Ch 2 Acct 702

Shows financial performance

Income statement

2 ways organizations become less valuable in terms of owners equity

Unprofitable operations and distributions by owners

Liquidity

the ease with which an asset can be converted into cash

Balance Sheet Equation

Assets = Liabilities + Equity

Accounting Equation

Assets = Liabilities + Owner's Equity

Statement of Cash Flows

which is a statement that lists the cash inflows and cash outflows for the business for a period of time.

Statement of Owner's Equity

which is the second financial statement created by accountants

Notes Payable

which is the value of amounts borrowed (usually not inventory purchases) that will be paid in the future with interest.

Examples of current liabilities include accounts payable

which is the value of goods or services purchased that will be paid for at a later date

inventory

which is the value of products to be sold or items to be converted into sellable products;

asset

—these are resources used to generate revenue.

Not All Transactions Affect Equity

• Exchanges of assets for assets • Exchanges of liabilities for liabilities • Acquisitions of assets by incurring liabilities • Settlements of liabilities by transferring assets

Elements of financial statements-equity

• Gains increase the value (equity) of the organization. • Losses decrease the value (equity) of the organization. • Investments by owners increase the value (equity) of the organization. • Distributions to owners decrease the value (equity) of the organization. • Changes in assets and liabilities can either increase or decrease the value (equity) of the organization depending on the net result of the transaction.

ten elements of financial statements

• Revenue—value of goods and services the organization sold or provided. • Expenses—costs of providing the goods or services for which the organization earns revenue. • Gains—gains are similar to revenue but relate to "incidental or peripheral" activities of the organization. • Losses—losses are similar to expenses but related to "incidental or peripheral" activities of the organization. • Assets—items the organization owns, controls, or has a claim to. • Liabilities—amounts the organization owes to others (also called creditors). • Equity—the net worth (or net assets) of the organization. • Investment by owners—cash or other assets provided to the organization in exchange for an ownership interest. • Distribution to owners—cash, other assets, or ownership interest (equity) provided to owners. • Comprehensive income—defined as the "change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources" (SFAC No. 6, p. 21). While further discussion of comprehensive income is reserved for intermediate and advanced studies in accounting, it is worth noting that comprehensive income has four components, focusing on activities related to foreign currency, derivatives, investments, and pensions.

Equity

(or net assets) refers to book value or net worth

Elements of the Income Statement

1. Revenues 2. Expenses 3. Gains 4. Losses Which determine the net income or net loss

Corporation

A "stand alone," business owned by stockholders who share in its profits but are not personally responsible for its debts. is a legal business structure involving one or more individuals (owners) who are legally distinct (separate) from the business.

Sole Proprietorship

A business owned by one person

short term liability

Common short-term liabilities or amounts owed by businesses include amounts owed for items purchased on credit (also called accounts payable), taxes, wages, and other business costs that will be paid in the future.

Accounts Receivable

Examples of current assets include _______, which is the outstanding customer debt on a credit sale;

Dividends

For investors who hold common stock in the organization, these periodic payments or distributions to owners are called

retained earnings

In a corporation, net income or net loss for the business becomes ___________, which is the cumulative, undistributed net income or net loss, less dividends paid for the business since its inception.

The first financial statement prepared is the

Income statement

2 ways organizations become more valuable

Profitable operations and investments by owners

net income/loss gains and losses formula

Revenue + Gain-Expense -losses= Net income (net loss) When (R+G) > (E+L) net income When (E+L) > ( R+G) net loss

Income Statement Equation

Revenue - Expenses = Net Income/(Loss)

Net Income/Loss Equation

Revenues - Expenses = Net Income/Loss (R>E) net income ; (E >R) net loss

common stock

Term used to describe the total amount paid in by stockholders for the shares they purchase.

Initial Public Offering (IPO)

The first public offering of a corporation's common stock.

common stock

When organizations generate funding by selling ownership, the ownership interest usually takes the form of

Securities and Exchange Commission (SEC)

a federal regulatory agency that, among other responsibilities, is charged with oversight of financial investments such as common stock.

