Ch2text - CHAPTER 2 THE BALANCE SHEET, INCOME STATEMENT,...

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CHAPTER 2 THE BALANCE SHEET, INCOME STATEMENT, AND STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY The purpose of financial accounting is to provide information about the firm to outsiders, particularly to investors and creditors. Companies convey information about their economic status and their economic accomplishments during the past year (or quarter) by publishing accounting reports that contain the balance sheet, the income statement, the statement of changes in stockholders’ equity, and the cash flow statement. In this chapter we describe the first three statements; the cash flow statement is addressed in chapter 5. Building on the elements defined in chapter 1, we construct these statements by explaining the line items within them. Businesses fall into three broad categories: service companies, merchandisers, and manufacturers. Service companies , as the name implies, provide services to customers. Accountants, hair stylists, entertainers, lawyers, and sports teams are examples of service companies. Merchandisers buy goods from distributors and wholesalers and resell them. Clothing stores, gas stations, grocery stores, shoe stores, and sporting goods stores are merchandisers. Manufacturers make the goods and sell them, and include auto makers, home builders, and makers of photographic instruments and materials. Distinctions among these businesses lead to differences in the asset section of the balance sheet and the income statement. One may also categorize firms by their organization. A sole proprietorship is an unincorporated business with a single owner. A partnership is an unincorporated business with more than one owner. A corporation is a business entity licensed by a state government, and it receives various rights and responsibilities. Accounting for
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Ketz--BS, IS, and SCSE Page 2-2 these three types of organizations leads to differences in the owner’s equity section of the balance sheet and to differences in the statement of changes in stockholders’ (owner’s) equity. After reading and studying this chapter, you should be able to: Prepare a balance sheet; Construct an income statement; Compute net sales, cost of goods sold, and gross margin for a merchandiser; Calculate cost of raw materials used, cost of goods manufactured, and cost of goods sold for a manufacturer; and Prepare a statement of changes in stockholders’ (owner’s) equity. BALANCE SHEET A balance sheet is a financial statement that shows the assets of the firm, its liabilities, and its stockholders’ (owner’s) equity. More specifically, the balance sheet utilizes the accounting identity that states that assets equal liabilities plus stockholders’ equity. As defined in chapter one, assets are resources owned or controlled by the firm that probably have future economic value, liabilities are obligations of the firm that can be discharged by disbursing assets, by providing services in the future, or by creating new obligations, and stockholders’ equity
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Ch2text - CHAPTER 2 THE BALANCE SHEET, INCOME STATEMENT,...

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