Chapter 1 Flashcards
Effects of Purchasing Land
Doesn’t make the company better to worse.
Assets
Things that have value.
Cash, land, supplies
Liabilities (notes payable)
A legal obligation to pay someone outside the company.
Equity
“Stockholders’ equity” or “owners’ equity”
CS + RE
Owners own all equity
IMPORTANT
A = L + E
Dividends
Reduces RE but are not a part of the net income calculation
Income Statement
Revenue + Expenses, but not “retained earnings”
Does not include notes payable
Covers exactly 1 year, “For the year…”
2 “things” that lower RE
Expenses & dividends
CS increases…
Cash increases (Equity)
Balance Sheet
Does not reset, is cummulative (“As of…”)
CS, RE, Land, Cash, Notes payable, Total assets, Total liabilities, Total equity
Solve for RE
A = L + CS + RE
JRT Company has $2 million of notes payable on the December 31, 2022 balance sheet. Do we know for sure that the company borrowed money from the bank in the year 2022?
No, the balance sheet is cumulative.
The money in notes payable could have come from any of the previous years.
West Arizona Electric is a utility company. During 2016, the company provided electricity to many houses and businesses. Would this affect the 12/31/2016 balance sheet in any way?
Yes, every event affects the forthcoming balance sheet,
BUT not every event affects the income statement.
Can cash be lower on Dec. 31 2018 than on Jan. 1 2018?
Yes
If revenue is 50,000,000 in 2015 and 62,000,000 in 2016, do we know that 2016 net income was higher (or lower) than 2015 net income?
No, there is no information regarding expenses.
Cash is 400,000 on January 1. During the year, the company earned 300,000 of net income and paid $50,000 of dividends. Is CASH definitely $650,000 on December 31?
No,
company may have purchased land,
could possibly be an estimate, not enough info
Suppose that, for one event, L increases by $400 and A is unchanged (let’s say 0). What would happen to equity?
A = L + E
0 = 400 + E
- 400 = E, therefore equity decrease
If you know cash, total equity, notes payable, and supplies, you can solve for…
Land
When the supplies increase, equity increases…
False, cash decrease so equity also decreases
If you look at the 12/31/2021 balance sheet, you can determine the AMOUNT of supplies purchased during year 2021.
False, doesn’t show what you purchase, but how much money was used to make the purchase.
Owners take $150,000 cash out of business, Equity (of the business) will definitely be 150,000 lower as a result.
Yes, (-) cash and (-) retained earnings = decrease in equity
Our company purchased land for $30,000 cash and borrowed $60,000 cash from a bank. If total assets were $400,000 before these events, what is the total amount of assets now?
$400,000 + $60,000 = $460,000
**The land entry does not change total assets
