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Introduction to
Accounting and
Business

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After Click
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chapter,
you should
be able
to:
1.

2.
3.

4.
5.
6.

Describe the nature of a business and types of business


organization.
Describe the role of ethics and accounting in business.
Describe the importance of business ethics, why ethics is
a fundamental business concept and the basic principles
of proper ethical conduct and legal compliance.
Explain what accounting is.
Identify the users and uses of the accounting information.
Describe the role of accounting in business and
specialized accounting fields.

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completing
chapter,
you should
be able
to:
7.

8.

9.

10.

11.

Explain the meaning of generally accepted accounting


principles (GAAPs).
Describe the assumptions, principles, and constraints and
relate to the practice of accounting.
State the basic accounting equation and explain each
element of the equation.
Analyze the effects of business transactions on the basic
elements of the accounting equation.
Describe the financial statements of a proprietorship and
how they are prepared.

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Objective
Objective 11
Describe the nature of a
business and types of business
organization
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Types of Businesses

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Service
ServiceBusiness
Business

Service
Service

The
TheWalt
WaltDisney
DisneyCompany
Company
Malaysia
MalaysiaAirlines
AirlinesSystem
System(MAS)
(MAS)
Maybank
MaybankCorporation
Corporation
Marriott
MarriottInternational
InternationalHotels
Hotels
KPMG
KPMG

Entertainment
Entertainment
Transportation
Transportation
Financial
Financialservices
services
Hospitality
Hospitalityand
andlodging
lodging
Auditing
Auditing

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Types of Businesses

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Merchandising
Merchandising Business
Business Product
Product
Giant
Giant
Amazon.com
Amazon.com
Toy
ToyR
RUs
Us
Panasonic
Panasonic
Gap
GapInc.
Inc.

General
Generalmerchandise
merchandise
Internet
Internetbooks,
books,music,
music,video
video
Toys
Toys
Consumer
Consumerelectronics
electronics
Apparel
Apparel

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Types of Businesses

Manufacturing
Manufacturing Business
Business

Product
Product

General
GeneralMotors
MotorsCorporation
Corporation
Nokia
Nokia
Dell
DellInc.
Inc.
Nike
Nike
FF&
&NNCompany
Company
Sony
SonyCorporation
Corporation

Cars,
Cars,trucks,
trucks,vans
vans
Cell
Cellphones
phones
Personal
Personalcomputers
computers
Athletic
Athleticshoes
shoesand
andapparel
apparel
Beverages
Beverages
Stereos
Stereosand
andtelevisions
televisions

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Common Forms of Business Organizations

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Proprietorship
Partnership
Corporation
Limited liability company
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Proprietorship

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owned by one individual,

more than 70% of business organizations in


Malaysia are organized by proprietorships,
easy and low cost of organizing,
financial resources are limited to the owners
resources, and
commonly used by small businesses such as
hardware stores, laundries, restaurants, and grocery 9
shop.

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Partnership

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owned by two or more individuals,


about 10% of business organizations in Malaysia
are organized by partnerships,
combine the skills and resources of more than one
person, and
like proprietorships, small local businesses such
as automotive repair shops, music stores, beauty
salons, and clothing stores may be organized as
partnerships.

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Corporation

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organized under state or federal statutes as a separate


legal taxable entity
generates 90% of the total dollars of business receipts
received.
comprises only 20% of the business organizations in
Malaysia.
ownership is divided into shares of stock, sold to
shareholders (stockholders)
able to obtain large amount of resources by issuing
stock.
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is used only by large businesses.

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Limited liability company (LLC)

combines attributes of a partnership and a


corporation in that it is organized as a corporation.
can elect to be taxed as a partnership
a popular alternative to a partnership
has tax and liability advantages to the owners.
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A business stakeholder is a
person or entity having an interest
in the economic performance and
well-being of a business.

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Capital market stakeholders


provide the major financing for the
business in order for the business to
begin and continue its operations.

