisions
Borrowing
Accounting, Fall 2013 Accounting, Fall 2013

2
 External Users of Accounting
Objectives of External Financial Reporting
Information
The primary external users of financial information are
•Owners investors and creditors.
•Creditors
•Potential investors
Cash Flow Prospects
Investors Creditors
•Labor unions
•Governmental agencies Return on Periodic Periodic
•Suppliers Investment dividends interest
•Customers Sale of Repayment of
•Trade associations Return of ownership at a loan at a
•General public Investment future date future date
General-purpose information
Accounting, Fall 2013 Accounting, Fall 2013

Objectives of External Financial

Objectives of External Financial Reporting
Reporting
A financial statement is a monetary declaration of what is
Provide specific information about economic
Specific resources, claims to resources, and changes in believed to be true about an enterprise.
resources and claims.
The primary financial statements.

Provide information useful in assessing amount, Balance Income

timing and uncertainty of future cash flows. Sheet Statement
Statement
Provide general information useful in making of Cash
General investment and credit decisions. Flows
Accounting, Fall 2013 Accounting, Fall 2013

3
 Characteristics of Externally Internal Users of Accounting
Reported Information Information
A Means to an End
 Board of Directors
Usefulness Broader than  Chief Executive Officer
Enhanced via Financial  Chief Financial Officer
Explanation Statements
 Vice Presidents
 Business Unit Managers
 Plant Managers
Based on General-
Historical in  Store Managers
Purpose Assumption
Nature  Line Supervisors

Information may not be available

Results from Inexact and to the external users.
Approximate Measures
Accounting, Fall 2013 Accounting, Fall 2013

Characteristics of Management
Integrity of Accounting Information
Accounting Information
Accounting information should be complete, unbroken,
Timeliness unimpaired, sound, honest and sincere.
Identify Decision-
A Means to an Making Authority • Institutional feasures
End  Accounting standards
 Internal control
 Audit

• Professional accounting organizations

Measures of Oriented Toward
Efficiency and Future • The personal competence, judgment and ethics of
Effectiveness
accountants

Accounting, Fall 2013 Accounting, Fall 2013

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 Components of Internal Control 我国的会计规范体系
In the process of achieving the company’s objectives,
internal control system is designed to provide a 会计法律法规： <会计法>等
reasonable assurance that the company is run in an
honest, efficient and effective manner. 企业会计制度
会计准则：
（核算办法集）
《企业财务通则》和《企业会计准
则》以及13个行业会计制度（1993）

Control <企业会计制度>(2001)
Environment Control Activities <企业会计准则>(2006)

Risk Assessment

Information and 会计规范层面 会计实务层面

Communication Monitoring

Accounting, Fall 2013 Accounting, Fall 2013

会计准则

Chapter 2: Basic Financial

Statements

Although much accounting information clearly is essential to business

operations, management still has many choices as to the types and
amount of accounting information to be developed or under what
assumptions to be developed.
Accounting, Fall 2013 Accounting, Fall 2013

5
 Introduction to Financial Introduction to Financial
Statements Statements
Companies prepare
Balance Sheet Balance Sheet
Describes where
interim financial
statements and annual the enterprise
Income Statement financial statements. Income Statement stands at a specific
date.
Statement of Cash Flows Statement of Cash Flows
Three primary
financial
statements.

We will use a corporation to describe these

statements.
Accounting, Fall 2013 Accounting, Fall 2013

Introduction to Financial Introduction to Financial

Statements Statements
Balance Sheet Balance Sheet

Income Statement
Depicts the Income Statement
revenue and
Statement of Cash Flows expenses for a Statement of Cash Flows
Depicts the ways
designated cash has changed
period of time. during a
Net income (or net
loss) is simply the designated period
difference between of time.
revenues and
expenses.

