ACC 255 CHP 1 Review and HW

Important Vocab

  • Assets: The resources of a company

    • Cash

    • Equipment

  • Liabilities: Amounts owed to creditors

    • Owing a bank, suppliers, employees, utility companies, and the government (taxes)

    • Typically include claims that must be paid by a specific date

  • Stockholders’ Equity: Represents the owners’ claims to resources. These claims arise from two primary sources

    • 1. Contributions by the owners themselves

    • 2. Net resources generated by company operations

  • Revenues: The amounts recognized when the company sells products or provides services to customers. For example, when you or one of your employees provides services to a customer, the company recognizes revenue

  • Expenses: The costs of providing products and services and other business activities during the current period. For example to operate the business, you’ll have costs related to salaries, rent, supplies, and utilities

  • Net Income: The difference between revenues and expenses. All businesses want revenues to be greater than expenses, producing a positive net income and adding to stockholders equity in the business

    • “Net” is often used to describe the different between two amounts

  • Dividends: CASH payments to stockholders

    • DIVIDENDS ARE NOT AN EXPENSE→ they are distributions to the owners of the company-the stockholders

  • Corporation: A company that is legally separate from its owners

    • Advantage: Stockholders have limited liability. Limited liability prevents stockholders from being held personally responsible for the financial obligations of the corporation, protecting their personal assets in case of bankruptcy or legal issues facing the company.

  • Sole proprietorship : A business owned and operated by a single individual, where the owner is personally responsible for all debts and obligations of the business, exposing their personal assets to risk.

  • Partnership: A business owned by two or more persons who share ownership, profits, and liabilities, allowing for greater resources and expertise but also exposing partners to joint liability for the debts and obligations of the business.

  • Financial Statements: Periodic reports published by the company for the purpose of providing information to external users → provide key information to make decisions about the company such as, Should I buy the company’s stock? Should I lend money to the company? Is the company profitable?

  • Common Stock: (External source of equity) Represents amounts invested by stockholders(owners) when they purchase shares of stock

  • Retained Earning: (Internal source of equity) Represents all net income minus all dividends over the life of the company

    • Retained earnings will always equal $0 at the beginning of year 1


Equations

  • The Accounting Equation: Shows the relationship among the three measurement categories. The equation shows that a company’s assets equal its liabilities plus stockholders’ equity. In other words, a company’s resources equal creditors’ and owners’ claims to those resources

  • Net Income Equation: Revenues(R) - Expenses(E) = Net Income(NI)

  • Stockholders Equity

    • Stockholders’ Equity = Common Stock + Retained Earnings

  • Common Stock

    • Beginning Common Stock + New Issuances = Ending Common Stock

  • Retained Earnings

    • Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

  • Change in Cash

    • Change in cash = Operating cash flows + Investing cash flows + Financing cash flows

The Finiancial Statements

  • The Income Statement: A financial statement that reports the company’s revenues and expenses over an interval of time. It shows whether the company was able to generate enough revenue during the period to cover the expenses of running the business. → The income statement compares revenues and expenses for the current period to assess the company’s ability to generate a profit from running its operations

  • The Statement of Stockholders’ Equity: A financial statement that summarizes the changes in stockholders’ equity over an interval of time. Stockholders’ equity arises from two primary sources→ common stock and retained earnings

    • Cash is a distribution of net income in the statements of stockholders’ equity

    • The statement of stockholders equity reports information related to changes in common stock and retained earnings each period. The change in retained earnings equal net income less dividends for the period

    • Statement of Retained Earnings: The middle column. In practice, companies don’t report retained earnings in a separate statement from common stock, so thats why we demonstrate the statement of stockholders equity. It is useful to see that this column highlights how net income from the income statement links to total stockholders’ equity by adding to the balance of retained earnings

  • The Balance Sheet: A financial statement that presents the financial position of the company on a particular date. The financial position of a company is summarized by the accounting equation

  • Statement of Cash Flows: A financial statement that measures activities involving cash receipts and cash payments over an interval of time

    • Operating Cash Flows: These are cash flows derived from the core business operations, including cash received from customers and cash paid to suppliers, salaries, and other operating expenses. This section is crucial for assessing a company's ability to generate sufficient cash flow to maintain and expand its operations.

    • Investing Cash Flows: These cash flows represent the cash transactions for the purchase and sale of physical and financial investments, such as property, plant, equipment, and securities. Understanding investing cash flows is essential for assessing how much money the company is allocating to its growth initiatives and capital expenditures.

    • Financing Cash Flows: Include cash transactions related to debt and equity financing, such as issuing or repaying loans and issuing stock or paying dividends. This section provides insights into the company's financial strategy and its approach to funding operations and growth.

