Lesson One: Introducing Financial Statements Flashcards
Assets:
Resources a company owns or controls that are expected to yield future benefits.
Liabilities:
Creditor’s claims on assets, obligations to provide assets, products or services to others.
A payable is a liability that promises a future outflow of resources.
Ex. wages payable to workers
Equity:
The owner’s claim on assets and is equal to assets minus liabilities.
It’s also called net assets or residual equity.
This increases from owner investments, also called stock issuances, and from revenues. It decreases from dividends and expenses.
Accounting Equation:
Assets = Liabilities + Equity
Expanded Accounting Equation:
Assets = Liabilities + (Common Stock - Dividends + Revenues - Expenses)
Dividends, revenues, and expenses are all under the “retained earnings” umbrella within equity.
Common Stock:
Reflects inflows of cash and other net assets from shareholders in exchange for stock (stock is part of contributed capital).
Dividends:
Outflows of cash and other assets to shareholders that reduce equity.
Revenues:
Increase equity (via net income) from sales of products and services to customers
Ex. sales of products, consulting services provided, facilities rented to others, and commission from others.
Expenses:
Decrease equity (via net income) from costs of providing products and services to customers.
Ex. costs of employee time, use of supplies, advertising, utilities, and insurance fees.
Lesson One, Section: Business Transactions and Accounting
This explains how the financial statements are all tied together.
Income Statement:
Describes a company’s revenues and expenses and computes net income or loss over a period of time.
Equation: Revenues - Expenses = Net Income
Statement of Retained Earnings:
Explains changes in retained earnings from net income (or loss) and any dividends over a period of time.
Equation: Beginning Retained Earnings + Net Income - Dividends = End Retained Earnings
Balance Sheet:
Describes a company’s financial position (types and amounts of assets, liabilities, and equity ) at A POINT IN TIME.
Statement of Cash Flows:
Identifies cash inflows (receipts) and cash outflows (payments) over a period of time.
Equation: +/- Operating Cash Flow +/- Investing Cash Flow +/- Financing Cash Flow = Change in Cash (Over a period of time)
Sole Proprietorship:
of Owners: 1 owner, easy to set up.
Business Taxation: No additional business income tax.
Owner Liability: Unlimited liability. Owner is personally liable for proprietorship debts.
Legal Entity: Not a separate legal entity.
Business Life: Business ends with owner death or choice.
