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© McGraw-Hill Education, 2017 2-1

CHAPTER

2

Financial Statements and Accounting Concepts/Principles

CHAPTER OUTLINE:

• Financial Statements
• From Transactions to Financial Statements
• Financial Statements Illustrated
• Explanations and Definitions
• Balance Sheet
• Income Statement
• Statement of Changes in Stockholders' Equity
• Statement of Cash Flows
• Comparative Statements in Subsequent Years
• Illustration of Financial Statement Relationships

II. Accounting Concepts and Principles

• Schematic Model of Concepts and Principles
• Concepts/Principles Related to the Entire Model
• Concepts/Principles Related to Transactions
• Concepts/Principles Related to Bookkeeping Procedures and the Accounting Process
• Concepts/Principles Related to Financial Statements
• Limitations of Financial Statements

III. The Corporation’s Annual Report

Chapter 2 Financial Statements and Accounting Concepts/Principles © McGraw-Hill Education, 2017 2-2

TEACHING/LEARNING OBJECTIVES:

Principal:

• To illustrate the four principal financial statements and their basic form.

• To introduce students to the terminology of financial statements.

• To present the accounting equation.

• To explain several of the concepts of financial accounting and financial statement

presentation.

Supporting:

• To explain that financial statements are the product of financial accounting and that the

statements represent a historical summary of transactions.

• To explain some of the limitations of financial statements.

• To illustrate that the financial statements are included in the corporation’s annual report.

• To introduce and explain several business procedures and their terminology.

TEACHING OBSERVATIONS:

• This is the keystone chapter of the text, and the material presented here becomes a foundation

for all subsequent financial accounting topics. The instructor must resist trying to teach the entire course from this one chapter! Instead, try to help students sort out the key ideas that must be learned now from those that they should be acquainted with, but that will really be learned when subsequent material is covered. Items to be learned now include:

• What a transaction is.
• The name of each financial statement and what it shows.
• The accounting equation.
• Financial statement relationships.
• Limitations of financial statements.

• A significant amount of time should be spent illustrating and explaining the purpose and

content—by account category (asset, liability, stockholders' equity, revenue, expense)—of each financial statement, and how the financial statements tie together. Some instructors may wish to discuss gains and losses at this point, but the key is to keep it as simple as possible!

Instructor’s Manual / Solutions Manual © McGraw-Hill Education, 2017 2-3

3. It is recommended that the following models be emphasized:

a. Balance Sheet:

Assets = Liabilities + Stockholders' Equity Beginning of Period $ $ $ Changes During Period +/- +/- +/-

End of Period $ $ $

b. Income Statement: Revenues

• Expenses

= Net Income

c. Statement of Changes in Stockholders’ Equity:

Beginning Balance of Stockholders' Equity

• Owners' Investment
• Net Income
• Dividends

= Ending Balance of Stockholders' Equity

(As with the discussion of gains and losses, some instructors may wish to acknowledge ―other‖ sources of changes in stockholders’ equity such as treasury stock, accumulated other comprehensive income, prior period adjustments, etc. This is a function of instructor preference and the extent to which students have been previously exposed to real world financial statements. An early dose of ―reality‖ can be refreshing for graduate students, but might be distracting to a younger, less experienced audience.)

• It is helpful to spend time with the concepts and principles model, explaining what each

concept/principle means and showing how it relates to the "Transactions to Financial Statements" process.

• It is appropriate to emphasize the limitations of financial statements now, because they can

create a mindset that helps students understand more specific accounting principles when they are covered later.

• The Business In Practice boxes are designed to enhance student understanding by removing

some jargon and explanation from the flow of the text material, while providing a context for that material. These provide good class discussion topics.

• You may wish to encourage students to self-study this material by using the PowerPoint

presentations available on the website.

• Remind students that the fully worked-out solutions to all odd-numbered exercises and

problems are provided on the website. The student study guide (previously a printed volume that students were required to purchase separately) is also available on the website for free.