ACCTG 211 1st Edition Lecture 2 Outline of Last Lecture I Accounting is the language of business II Instructors and office hour information III How to succeed in the course Outline of Current Lecture I The accounting equation II Four Basic Financial Statements a Income Statement b Statement of Changes in Shareholders Equity c Balance Sheet d Statement of Cash Flows Examples of How different transactions affect the accounting equation III Current Lecture II The Accounting Equation a Assets Liabilities Shareholders Equity b Assets are owned GAAP probable future benefit c Liabilities are owed GAAP probable future sacrifice of resources d Shareholders Equity is the residual or leftover amount when assets are used to pay off liabilities A L E i Can be things like dividends expenses retained earnings etc ii Each of these items will fall into the TWO categories of Shareholder s Equity 1 Contributed Capital common stock CS 2 Earned Capital retained earnings RE III Four Basic Financial Statements used in accounting a Income Statement b Statement of Changes in Shareholders Equity i I will shorten a bit to Statement of Shareholders Equity ii Sometimes called Statement of Stockholders Equity c Balance Sheet i Only financial statement that shows the current status AT a certain point in time rather than over a financial period d Statement of Cash Flows These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute IV Income Statement a Revenues Expenses Net Income b If revenues expenses Net Income results c If revenues expenses Net Loss results d Net Income is the link between the income statement and the statement of changes in Shareholder s Equity V Statement of Shareholders Equity a Contributed Capital and Earned Capital Total Shareholders Equity b Beginning Contributed CapitaL New Contributed Capital Ending CC c Beginning Retained Earnings Net Income Dividends Ending Retained Earnings d Total Shareholders Equity is the link between the Statement of Shareholders Equity and the Balance Sheet VI Balance Sheet a Total Assets Total Liabilities Total Shareholders Equity b This is the Accounting Equation c Total Shareholders Equity comes from the Statement of Shareholders Equity VII Statement of Cash Flows a Total Cash from Operating Activities Income Statement Total Cash from Investing Activities Long Term Assets Total Cash from Financing Activities Long Term Liabilities and Equity Net Change in Cash Beginning Cash Ending Cash b Statement of Cash Flows is basically a way of adding up the different expenditures and money earned of a company to see how cash moves and get the ending cash balance VIII Let s see how different examples of activities can affect the balance sheet Remember the accounting equation must remain true a Tom contributes 5 000 of his own money to start the business i Increase 5 000 to cash assets ii Increase 5000 to contributed capital stockholder s equity b Tom s companyborrows 500 from Tom s mom i Increase 500 in cash ii Increase 500 in notes payable liability c Tom s companybuys 100 T shirts for 400 cash i Decrease in cash ii Increase in inventory asset d Tom s companypays 50 for advertising i Decrease in cash ii Increase in advertising expense which decreases stockholder s equity e Tom s Wear sells 90 of the T shirts to friends for cash 10 each i Increases of 900 in cash ii Increase of 900 in sales revenue stockholder s equity iii BUT Tom paid 4 per shirt so let s take that into account 1 Inventory decreases by 360 I 2 Cost of Goods Sold is 360 shown as 360 on the balance sheet iv Tom s companyrepays the debt of 500 plus 5 interest 1 Cash decreases by 505 2 Notes Payable decreases by 500 3 Interest expense of 5 stockholder s equity Tom s companypays a dividend of 100 a Cash decreases by 100 b Stockholder s equity decreases by 100 retained earnings