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Product or service market stakeholders


include customers who purchase the
businesss products or services as well
as the vendors who supply inputs to the
business.
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Government stakeholders

have an interest in the economic


performance of a business. City,
county, state, and federal governments
collect taxes from businesses within
their jurisdiction.
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Internal stakeholders include


individuals employed by the business.
Managers have an incentive to
maximize the economic value of the
business. Employees have an interest
because their jobs depend on it.
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Objective
Objective 22 and
and 33

12-3

Describe the role of ethics and accounting in


business
Describe the importance of business ethics,
why ethics is a fundamental business
concept and the basic principles of proper
ethical conduct and legal compliance.

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ethics?to

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Because our actions are watched and judged as


right or wrong, honest or dishonest, and fair or bias.
because it has impact on society and others.
to communicate credible economic information
activities.
These judgments represent the standards of conduct
known as ethics.

Ethics is the moral principles that guide the


conduct of individuals.

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Objective
Objective 44

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Explain what accounting is.

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Accounting
an information system that provides
reports to stakeholders about the
economic activities and condition of a
business.
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Objective
Objective 55
Identify the users and uses of the
accounting information
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Who uses the accounting information?

Internal users
eg. marketing managers, production supervisors,
finance directors, and company officers.
they need detailed information like financial
comparison of operating alternatives, projection of
income from new sales, and forecasts of cash needs
for the coming year on a timely basis in running the
business.
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Who uses the accounting information?


External users
Investors to make decisions whether to buy, hold, or sell their share

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in the company.
Tax authority check for companys tax compliance.
Security Commission (SC) to make sure that company is operating
within the prescribed rules.
Customers observe whether company continues to maintain product
quality and warranty and then decide whether to continue supporting
its products.
Labour union want to know whether company can afford to give
pay
raises or benefits.
Economic planners to forecast economic activities.

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The process
which
accounting
provides
information to business stakeholders is as follows:

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Identify stakeholders.

Assess stakeholders information needs.


Design the accounting information system to meet
stakeholders needs.
Record economic data about business activities and events.
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Prepare accounting reports for stakeholders.

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Objective
Objective 66
Describe the role of the accounting
profession in business and specialized
accounting fields
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Financial accounting is primarily concerned


with the recording and reporting of economic
data and activities for a business.
Managerial accounting uses both financial
accounting and estimated data to aid
management in running day-to-day
operations and in planning future operations.
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Accountants employed by a business firm or


a not-for-profit organization are said to be
employed in private accounting.
Accountants and their staff who provide
services on a fee basis are said to be
employed in public accounting.
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Objective
Objective 77
Explain the meaning of GAAPs

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GAAPs (Generally Accounting Accepted Principles)


are a standard set of rules and standard system used in
preparing financial statements so that stakeholders can
compare financial performance and condition of one
company to another.
Accounting principles and concepts develop from
research, practice, and pronouncements of authoritative
bodies such as the Malaysian Accounting Standards
Board (MASB).
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Objective
Objective 88

1-8

Describe the assumptions,


principles, and constraints
and relate to the practice of
accounting.
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When developing GAAPs, there are certain basic

1-8

assumptions made.
The assumptions provide a foundation for the
accounting process.
There are four main basic accounting
assumptions:
[i] Economic Entity Assumption
[ii] Going Concern Assumption,
[iii] Time Period Assumption, and
[iv] Monetary-unit Assumption.

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There are at least five basic accounting


principles guiding accounting practices namely:
[i] Cost Principle,
[ii] Objectivity Principle,
[iii] Revenue Recognition Principle,
[iv] Matching Principle, and
[v] Full Disclosure Principle.

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There are two main accounting constraints:


[i] conservatism and
[ii] materiality

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The business entity concept


limits the economic data in
the accounting system to
data related directly to the
activities of the business.
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The cost concept is the


basis for entering the
exchange price, or cost
of an acquisition in the
accounting records.
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The objectivity concept


requires that the accounting
records and reports be based
upon objective evidence.
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The unit of measure


concept requires that
economic data be
recorded in dollars.
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Example 1
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 sellers
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 Services records?

