A, L, SE

Question 1

What is an Asset?

Answer 1

an Asset is a resource that is expected to provide future economic benefit, either:

1. generating future cash inflows
2. reduce future cash outflows

Question 2

What are the two criteria for establishing whether something is an Asset?

Answer 2

Must meet these two criteria:

1. acquired in past transaction or exchange
2. value of future benefits can be measure with reasonable degree of precision

signing a contract to deliver goods each month for the next year is not an asset. (1) no past transaction or exchange; (2) if contract broken, no basis to ask customer for money.

Question 3

What is a Liability?

Answer 3

A Liability is a claim on the assets of an org by non-owners that represent an obligation to make future payment of cash, goods or services.

Question 4

When is something put on the books as a Liability?

Answer 4

both criteria to be met:

1. obligation based on benefits or services received currently or in the past
2. amount of and timing of payment are reasonably certain

Income tax payable is a liability. (1) Benefit is allowed to operate business; (2) reasonable estimate of amount of and timing of tax owed.

If a company is sued for damages over defective products, not a liability. (1) they did sell defective products, so that condition is met, but (2) damages are not reasonably certain.

Question 5

What is Equity?

Answer 5

Equity = residual claims on Assets after settling claims of creditors. E=A-L!

No criteria. If A and L are correct, E is what is left.

Question 6

Two sources of Equity

Answer 6

1. Contributed capital (stocks / sale of shares)

2. Retained Earnings (from biz’ operations)

Question 7

How do you calculate Retained Earnings

Answer 7

R.E. = accumulation of Net Income less dividends, since the start of the biz

Formula:
R.E. END = R.E. BEG + (Rev - Expenses) - Dividends

Question 8

What are Dividends?

Answer 8

Dividends are distributions of retained earnings to shareholders. They are NOT expenses b/c they are not the cost of generating revenue.

Question 9

How are Dividends recorded?

Answer 9

Dividends are recorded as reduction of retained earnings on the declaration date.

mm/dd/yyyy Dr Retained Earnings (-SE) $$,$$$
Cr Dividends Payable (+L) $$,$$$