Accounting, Fall 2013 Accounting, Fall 2013

6
 A Starting Point: Statement of
The Concept of the Business Entity
Financial Position
Vagabond Travel Agency
Balance Sheet
December 31, 2009
A business
Assets Liabilities & Owners' Equity entity is
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000 Vagabond separate from
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Travel Agency the personal
Land 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity:
affairs of its
Office equipment 15,000 Capital stock
Retained earnings
150,000
70,000
owner.
Total $ 300,000 Total $ 300,000

Accounting, Fall 2013 Accounting, Fall 2013

Assets Assets
Vagabond Travel Agency These accounting principles support cost as
Balance Sheet
December 31, 2009 the basis for asset valuation.
Assets Liabilities & Owners' Equity
Cash
Assets are economic
$ 22,500 Liabilities:
Notes receivable 10,000 resources that are
Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000 Stable-Dollar Cost Principle
Supplies 2,000
owned by the
Salaries payable 3,000
Land 100,000 business and are
Total liabilities $ 80,000
Assumption
Building 90,000 Owners' Equity:
expected to benefit
Office equipment 15,000 Capital stock 150,000 Going-Concern
future operations.
Retained earnings 70,000
Objectivity Assumption
Total $ 300,000 Total $ 300,000
Principle
Accounting, Fall 2013 Accounting, Fall 2013

7
 The Reliability (Objectivity) Principle The Cost Principle
可靠性（客观性）原则 成本原则
Information must be Information must Assets and services acquired should be
reasonably accurate. be free from bias. recorded at their actual cost.

Individuals would
Information must
arrive at similar
report what
conclusions using
actually happened. same data.

Accounting, Fall 2013 Accounting, Fall 2013

The Going Concern Assumption

持续经营假设 Liabilities
Vagabond Travel Agency
The entity will continue to operate in the
Balance Sheet
future. December 31, 2009
Assets Liabilities & Owners' Equity
Liabilities are debts
Cash $ 22,500 Liabilities:
that represent
Notes receivable 10,000 Notes payable $ 41,000
The Stable-Monetary-Unit Assumption Accounts receivable
negative future cash
Supplies
60,500
2,000
Accounts payable
Salaries payable
36,000
3,000
币值稳定假设 Land
flows for the 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity:
enterprise.
Office equipment 15,000 Capital stock 150,000
The dollar’s purchasing power is relatively Retained earnings 70,000
stable. Total $ 300,000 Total $ 300,000

Accounting, Fall 2013 Accounting, Fall 2013

8
 Owners’ Equity Owners’ Equity
Vagabond Travel Agency Changes in Owners’
Balance Sheet
December 31, 2009 Equity
Assets Liabilities & Owners' Equity
Cash Owners’ equity $ 22,500 Liabilities:
represents the
Notes receivable
Accounts receivable
10,000
60,500
Notes payable
Accounts payable
$ 41,000
36,000
•Owners’
Investments
•Payments to
Owners
owners’ claims on
Supplies 2,000 Salaries payable 3,000 •Business •Business
Land 100,000 Total liabilities $ 80,000 Earnings Losses
the assets of the
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
business. Retained earnings 70,000
Total $ 300,000 Total $ 300,000

Accounting, Fall 2013 Accounting, Fall 2013

The Accounting Equation

Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

Vagabond Travel Agency
Balance Sheet
December 31, 2009 Let’s analyze
Assets Liabilities & Owners' Equity
Cash $ 22,500 Liabilities: transactions for
Notes receivable 10,000 Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000 JJ’s Lawn Care
Supplies
Land
2,000
100,000
Salaries payable
Total liabilities
3,000
$ 80,000
Service.
Building 90,000 Owners' Equity
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000
Accounting, Fall 2013 Accounting, Fall 2013

9
 On May 1, Jill Jones and her family invested
On May 2, JJ’s purchased a riding lawn mower for
$8,000 in JJ’s Lawn Care Service and received 800
$2,500 cash.
shares of stock.
JJ's Lawn Care Service
JJ's Lawn Care Service Balance Sheet
Balance Sheet May 2, 2009
May 1, 2009 Assets Owners' Equity
Assets Owners' Equity Cash $ 5,500 Capital Stock $ 8,000
Cash $ 8,000 Capital Stock $ 8,000 Tools & Equipment 2,500

