Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 2 Basic Accounting Concepts 61

In reviewing the preceding illustration and Exhibit 2, you should note the follow-

ing, which apply to all types of businesses:

1.The balance sheet reflects the accounting equation (assets liabilitiesstockholders’

equity).

2.The two sides of the balance sheet (accounting equation) are always equal.

3.Every transaction affects (increases or decreases) one or more of the balance sheet

elements—assets, liabilities, or stockholders’ equity.

4.A transaction may or may not affect (increase or decrease) an element of the state-

ment of cash flows or the income statement. Some transactions affect elements of

both statements, some transactions affect only one statement and not the other,

and some transactions affect neither statement.

5.The effect of every cashtransaction increases or decreases the asset cash on the

balance sheet. Every cash transaction also increases or decreases an operating,

investing, or financing activity on the statement of cash flows.

6.The net increase or decrease in cash for the period shown in the statement of cash

flows ($5,100 in Exhibit 2) agrees with the ending cash balance shown on the

balance sheet. In this illustration, this resulted because it was the entity’s first pe-

riod of operations. In future periods, the net increase (decrease) in cashwill be

Exhibit 2

Family Health Care Summary of Transactions for September

Statement of Cash Flows

a. Financing 6,000

b. Financing 10,000

c. Investing 12,000

d. Operating 5,500

e. Operating 2,900

f. Financing 1,500

Increase in cash

and Sept. 30 cash 5,100

Statement of

Cash Flows

Income

Statement

Income Statement

d.5,500 Fees earned

e.1,125 Wages expense

950 Rent expense

450 Utilities expense

100 Interest expense

275 Misc. expense

2,600 Net income

d.

e.

INTEGRATED FINANCIAL

STATEMENT FRAMEWORK

a. Investment by Dr. Landry

b. Loan from bank

c. Purchase of land

d. Fees earned

e. Paid expenses

f. Paid dividends

Balances, Sept. 30

Balance Sheet

Assets  Liabilities  Stockholders’ Equity

Notes Capital Retained

Cash  Land  Payable  Stock  Earnings

6,000 6,000

10,000 10,000

12,000 12,000

5,500 5,500

2,900 2,900

1,500 1,500

5,100 12,000 10,000 6,000 1,100

International Perspective
International Accounting
Standards (IASs) require the
same four general financial
statements that are required
under U.S. GAAP. How-
ever, IAS only requires one
year of historical financial
information, while public
companies in the United
States are required to
present three years of
comparative financial infor-
mation (two years for
balance sheet information).