Chapters 1-6 Flashcards
For-profit Organizations
Public Companies + Private Companies =
Need money from investors, creditors…
Not-for-profit Organizations
Need donations for donors
Who uses financial accounting information?
- external users
- internal users
External Users
- Shareholders / Owners
- Potential Investors
- Creditors
- Others
Internal Users
- Board of Directors
- Management
The Basic Accounting Equation
Assets = Liabilities + Owner’s / Shareholder’s Equity
Assets
Economic resources that are expected to produce a benefit in the future
Liabilities
“Outsider Claims”
Economic obligations payable to outsiders
Owner’s / Shareholder’s Equity
“Insider Claims” of a business
Shareholder’s Equity is divided in…
1) Contributed Capital
2) Retained Earnings
Contributed Capital
The amount invested in the corporation by its owners
Common Shares
The basic component of contributed capital
Retained Earnings
The amount earned by income-producing activities and kept for use in the business
Net Income Formula
Net Income = Total Revenue - Total Expenses
Revenues
Increases in retained earnings from delivering goods and services to customers
Expenses
Decreases in retained earnings that result from operations
4 Financial Statements
1) Income Statement
2) Statement of Changes in Equity
3) Statement of Financial Position (Balance Sheet)
4) Statement of Cash Flows
Income Statement
Reports revenues and expenses for a specific period of time
Statement of Changes in Equity
Reports the changes in each component of equity during a period of time
Statement of Financial Position (Balance Sheet)
Shows the assets, liabilities and shareholder’s equity at a specific point in time
Statement of Cash Flows
Shows how a company obtained cash and how that cash was used for a specific period of time
Steps for Income Statement
1) Company Name
2) Year ended…
3) Income Statement
4) Revenues
5) Expenses
6) Net Income before taxes
7) Net Income / Net Loss
Steps for Statement of Changes in Equity
-
List in Horizontal Top Row*
1) Common Shares
2) Retained Earnings
3) Total Equity) -
List in Vertical Right Row*
1) Balance, beginning
2) Stuff
3) Balance, end
Put in proper rows and add up
Steps for Statement of Financial Position (Balance Sheet)
1) List all Assets
2) Total Assets
3) List all Liabilities
4) Total Liabilities
5) List all Shareholder’s Equity
6) Total Shareholder’s Equity
7) Total Liabilities + Total Shareholder’s Equity
Current Assets
Assets expected to be converted to cash or used in the business within 1 year or 1 operating cycle
* listed in order of equity*
Current Assets Examples
- cash
- short-term investments
- accounts receivable
- merchandise inventory
- prepaid expenses
Non-Current Assets
Assets not expected to be converted to cash or used in the business within 1 year or 1 operating cycle
Non-Current Assets Example
- long-term investments
- property, plant, equipment (PPE)
- intangible assets / goodwill
- other assets
Long-Term Investments
Investments in:
- Debt securities (loans, notes, bonds, mortgages)
- Equity securities (shares of other companies)
Not normally intended to be sold within 1 year
Property, Plant, Equipment (PPE)
- Assets with normally long useful lives
- Used in operating the business
- Listed in order of permanency
