ECON 4: The Balance Sheet Equation

fundamental equation of balance sheet

Assets = Liabilities + Stockholder's Equity

Contributed Capital

-Increases from issuance of new common stock - additional paid-in-capital - treasury stock

how is a liability recognized

-the obligation is based on benefits or services received currently or in the past - the amount of timing of payments is reasonably certain

Stockholder's Equity

-the residual claim on assets after settling claims with creditors -can be thought of as the net value of the assets after netting out the "expense" associated with liabilities - "net worth" "net assets" "net book value"

How is an asset recognized

-when acquired in a past transaction or exchange - the value of its future benefit can be measured with a reasonable degree of precision

Liabilites

a claim on an asset by a creditor (non-owner) - represents an obligation to make future payments of cash, goods, or services either to or on behalf of the creditor.

Net Incom

a measure of total earnings that accrue from operating the business over a period of time

Assets

a resource that is expected to yield some future economic benefit by either increasing future cash inflows or decreasing future cash outflows

Sources of Stockholder's Equity

contributed capital (selling new stock) retained earnings

Dividends

distributions of retained earnings to stockholder's - not treated as an operating expense

Retained Earnings

the difference between net income earned from operating in a given period less dividends paid out to investors during that same period i.e. delta (Retained Earnings) = Net Income - Dividends