Total $ 8,000 Total $ 8,000

Total $ 8,000 Total $ 8,000

On May 8, JJ’s purchased a $15,000 truck. On May 11, JJ’s purchased some repair parts for
JJ’s paid $2,000 down in cash and issued a note $300 on account.
payable for the remaining $13,000.
JJ's Lawn Care Service
JJ's Lawn Care Service Balance Sheet
Balance Sheet May 11, 2009
May 8, 2009 Assets Liabilities and Owners' Equity
Assets Liabilities and Owners' Equity Cash $ 3,500 Liabilities:
Cash $ 3,500 Liabilities: Tools & Equipment 2,800 Notes Payable $ 13,000
Tools & Equipment 2,500 Notes Payable $ 13,000 Truck 15,000 Accounts Payable 300
Truck 15,000 Owners' Equity: Total Liabilities $ 13,300
Capital Stock 8,000 Owners' Equity:
Capital Stock 8,000

Total $ 21,300 Total $ 21,300

Total $ 21,000 Total $ 21,000

10
 Jill realized she had purchased more repair parts than needed.
On May 18, JJ’s was able to sell half of the repair parts to ABC Lawns On May 25, ABC Lawns pays JJ’s $75 as a partial
for $150, a price equal to JJ’s cost. JJ’s will receive the cash within 30 settlement of its accounts receivable.
days.

JJ's Lawn Care Service JJ's Lawn Care Service

Balance Sheet Balance Sheet
May 18, 2009 May 25, 2009
Assets Liabilities and Owners' Equity Assets Liabilities and Owners' Equity
Cash $ 3,500 Liabilities: Cash $ 3,575 Liabilities:
Accounts Receivable 150 Notes Payable $ 13,000 Accounts Receivable 75 Notes Payable $ 13,000
Tools & Equipment 2,650 Accounts Payable 300 Tools & Equipment 2,650 Accounts Payable 300
Truck 15,000 Total Liabilities $ 13,300 Truck 15,000 Total Liabilities $ 13,300
Owners' Equity: Owners' Equity:
Capital Stock 8,000 Capital Stock 8,000

Total $ 21,300 Total $ 21,300 Total $ 21,300 Total $ 21,300

On May 29, JJ’s recorded lawn care services

On May 28, JJ’s pays $150 of its accounts payable. provided during May of $750. All clients were
paid in cash.
JJ's Lawn Care Service JJ's Lawn Care Service
Balance Sheet Balance Sheet
May 28, 2009 May 29, 2009
Assets Liabilities and Owners' Equity Assets Liabilities and Owners' Equity
Cash $ 3,425 Liabilities: Cash $ 4,175 Liabilities:
Accounts Receivable 75 Notes Payable $ 13,000 Accounts Receivable 75 Notes Payable $ 13,000
Tools & Equipment 2,650 Accounts Payable 150 Tools & Equipment 2,650 Accounts Payable 150
Truck 15,000 Total Liabilities 13,150 Truck 15,000 Total Liabilities 13,150
Owners' Equity: Owners' Equity:
Capital Stock 8,000 Capital Stock 8,000
Retained Earnings 750
Total $ 21,150 Total $ 21,150 Total $ 21,900 Total $ 21,900

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 On May 31, JJ’s purchased gasoline for the lawn Accts.
Assets
Tools &
= Liabilities
Notes Accts.
+ Owners' Equity
Capital Retained
mower and the truck for $50 cash. May 1
Cash
$ 8,000
+ Rec. + Equip. + Truck = Payable + Pay. + Stock + Earnings
$ 8,000
Balances $ 8,000 $ 8,000
JJ's Lawn Care Service May 2 (2,500) $ 2,500
Balances $ 5,500 $ 2,500 $ 8,000
Balance Sheet May 8 (2,000) $ 15,000 $ 13,000
May 31, 2009 Balances $ 3,500 $ 2,500 $ 15,000 $ 13,000 $ 8,000
Assets Liabilities and Owners' Equity May 11 300 $ 300
Cash $ 4,125 Liabilities: Balances $ 3,500 $ 2,800 $ 15,000 $ 13,000 $ 300 $ 8,000
May 18 $ 150 (150)
Accounts Receivable 75 Notes Payable $ 13,000 Balances $ 3,500 $ 150 $ 2,650 $ 15,000 $ 13,000 $ 300 $ 8,000
Tools & Equipment 2,650 Accounts Payable 150 May 25 75 (75)
Truck 15,000 Total Liabilities 13,150 Balances $ 3,575 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 300 $ 8,000
Owners' Equity: May 28 (150) (150)
Balances $ 3,425 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000
Capital Stock 8,000
May 29 750 750
Retained Earnings 700 Balances $ 4,175 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 750
Total $ 21,850 Total $ 21,850 May 31 (50) (50)
Balances $ 4,125 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 700
Now, let’s review how JJ’s transactions affected the
accounting equation.