Follow My Example
$137,000. Under the cost concept, the land should be recorded at
the cost to Gallatin Repair Service.
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Objective
Objective 99

1-9

State the basic accounting


equation and explain each
element of the equation.
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The Accounting Equation

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Assets = Liabilities + Owners Equity


The resources
owned by a
business

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The Accounting Equation

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Assets = Liabilities + Owners Equity


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

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Assets = Liabilities + Owners Equity


The rights of the
owners

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Example 2

Johan is the owner and operator of Youre A Star, a motivational consulting


business.
At the
end of itsappear
accounting
December
31, 2008,
The
following
accounts
in theperiod,
adjusted
trial balance
of Youre A
Star has assets
of $800,000
and liabilities
$350,000.
Using
thebe
Hindsight
Consulting.
Indicate
whetherofeach
account
would
accounting
equation,
determine
the(b)
following
amounts:
reported
in the
(a) current
asset;
property,
plant, and
a. Owners
as liability,
of December
31, 2008. liability; or (e)
equipment;
(c)equity,
current
(d) long-term
b. Owners
as of December
31, 2009,
assuming
that assets
owners
equityequity,
section
the December
31, 2007,
balance
sheet
increased
by $130,000 and liabilities decreased by $25,000
of Hindsight
Consulting.
during 2009.

Follow My Example
a.

A = L + OE
b.
$800,000 = $350,000 + OE
OE = $450,000

A = L + OE
$130,000 = $25,000 + OE
OE = $155,000
OE on Dec. 31, 2009:
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$605,000 ($450,000 + $155,000)
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Objective
Objective 10
10
Analyze the effects of business
transactions on the basic elements
of the accounting equation.
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A business transaction is an
economic event or condition that
directly changes an entitys
financial condition or directly
affects its results of operations.
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On November 1, 2007, Kris


Klarah begins a business that
will be known as
JaringSolutions.

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Assets
a.

Cash
25,000

=
=

Owners Equity
Kris Klarah, Capital
25,000 Investment
by Kris
Klarah

a. Kris Klarah deposits $25,000 in a bank


account in the name of JaringSolutions.

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Assets
Cash + Land
Bal. 25,000
b. 20,000
+20,000
Bal. 5,000
20,000

=
=

Owners Equity
Kris Klarah, Capital
25,000
25,000

b. JaringSolutions exchanged $20,000 for


land.
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Owners
Liabilities + Equity
Accounts
Kris Klarah,
Payable
Capital

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Assets

Cash + Supplies + Land


Bal. 5,000
c.
Bal. 5,000

20,000
+1,350
1,350

20,000

25,000
+1,350
1,350

25,000

c. During the month, JaringSolutions


purchased supplies for $1,350 and agreed
to pay the supplier in the near future (on
account).

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110

Beginning with entry (d) the


asset section will be shown
first, then the liabilities and
owners equity will be shown
in the following slide.

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Assets
Cash + Supplies + Land
5,000
1,350
20,000

Bal.
d. +7,500
12,500
Bal.

1,350

20,000

d. JaringSolutions provided services to


customers, earning fees of $7,500 and
received the amount in cash.

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Liabilities +
Owners Equity
Accounts
Kris Klarah,
Fees
Payable +
Capital + Earned
Bal.
1,350
25,000
+7,500 d.
1,350
25,000
7,500 Bal.

d. JaringSolutions provided services to


customers, earning fees of $7,500 and
received the amount in cash.

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Expenses

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The amounts used in earning revenue are


called expenses. Adding expenses to the
owners equity section results in a space
problem. To adjust for these added
headings, the word Bal. has been omitted
from the following Slides. The bottom row
in these four slides provides the balances
after each transaction.
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Assets
Cash + Supplies + Land
Bal. 12,500
1,350
20,000
e. 3,650
Bal. 8,850

1,350

20,000

e. JaringSolutions paid the following


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

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Liabilities +
Owners Equity
Accounts
Kris Klarah,
Fees
Wages
Rent
Utilities
Payable + Capital + Earned Expense Expense Expense
Expense
1,350
25,000
7,500
1,350

25,000

7,500

2,125

800

450

2,125

800

450

Misc.

e.

275

e. JaringSolutions paid the following expenses:


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

275

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Assets
Cash + Supplies + Land
Bal. 8,850
1,350
20,000
f. 950
Bal. 7,900

1,350

20,000

f. JaringSolutions paid $950 to


creditors during the month.

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Liabilities +
Owners Equity
Accounts
Kris Klarah,
Fees
Wages
Rent
Utilities
Misc.
Payable + Capital + Earned Expense Expense Expense
Expense
800
450
275
1,350
25,000
7,500 2,125

f.

