Slide 1Ch. 2 – Financial Accounting System ElementsSlide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Summarize account balancesCh. 2: Financial Statements - Income StatementCh. 2: Financial Statements - Retained Earnings StatementCh. 2: Financial Statements - Balance SheetCh. 2: Financial Statements - Statement of Cash FlowsBasic Accounting ConceptsChapter 2A200 - Survey of AccountingUniversity of TennesseeFall 20151Ch. 2 – Financial Accounting System ElementsRules:1. Record business transactions based on the eight accounting concepts2. Record business transactions using Generally Accepted Accounting Principles (GAAP)Framework: 3. Analyze and record business transactions into accounts using journal entries and the integrated financial statement framework (slide #3)4. Organize accounts into the four Financial StatementsFinancial Statement Controls:5. Income Statement: Net income must equal the net effects of revenues and expenses on the Statement of Retained Earnings 2. Balance Sheet: Assets must equal Liabilities plus Equity3. Statement of Cash Flows: Ending cash must equal Cash on the Balance Sheet 2Integrated Financial Statement Framework for recording business transactionsSTATEMENT OF CASH FLOWS (explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explain the change in the equity Retained Earnings)Assets = Liabilities + EquityA. Cash in (out) from Operating activitiesRevenues – Expenses = Net Income (Net Loss)B. Cash in (out) from Investing activities- DividendsC. Cash in (out) from Financing activities= Increase or (decrease) to Retained Earnings= Increase or (decrease) to Cash3Ch. 2: Business Activity – FinancingTransaction #1: In January 2015, Warren Corporation raised $200,000 by issuing capital stock to new owners in exchange for cash.STATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityCash Capital Stock200,000 Cash in Financing 200,000 = 200,0004This transaction increases both assets and equity on the Balance SheetCh. 2: Business Activity – FinancingTransaction #2: Also in January, Warren Corporation raised $120,000 by issuing a note payable to First National BankSTATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityCash Note Payable120,000 Cash in Financing 120,000 = 120,0005This transaction increases both assets and liabilities on the Balance SheetCh. 2: Business Activity – InvestingTransaction #3: Also in January, Warren Corporation used cash to purchase a building for $100,000 and equipment for $125,000STATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityCash Building Equipment(225,000) Cash out Investing(225,000) 100,000 125,000 =6This transaction changes the mix of assets on the Balance SheetCh. 2: Business Activity – OperatingTransaction #4: Also in January, Warren Corporation earned $8,000 by selling services. It received cash at the same time.STATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityCash Retained Earnings8,000 Cash in Operating8,000 = 8,0008,000 Fees Revenue7Revenue transactions increase assets and equity on the Balance SheetCh. 2: Business Activity – Operating Transaction #5: Also in January, Warren Corporation incurred the following expenses and paid cash: wages, $3,000; rent, $2,600; miscellaneous, $750 STATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityCash Retained Earnings(3,000) Cash out Operating(3,000) (3,000)(3,000)Wages Expense (2,600) Cash out Operating(2,600) (2,600)(2,600)Rent Expense (750) Cash out Operating( 750) ( 750) (750) Misc. Expense 8Expense transactions decrease assets and equity on the Balance SheetCh. 2: Business Activity – FinancingTransaction #6: Also in January, Warren Corporation distributed $200 of its earnings to the stockholders in cash.STATEMENT OF CASH FLOWS(explains the change in the asset Cash)BALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGS(explains the change in the equity Retained Earnings)Assets = Liabilities + EquityCash Retained Earnings(200) Cash out Financing (200) = (200)(200)Dividends 9Dividend transactions decrease assets and equity on the Balance SheetSummari ze account balances STATEMENT OF CASH FLOWSBALANCE SHEETINCOME STATEMENTandSTATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityCash Building Equipment Note PayableCapital StockRetained EarningsBeg 0 0 0 0 = 0 + 0 0#1 200,000 Financing 200,000 200,000#2 120,000 Financing 120,000 120,000#3 (225,000) Investing (225,000) 100,000 125,000#4 8,000 Operating8,000 8,0008,000Revenue#5 (6,350) Operating (6,350) (6,350)(6,350)Expenses#6 (200)Financing (200) (200)(200)DividendsEnd 96,450 96,450 100,000 125,000 = 120,000 + 200,000 1,4501,650 Net Income and 1,450 net increase to RETA = 321,450TL + TE = 321,4501011 Ch. 2: Financial Statements - Income StatementWarren Corporation Income StatementFor the month ended January 31, 2015Revenues: Fees Earned $8,000 (trans. #4)Expenses: Wages expense $ 3,000 Rent expense 2,600 (trans. #5) Miscellaneous expense 750 (6,350) Net Income: $1,650Net Income increases Equity (Retained Earnings) So, Revenue increases Equity and Expenses decrease Equity12Ch. 2: Financial Statements - Retained Earnings StatementWarren CorporationStatement of Retained EarningsFor the month ended January 31, 2014Retained Earnings, January 1, 2015: $ 0 + Net Income 1,650- Dividends (200) (trans. #6)Retained Earnings, January 31, 2015: $1,45013Ch. 2: Financial Statements - Balance SheetWarren CorporationBalance Sheetas of January 31, 2015Assets LiabilitiesCash $ 96,450