Let’s prepare the Income Statement and Statement

of Cash Flows for JJ’s =Lawn
Assets Care Service
Liabilities + for the
Owners' Equity
Accts. month
Tools & ending May
Notes 31, 2009.
Accts. Capital
Cash + Rec. + Equip. + Truck = Payable + Pay. + Stock + Earnings
Retained
JJ's Lawn Care Service
May 1 $ 8,000 $ 8,000
Balances $ 8,000 $ 8,000 Income Statement
May 2 (2,500) $ 2,500 These transactions
Balances $ 5,500 $ 2,500
impact the Statement $ 8,000 For the Month Ended May 31, 2009
May 8 (2,000) $ 15,000 $ 13,000
Balances $ 3,500 $ 2,500 of Cash $Flows.
$ 15,000 13,000 $ 8,000
May 11 300 $ 300
Balances $ 3,500 $ 2,800 $ 15,000 $ 13,000 $ 300 $ 8,000 Sales Revenue $ 750
May 18 $ 150 (150)
Balances $ 3,500 $ 150 $ 2,650 $ 15,000 $ 13,000 $ 300 $ 8,000 Operating Expense:
May 25 75 (75)
Balances
May 28
$ 3,575
(150)
$ 75 $ 2,650 $ 15,000 $ 13,000 $ 300
(150)
$ 8,000 Gasoline Expense 50
Balances
May 29
$ 3,425
750
$ 75 $ 2,650 $ 15,000 $ 13,000
These transactions
$ 150 $ 8,000
750
Net Income $ 700
Balances $ 4,175 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 750
May 31 (50) impact the Income (50) Investments by and payments to the owners are
Balances $ 4,125 $ 75 $ 2,650
Statement.
$ 15,000 $ 13,000 $ 150 $ 8,000 $ 700
not included on the Income Statement.
Accounting, Fall 2013

12
 JJ's Lawn Care Service
Income Statement Statement of Cash Flows
For the Month Ended May 31, 2009
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash provided by operating activities $ 700
Revenues Expenses Cash flows from investing activities:
result in result in Purchase of lawn mower $ (2,500)
positive Purchase of truck (2,000)
negative
cash flow. Collection for sale of repair parts 75
cash flow.
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, 2009 -
Either in the past, present, or future. Cash balance, May 31, 2009 $ 4,125
Accounting, Fall 2013 Accounting, Fall 2013

JJ's Lawn Care Service JJ's Lawn Care Service

Statement of Cash Flows Statement of Cash Flows
For the Month Ended May 31, 2009 For the Month Ended May 31, 2009
Cash flows from operating activities: Cash flows from operating activities:
Cash received from revenue transactions $ 750 Cash received from revenue transactions $ 750
Cash paid for expenses (50) Cash paid for expenses (50)
Net cash provided by operating activities $ 700 Net cash provided by operating activities $ 700
Cash flows from investing activities: Cash flows from investing activities:
Operating activities include the cash effects
Purchase of lawn mower $ (2,500) Purchase of lawn mower $ (2,500)
of revenue and expense transactions.
Purchase of truck (2,000) Purchase of truck (2,000)
Collection for sale of repair parts 75 Collection for sale of repair parts 75
Payment for repair parts (150) Payment for repair parts (150)
Net cash used by investing activities (4,575) Net cash used by investing activities (4,575)
Cash flows from financing activities: Cash flows from financing activities:
Investment by owners 8,000 Investing activities include the cash effects8,000
Investment by owners of
Increase in cash for month $ 4,125 purchasing and selling assets.
Increase in cash for month 4,125 $
Cash balance, May 1, 2009 - Cash balance, May 1, 2009 -
Cash balance, May 31, 2009 $ 4,125 Cash balance, May 31, 2009 $ 4,125
Accounting, Fall 2013 Accounting, Fall 2013

