Accounting: Chapter 1

Stockholders equity équation

stockholders equity= common stock + retained earnings

Advantages to being a corporation

stockholders have limited liability

What accounts make up stockholders' equity accounts?

-Retained earnings -common stock

The system that maintains records of a company's operations and then communicates that information to decision makers is referred to as

Accounting

Accounting equation

Assets = Liabilities + Stockholder's Equity

Which financial statements shows a firm's financial position on a particular date?

Balance sheet

What appears on the statement of stockholders' equity?

Beginning balance of retained earnings Dividends Net income

Measuring business activities and reporting those measurements to external parties is the function of ______ accounting.

Financial

Retained earnings equation

Retained earnings = all net income -all dividends

Income statement equation

Revenues - Expenses = Net Income

Sole proprietorship

a business owned by one person

Partnership

a business owned by two or more persons

Corporation

a company that is legally separate from its owners

Balance sheet (statement of financial position)

a financial statement that presents the financial position of the company on a particular date -summarized by the accounting equation assets= liabilities + stockholders equity

Common stock

an external source of stock holders equity where it is amounts invested by stockholders

Retained earnings

an internal source of stockholders equity over the life of the company

Operating cash flows

cash receipts and cash payments for transactions involving revenue and expense activities during the period -the cash effects of the same activities that are reported in the income statement to calculate net income

Investing cash flows

cash transactions for the purchase and sale of investing and long-term assets

Financing cash flows

cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends

Assets examples

cash, land, account receivable, notes receivable, vehicles, supplies, equipment

Investors

decide whether to invest in stock -they want to make good decisions related to buying and selling their shares of the company's stock

Creditors

decide whether to lend money -make decisions related to lend money to the company: will the company be able to repay its debt and interest when they come due?

Customers

decide whether to purchase products

Dividends are NOT

expenses

Statement of cash flows

financial statement that measures activities involving cash receipts and cash payments over an interval of time

Accounts that include the term "payable" typically are classified as

liabilities

Amounts owed to creditors are

liabilities

Revenues minus expenses equals

net income

What appears on both the income statement and the statement of stockholders' equity?

net income

When expenses are greater than revenues, it is referred to as

net loss

Many liabilities are referred to as ___ to indicate that amounts must be paid.

payables

Financial statements are

periodic reports published by the company for the purpose of providing information to external users -they give investors and creditors the key information they need when making decisions about a company

Creditor

person or institution to whom money is owed -Lends money to a company

Limited liability

prevents stockholders from being held personally responsible for the financial obligations of the corporations

Income statement (statement of operations, statement of income, profit and loss statement)

reports the company's revenues and expenses over an interval of time -shows whether the company was able to generate enough revenue to cover the expenses of running the business

Long term assets

resources owned by a company that are thought to provide benefits for more than one year

The net income earned by a corporation and not yet paid to shareholders?

retained earnings

Revenues are

sales of goods or services to customers

Any transaction that affects the income statement ultimately affects

the balance sheet through the balance of retained earnings

Double taxation

the company first pays corporate income taxes on income it earns -then stockholders pay personal income taxes when the company distributes that income as dividends to them

Expenses

the cost of providing products and services and other business activities during a current period

Expenses are:

the costs of doing business that are necessary to produce revenue

The four financial statements published to provide information to external users include

-income statement -stockholders equity -balance sheet -statement of cash flows

The two primary functions of financial accounting are

-measure business activities. -communicate measurements to investors and creditors afor

Three categories of all cash transactions

-operating cash flows -investing cash flows -financing cash flows

Disadvantages to sole proprietorship and partnership

-owners must have sufficient personal funds to finance the business in addition to the ability to borrow money -neither offers limited liability meaning that owners are held personally responsible for the activities in the business

The fundamental model of business valuation is commonly referred to as the

accounting equation

Ending retained earnings is calculated as

beginning retained earnings + net income - dividends

Change in cash =

operating cash flows + investing cash flows + financing cash flows

Net income

the difference between revenues and expenses -when revenues are greater than expenses

In accounting, the term net is used to describe

the difference between two amounts

Statement of stockholders equity

a financial statement that summarizes the changes in stockholders' equity over an interval of time

Accounting

a system of maintaining records of a company's operations and communicating that information to decision makers

Liabilities

amounts owed to creditors -money owed to a bank -salaries -supplier $$ -utility companies -government taxes

Liabilities =

assets- stockholders equity

Dividends

cash payments to stockholders -distributions to OWNERS of the company

The balance sheet shows that a company's resources equal _____ claims to those resources.

creditors claims plus owners'

A distribution of net income to owners is called a(n)

dividend

Disadvantage to corporations

double taxation

Shareholders' equity arises primarily from amounts invested by shareholders and amounts ______.

earned by the corporation

Other names for net income

earnings profit

Dividends paid to shareholders is on which financial statement?

statement of stockholders equity

For a corporation, the owners' claims to the resources of a company are called

stockholders equity

Total assets-total liabilities

stockholders equity

Revenues

the amounts recognized when the company sells products or provides services to customers

Stockholders' equity is

the owners' claims to resources of the corporation.

Retained earnings represents

the total net income earned over the life of the company that has not been distributed as dividends.

Assets

the total resources of a company -cash -equipment -supplies -inventory for sale -buildings -land -investments

Investing activities

transactions involving the purchase or sale of resources that are expected to benefit the company for several years, such as the purchase of equipment.

Operating activities

transactions that relate to the primary operations of the company, such as providing products and services to customers and the associated costs of doing so like rent, salaries, utilities, and advertising

Financing activities

transactions the company has with investors and creditors, such as issuing stock and borrowing money from a local bank

Net loss

when expenses are greater than revenues