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Lecture Financial accounting (10th edition): Chapter 2 - Pratt, Peters

Chapter 2 - A closer look at the financial statements. In this chapter students will be able to: Describe the balance sheet in terms of equity and debt capital and producing and operating assets, explain the concept of net income, who owns it and what they can do with it, define the three major activities of a business,. | 2 A Closer Look at the Financial Statements Chapter 2: 2 3 Describe the balance sheet in terms of equity and debt capital and producing and operating assets. Learning Objective 1 4 A Story that builds a Set of Financial Statements Businesses’ needs are evaluated and can be acquired utilizing capital Business Plan – shows your ideas on how the business will show a profit Contributed Capital Given in return for ownership interest Investors expect a return on their investment (dividends and growth) Debt Capital Capital paid back over time (liability) Interest charged for the use of the capital 5 A Story that builds a Set of Financial Statements Capital investment (equity and debt) can be used to purchase assets Producing assets Support the generation of revenue Useful over the long term (several years) Examples – land, buildings, equipment Operating assets Support the generation of revenue Used up quickly – replaced often Assets that are for sale 6 Concept Practice 1 7 Explain the . | 2 A Closer Look at the Financial Statements Chapter 2: 2 3 Describe the balance sheet in terms of equity and debt capital and producing and operating assets. Learning Objective 1 4 A Story that builds a Set of Financial Statements Businesses’ needs are evaluated and can be acquired utilizing capital Business Plan – shows your ideas on how the business will show a profit Contributed Capital Given in return for ownership interest Investors expect a return on their investment (dividends and growth) Debt Capital Capital paid back over time (liability) Interest charged for the use of the capital 5 A Story that builds a Set of Financial Statements Capital investment (equity and debt) can be used to purchase assets Producing assets Support the generation of revenue Useful over the long term (several years) Examples – land, buildings, equipment Operating assets Support the generation of revenue Used up quickly – replaced often Assets that are for sale 6 Concept Practice 1 7 Explain the concept of net income, who owns it and what they can do with it. Learning Objective 2 8 Reporting through the Financial Statements Financial statements communicate the operations and status of the organization Income Statement Revenues – Expenses Revenues are generated from sale of goods/services Expenses include cost of goods sold and operating expenses needed to run the business Options with profits Reinvest in the business Pay out to owners (dividends) 9 Concept Practice 2 First – calculate Total revenue Then – take out dividends which are paid out to owners What remains in the net income reinvested (becomes part of retained earnings) Next – subtract Expenses for Net Income 10 Define the three major activities of a business. Learning Objective 3 11 Statement of Cash Flows Business activities produce cash inflows and outflows that are highlighted in the statement of cash flows. There are three categories of business activities Operating Activities Cash inflows are collections from .