13
 JJ's Lawn Care Service
Now, let’s prepare the Balance Sheet for JJ’s Lawn
Statement of Cash Flows Care Service for May 31, 2009.
For the Month Ended May 31, 2009 Assets = Liabilities + Owners' Equity
Cash flows from operating activities: Accts. Tools & Notes Accts. Capital Retained
Cash received from revenue transactions $ 750 Cash + Rec. + Equip. + Truck = Payable + Pay. + Stock + Earnings
May 1 $ 8,000 $ 8,000
Cash paid for expenses (50) Balances $ 8,000 $ 8,000
Net cash provided by operating activities $ 700 May 2 (2,500) $ 2,500
Cash flows from investing activities: Balances $ 5,500 $ 2,500 $ 8,000
May 8 (2,000) $ 15,000 $ 13,000
Purchase of lawn mower $ (2,500)
Financing activities include the cash effects
Purchase of truck (2,000)
Balances
May 11
$ 3,500 $ 2,500
300
$ 15,000 $ 13,000
$ 300
$ 8,000

of transactions with the owners and creditors.

Collection for sale of repair parts 75 Balances
May 18
$ 3,500
$ 150
$ 2,800
(150)
$ 15,000 $ 13,000 $ 300 $ 8,000

Payment for repair parts (150) Balances $ 3,500 $ 150 $ 2,650 $ 15,000 $ 13,000 $ 300 $ 8,000
Net cash used by investing activities (4,575) May 25 75 (75)
These balances will
Cash flows from financing activities: Balances
May 28
$ 3,575
(150)
$ 75 appear on the Balance
$ 2,650 $ 15,000 $ 13,000 $ 300
(150)
$ 8,000
Investment by owners 8,000
Balances $ 3,425 $ 75 $ 2,650 Sheet.
$ 15,000 $ 13,000 $ 150 $ 8,000
Increase in cash for month $ 4,125 May 29 750 750
Cash balance, May 1, 2009 - Balances $ 4,175 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 750
May 31 (50) (50)
Cash balance, May 31, 2009 $ 4,125
Balances $ 4,125 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 700

Accounting, Fall 2013

Practice Question:
Complete the January 31, 20__, balance sheet of Nathan Accounting using the following
information.
JJ's Lawn Care Service (1) Stockholders’ equity at January 1, 20__, included capital stock of $150,000.
Balance Sheet (2) The land and building were purchased by the business for a total price of $200,000 on
January 25, 20__, from a company forced out of business. On January 31, an appraiser valued
May 31, 2009 the property at $230,000.
Assets Liabilities (3) Owner Nathan Ice invested another $15,000 cash in the business in January.
Cash $ 4,125 Notes payable $ 13,000 (4) Earnings for January amounted to $28,000.
Accounts receivable 75 Accounts payable 150 NATHAN ACCOUNTING SERVICES
Tools & equipment 2,650 Owners' Equity Balance Sheet
Truck 15,000 Capital stock 8,000 January 31, 20__
Assets Liabilities & Stockholders’ Equity
Retained earnings 700
Cash $ 15,000 Liabilities:
Total assets $ 21,850 Total liabilities & equity $ 21,850 Accounts receivable Notes payable …………………$
Land 40,000 Accounts payable……………… 11,000
Building Total liabilities………………. $
Assets = Liabilities + Owners’ Equity Equipment 20,000 Owners' equity:
Nathan Ice, capital…………….…. _______
Total liabilities and
Total assets $ stockholders’ equity…………..$235,000
$21,850 = $13,150 + $8,700
Accounting, Fall 2013 Accounting, Fall 2013

