Accounting 1, Financial Statements

Financial Statements

A set of accounting reports that convey economic and financial information to outside users such as creditors and investors

Balance Sheet

the financial statement that describes the company's resources (assets) and the claims against those resources by creditors (liabilities) and owners (equity)

Four Major Financial Statements

1. Balance Sheet

2. Income Statements

3. Statement of Owners Equity

4. Statement of Cash Flows

Assets

The economic resources owned by a business

Liabilities

- the debts owed by a business

- represent creditor claims against the company's assets

Equity

The amount of the owners investment in the business, the component of the section on the balance sheet will depend on the business organization being used

What three things does a balance sheet have on it

1. Assets

2. Liabilities

3. Equity

Fundamental Accounting Equation

Assets= Liabilities+ Equity

Two major categories of assets

1. Current assets

2. Long term assets

Current assets

Assets that are expected to either be converted to cash or expire (be used up) within one year

Examples of current assets

1. Cash

2. Accounts receivable

3. Inventory

4. Supplies

Accounts receivable

represents amounts owed to the company by its customers

Long term assets

Assets that are expected to be used in business operations for longer than one year

Two categories of long term assets

1. Property Plant Equipment (PPE)

2. Intangible assets

Property Plant Equipment (PPE)

Long term assets that have a physical substance (you can touch feel and see)

Examples of PPE

1. Land

2. Buildings

3. Equipment

Intangible Assets

Long term assets that lack a physical substance (you cannot touch, feel, or see)

Examples of Intangible assets

1. Trademark

2. Patent

3. Copyright

Historical Cost Concept

GAAP that states assets are to be shown on the balance sheet at their cost, not at their current value and they are not adjusted to current values over time

GAAP

Generally Accepted Accounting Principle

two major categories of liabilities

1. Current Liabilities

2. Long Term Liabilities

Current Liabilities

Liabilities expected to be paid within one year

Examples of current liabilities

1. Accounts Payable

2. Short-Term Notes Payable

3. Salaries Payable

4. Income Taxes Payable

5. Utilities Payable

Examples of Accrued Liabilities

1. Salaries Payable

2. Income Taxes Payable

3. Utilities Payable

long-term liabilities

Debts that will be paid in longer than one year

Examples of long term liabilities

1. Long-term notes payable

2. Mortgage Payable

3. Bonds payable

Two types of equity for a corporation

1. Contributed Capital (Common Stock)

2. Retained earnings

Contributed Capital

Represents investments made by owners into the business through the purchase of the organizations stock

Retained earnings

Represents the net income earned by the corporation that is kept within the company for growth and expansion rather than given to the stockholders as a dividend

Income statement

The financial statement that shows the profitability of the company for a period of time

Two Items Found on the Income Statement

1. Revenues

2. Expenses

Revenues

- Represents the amounts earned during the accounting period (year)

- may result from sale of merchandise, services, rental of property, or lending money

Examples of Revenues

1. Sales Revunue

2. Service Revenue

3. Rental Revenue

4. Interest Revenue

5. Dividend Revenue

Expenses

Costs occurred in the process of earning revenue

Examples of Expenses

1. Costs of goods sold

2. Salaries expense

3. Rent Expenses

4. Utilities Expense

5. Interest Expense

6. Advertising Expense

7. Income Tax Expense

Income Statement Equation 1 (net income equation)

Revenues - Expenses = Net Income

Income Statement Equation 2 (gross profit equation)

Sales revenue- Cost of Goods sold= Gross profit

Sales revenue

The selling price of inventory

Cost of goods sold

Cost of the inventory sold

Gross Profit

The profit earned from selling inventory

Income statement format

sales revenue

- cost of goods sold

-----------------------

gross profit

+ other revenues

- other expenses

-----------------------

net income

Statement of Owners Equity

shows the changes in equity for a period of time (same period of time as the income statement)

Common Stock Equation (Statement of Owners Equity Equation 1 )

Beginning Balance (January 1)

+ Additional Sales of Common stock

----------------------------------------

= Ending Common Stock (Dec 31st)

Retained Earnings Equation (Statement of Owners Equity Eqtn 2)

Beginning balance (Jan 1st)

+ Net Income

- Dividends

------------------------------------

Ending Retained Earnings (Dec 31st)

are dividends paid by the company considered to be an expense?

No, there is not a legal requirement for a company to pay dividends

What Increases Owners Equity?

- investments by owner

- revenues

What Decreases Owners Equity?

- dividends/withdrawals

- expenses

How do dividends declared and paid by a corporation effect the companies net income?

They have no effect because they are not classified as an expense

Statement of Cash Flows

shows the changes in cash for a period of time (same period as income statement)

The statement of cash flows provides information about

- Cash receipts (inflows)

- Cash payments (outflows)

Cash inflows and outflows are categorized as either

- operating activities

- investing activities

- financing activities

Operating Activities

cash inflows and cash outflows associated with the primary operations of the business

Operating Activities Example: Cash Inflows

From a sale of goods or services

Operating Activities Example: Cash Outflows

- to suppliers for inventory

- to employees for services

- to government for taxes

- to lenders for interest

Investing Activities

Cash inflows and cash outflows associated with the purchase or sale of long term assets such as P-P-E

Investing Activities Example: Cash Inflows

From the sale of assets such as land, buildings, and equipment

Investing Activities Examples: Cash Outflows

From the purchase of assets such as land, buildings, and equipment

Financing Activities

cash inflows and cash outflows associated with the sources of funding the business

Financing Activities Incude

Obtaining cash from and paying cash to:

- Creditors

- Stockholders

Examples of Financing Activities: Cash inflows

-from sale of company's own stock (common stock)

-from borrowing money (i.e., a bank loan)

Examples of Financing Activities: Cash Outflows

- to stockholders as dividends

- to creditors for repayment of funds borrowed

Accural Accounting

where revenues are recorded when they are earned and expenses are recorded when they are incurred, regardless of when cash is actually received or paid.

Realization Principal

when product or service is delivered and cash had been received that brings reasonable assurance of collectability

matching concept

expenses should be recognized in the same accounting period as the revenues they help generate.

Normal balance debit

assets and expenses

normal balance credit

liabilities, shareholders, equity, and revenue

ledger

all accounts of the company taken together

journal

the place where all accounting transactions are initially recorded

journal entry

the means used to record transactions in the journal

double entry accounting

every transaction must be recorded with at least one debit and credit with total dollar debits= credits

posting

process of transferring debit and credit amounts from journal to the ledger.

analyzing transactions

the process of identity the specific effects of economic events on the accounting elements