950
400

25,000

7,500

2,125

800

f. JaringSolutions paid $950 to


creditors during the month.

450

275

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Assets
Cash + Supplies + Land
Bal. 7,900
1,350
20,000
g.
Bal. 7,900

800
550

20,000

g. At the end of the month, the cost


of supplies on hand is $550, so
$800 of supplies were used.

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Liabilities +

Owners Equity

Accounts Kris Klarah, Fees


Wages
Payable + Capital + Earned
Exp.
400
25,000
7,500 2,125
400

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25,000

7,500

2,125

Rent Supplies Util. Misc.


Exp.
Exp.
Exp. Exp.
800
450 275
g.
800
800

800

450 275

g. At the end of the month, the cost


of supplies on hand is $550, so
$800 of supplies were used.

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Assets
Cash + Supplies + Land
Bal. 7,900
550
20,000
h. 2,000
Bal. 5,900

550

20,000

h. At the end of the month, Kris


withdrew $2,000 in cash from the
business for personal use.

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Liabilities +
Owners Equity
Accounts Kris Klarah, Kris Klarah, Fees Wages
Supplies Util. Misc.
Payable + Capital + Drawing Earned Exp.
400
25,000 Exp.
7,500 2,125 800
800
Exp.
Exp.

Rent
Exp.
450 275

h.

2,000
400

25,000

2,000

7,500 2,125

800

800

450

h. At the end of the month, Kris


withdrew $2,000 in cash from the
business for personal use.

275

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Owners Equity
Increased by

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Decreased by

Owners
investments

Owners
withdrawals

Revenues

Expenses
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Example 3
Salyo Delivery Service is owned and operated by Jo Salyo.
The following selected transactions were completed by
Salyo Delivery Service during February:
1. Received cash from owner as additional investment,
$35,000.
2. Paid creditors on account, $1,800.
3. Billed customers for delivery services on account,
$11,250.
4. Received cash from customers on account, $6,740.
5. Paid cash to owners for personal use, $1,000.
Continued

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Example 3

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Indicate the effect of each transaction on the accounting


equation elements (Assets, Liabilities, Owners 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; Owners Equity (Jo
Salyo, Capital) increases by $35,000.
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Follow My Example

(2) Asset (Cash) decreases by $1,800; Liability (Accounts


Payable) decreases by $1,800.
(3) Asset (Accounts Receivable) increases by $11,250;
Revenue (Delivery Service Fees) increases by $11,250.
(4) Asset (Cash) increases by $6,740; Asset (Accounts
Receivable) decreases by $6,740.
(5) Asset (Cash) decreases by $1,000; Owners Equity (Jo
Salyo, Drawing) increases by $1,000.
For Practice: PE 1-3

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Objective
Objective 11
11

111

Describe the financial


statements of a proprietorship,
explain how they interrelate,
and how they are prepared.
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111

Accounting reports, called


financial statements,
provide summarized
information to the owner.
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111

The income statement is a


summary of the revenue and
expenses for a specific
period of time, such as a
month or a year.

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Income Statement

111

Net income is carried


to the statement of 7172
owners equity
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A statement of owners equity is


a summary of the changes in
the owners equity that have
occurred during a specific
period of time.
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Statement of Owners Equity

111

From the income statement

To the balance sheet

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111

A balance sheet is a list of


the assets, liabilities, and
owners equity as of a
specific date.

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111

This amount is compared


to the net cash flow on the
statement of cash flows

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Balance Sheet

From the statement


of owners equity

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111

A statement of cash flows


is a summary of the cash
receipts and payments for
a specific period of time.

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Statement of Cash Flows

This amount should match


Cash on the balance sheet.

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Income Statement

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The income statement reports the


revenues and expenses for a period of
time based on the matching concept.
This concept is applied by matching the
expenses with the revenue generated
during a period by those expenses.
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111

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.
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Example 4

111

The assets and liabilities of Chickadee Travel Service at April 30,


2009, 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, 2008, the beginning of the current
year.
Accounts payable
Accounts receivable
Cash
Fees earned
Land

$ 12,200
31,350
53,050
263,200
80,000

Miscellaneous expense $ 12,950


Office expense
63,000
Supplies
3,350
Wages expense
131,700

Prepare an income statement for the current year ended April


30, 2009.

