Accounting Day One Concepts and Drinks Case Review

Vocabulary flashcards covering core accounting definitions, key financial statements, business framework stages, and specific figures from the Drinks Case.

Financing

Obtaining capital from owners or lenders, such as issuing shares and borrowing.

Making investments

In the introductory business-stage framework, using financing to acquire assets needed by the business.

Operations

The day-to-day activities through which the business sells goods or services and earns revenue.

Accounting equation

$$\text{Assets} = \text{Liabilities} + \text{Shareholders' Equity}$$

Asset / economic resource

A resource of the business, such as cash and inventory in the drinks case.

Shareholders' equity

The owners' interest in the business, which includes contributed capital and retained earnings.

Common stock / common shares

Capital contributed by shareholders.

Retained earnings / retained profits

Profits retained in the business, also described as earned capital.

Revenue / sales

Economic benefits flowing into the business from customers.

Expense

A cost or sacrifice.

Cost of goods sold / cost of sales

The cost or sacrifice of the inventory delivered to customers.

Net income / profit / earnings

Revenues minus expenses; alternate wording includes profit, earnings, and bottom line.

Balance sheet

A financial statement that reports financial position as of a specific date; also known as the statement of financial position.

Income statement / statement of operations

A financial statement that reports revenues, expenses, and net income over a period.

Statement of cash flows

A financial statement that reports operating, investing, and financing cash flows over a period.

Four stages of the introductory business framework

1. Set goals and strategies; 2. Obtain financing; 3. Make investments; 4. Conduct operations.

Equity financing example

Issuing common shares for cash.

Financing (Drinks Case)

Five owners contribute a total of $100$ in exchange for common shares, increasing cash and common stock.

Inventory (Drinks Case)

The business uses $100$ cash to buy 100 drinks at $1.00$ per drink, causing cash to decrease and inventory to increase.

Sale (Drinks Case)

The business sells all 100 drinks for $10$ each, generating $1,000$ in revenue and collecting $1,000$ cash.

Cost of Goods Sold (Drinks Case)

The cost of inventory delivered to customers, totaling $100$.

Net Income Calculation (Drinks Case)

$$1,000\text{ revenue} - 100\text{ cost of goods sold} = 900$$

Ending Balance Sheet (Drinks Case)

$$\text{Cash } 1,000 = \text{Common stock } 100 + \text{Retained earnings } 900$$

Retained Earnings Calculation (Drinks Case)

$$\text{Beginning retained earnings } 0 + \text{Net income } 900 = 900$$

Cash Flows (Drinks Case)

Operating cash flow $900$, investing cash flow $0$, and financing cash flow $100$ inflow, resulting in ending cash of $1,000$.