14
 NATHAN ACCOUNTING LEGAL SERVICES
Balance Sheet
January 31, 20__
Relationships Among Financial
Cash
Assets Liabilities & Stockholders’ Equity
$ 15,000 Liabilities: Statements
Accounts receivable 8,000c Notes payable ................ $ 31,000f
Land 40,000 Accounts payable…………….. 11,000
Building 160,000b Total liabilities.............. $ 42,000e
Equipment…………………………….. 12,000 Owners' equity
Nathan Ice, capital.. $193,000d Date at Date at end
Total liabilities and beginning of of period
Total assets $ 235,000a stockholders’ equity.............. $235,000 period
Time
Computations
a Total assets must be equal to total liabilities & stockholders’ equity of $235,000.
b $200,000 (cost of land and building) less $40,000 for land = $160,000 for building. Balance Sheet Balance Sheet
(Appraised value of property ignored.)
c Accounts receivable must be $8,000 to achieve total assets of $235,000.
d $150,000 (equity at January 1) plus $15,000 (additional investment) + $28,000
earnings = $193,000.
e Total liabilities must be $42,000 to achieve total liabilities & owners’ equity of
$235,000. Income Statement
f Notes payable must be $31,000 to achieve total liabilities of $42,000. Statement of Cash Flows

Accounting, Fall 2013 Accounting, Fall 2013

Financial Statement Articulation Financial Reporting and Financial

JJ's Lawn Care Service
Statements
Statement of Cash Flows
JJ's Lawn Care Service
For the Month Ended May 31, 2009
Cash flows from operating activities: Income Statement Financial statements are just
Cash received from revenue transactions $
Cash paid for expenses
750
(50)
For the Month Ended May 31, 2009 one source of financial
Net cash provided by operating activities $ 700
Sales Revenue $ 750 accounting information. Income
Statement
Cash flows from investing activities:
Purchase of lawn mower $ (2,500) Operating Expense:
Purchase of truck (2,000) Gasoline Expense 50 Balance
Collection for sale of repair parts 75 Sheet
Net Income $ 700
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Statement
Cash flows from financing activities: of Cash
Investment by owners 8,000 Flows
Increase in cash for month $ 4,125 JJ's Lawn Care Service
Cash balance, May 1, 2009 -
Balance Sheet
Cash balance, May 31, 2009 $ 4,125
May 31, 2009
Assets Liabilities
Cash $ 4,125 Notes payable $ 13,000
Accounts receivable 75 Accounts payable 150
Tools & equipment 2,650 Owners' Equity Other Information:
Truck 15,000 Capital stock 8,000
Retained earnings 700
•Industry
Total assets $ 21,850 Total liabilities & equity $ 21,850 •Competitors
•National economy
Accounting, Fall 2013

15
 A Comparison of Partnership and Corporations
Forms of Business Organization Corporation Partnership

Liquidity Shares can easily be Subject to substantial

exchanged restrictions.

Sole Voting Rights Usually each share gets one General Partner is in charge;
Proprietorships Partnerships Corporations vote limited partners may have
some voting rights.

Taxation Double with dividend tax Partnership income is

credit taxable.

Reinvestment Broad latitude All net cash flow is

distributed to partners.

Liability Limited liability General partners may have

unlimited liability. Limited
partners enjoy limited
liability.

Continuity Perpetual life Limited life

Accounting, Fall 2013 Accounting, Fall 2013

Reporting Ownership Equity in the The Use of Financial Statements by

Statement of Financial Position External Parties
Sole Proprietorships Ow ner's equity:
Jill Jones, capital $ 8,000

Partners' equity Two concerns:

Jill Jones, capital $ 4,000
Partnerships
Bill Jones, capital 4,000 Creditors Liquidity
Total partners' equity $ 8,000 Profitability
Owners' equity
Corporations
Capital stock $ 7,000
Retained earnings 1,000
Total stockholders' equity $ 8,000 Investors
Accounting, Fall 2013 Accounting, Fall 2013

16
 Management’s Interest in Financial
The Need for Adequate Disclosure
Statements
Creditors are more likely to extend credit if
Balance Sheet Notes to the financial statements show a strong statement of
financial financial position—that is, relatively little debt
Income Statement
statements often and large amounts of liquid assets.
Statement of Cash Flows provide facts
necessary for the
proper
interpretation of
the statements. Window dressing occurs when management
takes measures to make the company appear
as strong as possible in it financial statements.
Accounting, Fall 2013 Accounting, Fall 2013

End of Chapter 2

Accounting, Fall 2013

17