Financial Accounting Test 1

financing activities

borrowing/paying back $ to lenders and receiving additional funds from stockholders or paying them dividends

investing activities

buying/selling items such as plants/equipment used in production

operating activities

day-to-day process of purchasing ingredients from suppliers, manufacturing, delivering them to customers, collecting cash from customers, and paying suppliers

balance sheet

reports the economic resources it owns and the sources of financing for those resources

shows net worth in terms of assets, shareholders’ equity, and liabilities in dollar amounts 

• Total assets must =/balance total liabilities + stockholders’ equity 

income statement

reports a company’s abilities to sell goods for more than their cost to produce and sell

shows change in net worth over a period of time (revenues and expenses)

net income equation

Revenue – expenses = net income 

statement of stockholders’ equity

report additional contributions from/payments to investors and the amount of income the company reinvested for future growth

reports cumulative earnings reinvested in the business over a period of time (usually a yr) 

• aka statement of retained earnings 

Common stock 

amts invested in the business by stockholders 

Retained earnings

profits reinvested into the business (not distributed to stockholders in the form of dividends)

past earnings not distributed to stockholders 

• = Beginning retained earnings + net income – dividends declared

common stock + retained earnings go with which financial statement?

stockholders’ equity

statement of cash flows

reports ability to generate cash and how it was used

shows cash effects of transactions (operating, investing, and financing activities)  

basic accounting equation

assets = liabilities + stockholders’ equities

what the company owns = what the company owes to creditors + owners

financial position

the economic resources that the company owns and the sources of financing for those resources

assets

economic resources owned by the entity

cash, inventories, accounts receivable, property/plant/equipment

liabilities

indicate the amount of financing provided by creditors (company’s debts/obligations)

accounts payable and notes payable

accounts payable

purchase of goods/services from suppliers on credit w/o a formal written contract

notes payable

cash borrowings based on formal written debt contracts with banks

income statement equation

revenues - expenses = net income

retained earnings equation

beginning retained earnings + net income -