      • This statement shows the cash flows for each type of activity, with net cash inflows shown as positive amounts and net cash outflows shown in parenthesis to denote negative amounts. Cash flows from operating activities are most often computed as net income adjusted for certain reconciling items. Cash flows from investing and financing activities are computed as all cash inflows minus all cash outflows associated with those activities


Other Important Information

  • Potential disadvantage of a corporation is double taxation

    • The company first pays corporate income taxes on income it earns

    • Stockholders then pay personal income taxes on income distributed to them from the company

  • Two additional business forms have evolved in response to liability issues and tax treatment

    • Limited Liability Companies(LLCs): A hybrid business structure that combines the characteristics of corporations and partnerships, providing limited liability protection to its owners while allowing for pass-through taxation.

    • Limited Liability Partnerships (LLPs): These partnerships provide liability protection to each partner, shielding them from the negligence or misconduct of other partners, while also allowing profits and losses to pass through directly to partners for tax purposes.


Homework Takeways

  • Description and Account Classification

    • Sale of products or services → Revenues

    • Owners claims to resources→ Stockholders' equity

    • Distribution to stockholders→ Dividends

    • Costs of selling products or services → Expenses

    • Resources of a company → Assets

    • Creditors claims to resources → Liabilities

  • Transaction Description and Account Title

    • Cost of rent → Rent Expense

    • Interest earned on savings account → Interest Revenue

    • Cash payments to stockholders → Dividends

    • Land use for operations → Land

    • Amounts owed to suppliers → Accounts Payable

    • Amounts owed fro utilities → Utilities Payable

    • Cash available for use → Cash

    • Cost of salaries → Salaries expense

    • Shares of ownership sold to investors → Common Stock

    • Sale of services to customers → Service revenue

  • Items and Financial Statements

    • The change in retained earnings due to net income and dividends → Statement of stockholders equity

    • Amount of cash received from borrowing money from a local bank → Statement of cash flows

    • Revenue from sales to customers during the year → Income statement

    • Total amounts owed to workers at the end of the year → Balance sheet

  • Example of retained earnings table

    • Year → Net Income → Dividends → Retained Earnings

    • 1 → $1,700 → $600 → $1,100

    • 2 → $2,200 → $600 → $2,700

    • 3 → $3,100 → $1,500 → $4,300

    • 4 → $4,200 → $1,500 → $7,000

    • 5 → $5,400 → $1,500 → $10,900


Video Review Notes and Information

  • Accounting can be defined as…

    • The language of business and a measurement or communication process

    • Accounting is NOT math

  • The income statement must be done first because we need to plug in the net income/ net loss into the statement of stockholders equity→ plug total into balance sheet

  • In the balance sheet the left side are assets (resources the company owns) that has to be equal to the right side (liabilities + stockholdrers' equity), liabilities - are what the company owes to others, stockholders equity - anything leftover that would be distributed to the owners or share holders

    • Example: If a company were to file bankruptcy, it would sell off all its assests, then it would pay all of its outstanding liabilities → whatever is left over would be distributed to owners or shareholders

  • The Income Statement

    • You can identify (most of the time) what goes in the income statement because the accounts/ amounts will say “revenue” or “expense”

    • Revenues - Expenses = Net income or net loss

    • First part, we are putting anything that is revenue, so sales or service revenue or interest revenue

    • In the bottom part we have the expenses

      • you can mostly identitfy an expense with the term expenses, for examples, salaries expense, rent expense, delivery expense

  • Statement of stockholders equity - what is called contributed capitol

    • Common stock is contributed capitol and retained earnings are earned capitol

    • Contributed capitol is what shareholders purchased in the form of stock → pay cash for it → this is what is happening in the common stock column

    • Sometimes common stock will be issued through out the year and sometimes it will not

    • Retained earnings is net income - dividends paid out for the life of the company

    • if there is no beginning balance in retained earnings that means it is the first year of a companys operations

  • Blance sheet

    • Left side→ all of the assets such as cash, supplies, equipment, buildings

      • The way to identify an asset is to go through the list and think about what resources the company would own that it would use up

    • The right side top section is liabilities such as accounts payable and salaries payable

      • Can usually be identified by the word payable (an amount due to others)

      • Accounts payable -an amount that the company owes to vendors that are outside the company

      • Salaries payable - amounts that are due to employees that have worked but have not been paid so they are owed money

    • The right side bottom section is stockholders equity with common stock and retained earnings

      • The total assets MUST equal total liabilities and stockholders equity

    • You are taking the total common stock and total retained earnings from the Statement of Stockholders equity