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Follow My Example

111

CHICKADEE TRAVEL SERVICE


INCOME STATEMENT

For the Year Ended April 30,


Fees earned
$263,200
2009
Expenses:
Wages expense
$131,700
Office expense
63,000
Miscellaneous expense
12,950
Total expenses
207,650
Net income
$ 55,550
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For practice: PE 1-4

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Statement of Owners Equity

111

The statement of owners


equity reports the changes in
the owners equity for a period
of time. It is prepared after the
income statement.
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Example 5
Using the data for Chickadee Travel Service shown
in Example 4, prepare a statement of owners
equity for the current year ended April 30, 2009.
Adam Che Lini invested an additional $50,000 in
the business during the year and withdrew cash of
$30,000 for personal use.

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Follow My Example

111

CHICKADEE TRAVEL SERVICE


STATEMENT OF OWNERS EQUITY
For the Year Ended April 30, 2009
Adam Cellini, capital, May 1, 2008
Additional investment by owner during year
Net income for the year
Less withdrawals
Increase in owners equity
Adam Cellini, capital, April 30, 2009

$ 80,000
$ 50,000
55,550
$105,550
30,000
75,550
$155,550

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For Practice: PE 1-5

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Balance Sheet

111

The balance sheet reports


the amounts of a firms
assets, liabilities, and
owners equity at the end
of a specific period.
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The account form of balance


sheet lists the assets on the left
and the liabilities and owners
equity on the rightsimilar to
design of an account.
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The report form of balance


sheet presents the liabilities
and owners equity sections
below the assets section.

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Example

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Using the data for Chickadee Travel Service shown in Example


Exercise 4 and 5, prepare the balance sheet as of April 30, 2009.

Follow My Example
CHICKADEE TRAVEL SERVICE
BALANCE SHEET
Assets
Cash
Accounts receivable
Supplies
Land
Total assets

For Practice: PE 1-6

April 30, 2009

Liabilities
$ 53,050 Accounts payable
$12,200
31,350
3,350
Owners Equity
80,000 Adam Cellini, capital
155,550
$167,750 Total liab. & owners eq. $167,750
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Statement of Cash Flows

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The statement of cash flows


consists of three sections:
(1) Operating activities
(2) Investing activities
(3) Financing activities
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The cash flows from


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


activities section reports the cash
transactions for the acquisition and sale
of relatively permanent assets.

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The cash flows from financing


activities section reports the
cash transactions related to cash
investments by the owner,
borrowings, and cash
withdrawals by the owner.
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Example 7

Click
to
edit
Master
title
style
A summary of cash flows for Chickadee Travel Service for the
year ended April 30, 2009, is shown below.
Cash receipts:
Cash received from customers
Cash received from additional
investment of owner
Cash payments:
Cash paid for expenses
Cash paid for land
Cash paid to owner for personal use

$251,000
50,000
210,000
80,000
30,000

The cash balance as of May 1, 2008, was $72,050.


Prepare a statement of cash flows for Chickadee
Travel Service for the year ended April 30. 2009.

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Follow My Example

ClickCHICKADEE
to edit Master
title style
TRAVEL SERVICE

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STATEMENT OF CASH FLOWS


For the Year Ended April 30, 2009
Cash flows from operating activities:
Cash received from customers
$251,000
Deduct cash payments for expenses
210,000
Net cash flows from operating activities
Cash flows from investing activities:
Cash payments for purchase of land
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
Net decrease in cash during year
Cash as of May 1, 2008
Cash as of April 30, 2009

For Practice: PE 1-7

$ 41,000
(80,000)

20,000
$(19,000)
72,050
$ 53,050
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Interrelationships Among Financial Statements

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The income statement and the statement


of owners equity are interrelated.
Net income or net loss
appears on both statements.

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The statement of owners equity and


the balance sheet are interrelated.
The owners capital at the end of the
period on the statement of owners
equity also appears on the balance
sheet as owners capital.
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The balance sheet and the statement


of cash flows are interrelated.

The cash on the balance sheet also


appears as the end-of-period cash on
the statement of cash flows.
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