Once the statement of owner's equity is completed,

accountants typically complete the balance sheet

Accrual Basis Accounting

accounting method where revenue or expenses are recorded when a transaction occurs rather than when payment is received or made.

Stakeholders

any persons or groups who will be affected by an action. can include groups or individuals affected by the actions or policies of an organization, including include investors, creditors, employees, managers, regulators, customers, and suppliers. The stakeholder's interest sometimes is not directly related to the entity's financial performance. Examples of stakeholders include lenders, investors/owners, vendors, employees and management, governmental agencies, and the communities in which the businesses operate.

Shows the financial position at a point in time

balance sheet

Four Financial Statements

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

long-term liabilities

can include such liabilities as long-term notes payable, mortgages payable, or bonds payable.

gain

can result from selling ancillary business items for more than the items are worth. (Ancillary business items are those that are used to support business operations.) differ from revenue because While selling other items for more than the value of the item does occur in business, these transactions are classified as gains, because these sales are infrequent and not the primary purpose of the business.

Examples of short-term assets that businesses own

cash, accounts receivable, and inventory

short term assets

current asset (which is typically used up, sold, or converted to cash in one year or less)

Working Capital

current assets - current liabilities. sometimes used as a measure of liquidity

Current Ratio

current assets divided by current liabilities

Net Income

determined by comparing revenues and expenses. ________ is a result of revenues (inflows) being greater than expenses (outflows).

tangible assets

have a physical nature, such as trucks or many inventory items

intangible assets

have value but often lack a physical existence or corpus, such as insurance policies or trademarks.

The elements of the financial statements shown on the statement of owner's equity

investments by owners as well as distributions to owners. Also, net income or net loss affects the value of the organization (net income increases the value of the organization, and net loss decreases it).

expense

is a cost associated with providing goods or services to customers. represent the dollar value of costs incurred to provide goods and services to customers for a given period of time

Partnership

is a legal business structure consisting of an association of two or more people who contribute money, property, or services to operate as co-owners of a business.

revenue

is the value of goods and services the organization sold or provided to customers for a given period of time.

Examples of long-term assets include

land, machinery, office furniture, buildings, and vehicles.

long term assets

noncurrent asset (which is not expected to be converted into cash or used up within one year). are often used in the production of products and services.

(Net Loss)

occurs when expenses (outflows) are greater than revenues (inflows).

two ways by which organizations become more valuable:

profitable operations (when revenues exceed expenses) and investments by owners.

Cash basis accounting method

recognizes a transaction at the time the cash is taken in or released

Investments by owners

represent an exchange of cash or other assets for which the investor is given an ownership interest in the organization. This is a mutually beneficial arrangement: the organization gets the funding it needs on a timely basis, and the investor gets an ownership interest in the organization.

loss

results from selling ancillary business items for less than the items are worth. losses are similar to expenses in that both losses and expenses decrease the value of the organization.

In accounting, revenues are often also called

sales or fees earned.

Types of business structures

sole proprietorships, partnerships, corporations

The fourth and final financial statement prepared is the

statement of cash flows

statement that shows how the equity (or value) of the organization has changed over time.

statement of owner's equity

Balance Sheet

statement that lists what the organization owns (assets), what it owes (liabilities), and what it is worth (equity) on a specific date. specific date.

Income Statement

statement that shows the organization's financial performance for a given period of time.

publicly traded company

the company's stock can be purchased by the general public on a public exchange like the New York Stock Exchange (NYSE). That is, investors can become owners of the particular company.

Financial Statements

the overall purpose of financial statements is to evaluate the performance of a company, governmental entity, or not-for-profit entity

Notes Receivable

the value of amounts loaned that will be received in the future with interest, assuming that it will be paid within a year. Written promise

liability

these are amounts owed to others (called creditors).

Cash Basis Accounting

transactions (i.e., a sale or a purchase) are not recorded in the financial statements until there is an exchange of cash.

Accrual Basis Accounting

transactions are generally recorded in the financial statement when the transactions occur, and not when paid, although in some situations the two events could happen on the same day.

Distributions to owners

which are periodic rewards issued to the owners in the form of cash or other assets. Distributions to owners represent some of the value (equity) of the organization.