Partnership Corporation Financing Activities Chapter 1 Proprietorship Forms of Business Organization Generally owned By one user detailed info on Student Guide Internal Users Uses of Financial Info Marketing finance human resources management Financial Accounting is focused on the needs of external users Managerial Accounting is focused on the needs of internal users Business Activities Two Primary Sources of funds are 1 Borrowing Money a Amounts owed are called liabilities b Party to whom amount is owed are creditors c Notes payable and bonds payable are types of liabilities 2 Issuing Shares of stock for cash a Payments to stockholders are called dividends Investing Activities Purchase of resources a company needs to operate 1 Computers delivery trucks furniture buildings etc 2 Resources owned by a business are called ASSETS anything we own Operating Activities Once a business has the assets it needs it can begin its operations 1 Revenues amounts earned from the sale of product sales revenue service revenue etc 2 Inventory 3 Accounts receivable right to receive money from a customer in the future as a result of a sale or service 4 Expenses cost of assets 5 Liabilities 6 Net Income 7 Net Loss Revenue expenses are the two things on an income statement Expenses revenue Net Loss BAD Business Entities Service accountants attorneys physicians banks Merchandising Target Publix etc Manufacturing Apple Dell Ford etc Some businesses provide more than one of the functions listed above For a period of time Only for one point in time The Four Financial Statements Companies prepare 4 financial statements from the summarized accounting data Revenues Expenses Net Income Income statement Balance Sheet Assets Liabilities Equity Beginning Retained Earnings RE Net Income Retained Earnings Statement Distributions Dividends Ending RE Cash Inflow Cash Outflow Net Cash Flow Statement of Cash Flows Definition of equity what one s worth Some corporations use the statement of Stockholders Equity Assets Liabilities Equity The Accounting Equation Balance Sheet Bible of Accounting Equity the owner s share Equity contributed by owners Equity earned by competitors Expanded accounting equation Assets Liabilities Common Stock Retained Earnings RE Accounting Transactions Transactions are economic events that require recording in the financial statements May be external or internal Not all activities represent transactions Each transaction has a dual effect on the accounting equation Retained Earnings net income we had and we have retained still have If the financial position of the company has changed assets liabilities or stockholders equity that s a transaction that needs to be recorded RE Date Cash Flow Transaction Cash Balance Assets Liabilities Common Stock Jan 1 Ron s wine shop is started when it received cash of 5 000 from investors in exchange for common stock 5 000 Cash 5 000 Com Stock Rev Exp NI Nothing in this box b c no revenue 5 000 Fin Financing Common stock on a balance sheet of a corporation is the account that denotes that someone gave us money in return for them owning part of the company Investor GAVE company money not investment on company s part Cash Trans 1 5 000 Trans 2 1 000 Trans 3 300 100 Trans 4 Usually not all transactions involve cash Jan 11 Ron s wine shop borrows 1 000 from Ron s friend Ginger 1 000 N P 1 000 Cash N P Means note payable Notes Payable Accounts payable are BOTH Liabilities N P Note actually signed more legal A C No notes signed but everyday transaction w partners for instance Rev Exp NI 1 000 Fin Nothing in this box b c no revenue Revenue would come from selling wine for instance Liabilities Common Stock Assets Transaction Cash Flow Date RE RE Date Date Cash Flow Transaction Assets Rev Exp Liabilities Common Stock 300 Operating Jan 25 Ron s wine shop provides a service to a customer and charges 300 We recommend a beautiful Bordeaux to a company at a dinner of cassoulet Earn 300 Cash 300 Service Revenue ed 300 because we provided a service only reduce Net Income by paying expenses or dividends rest is Retained Earnings NI 300 300 September 8 2014 Notes Jan 31 Ron s wine shop pays the utility bill for January 100 100 Utility Expense 100 Cash Earned 300 because we provided a service only reduce Net Income by paying expenses or dividends rest is Retained Earnings NI 100 Operating 100 100 Utility expense before transaction was 0 and now is 100 utility expense going up 5 000 Cash 5 000 Common Stock 1 000 N P 1 000 Cash 300 Cash 300 Service Revenue 100 Utility Expense 100 Cash Order of Statements Income statement Retained Earnings Balance Sheet Must Balance gives Net Income Gives RE Liabilities Common Stock Stockholders Equity Rev Exp Liabilities Assets Transaction Cash Flow Assets RE Assets Income Statement Revenue Expenses Net Income 5 000 Cash 1 000 Cash 300 Cash 100 Cash 1 000 N P Liabilities Stockholders Equity 5 000 Common Stock 300 Service Revenue 100 Utility Expense Assets Cash Expenses Revenue INCOME STATEMENT RETAINED EARNINGS STATEMENT Service Total Revenue Utility Total Expenses Net Income Retained Earnings Jan 1 Add Net Income Less Dividends Retained Earnings Jan 31 300 100 BALANCE SHEET Notes Payable 6 200 Common Stock Retained Earnings 6 200 300 100 200 0 200 200 0 200 Liabilities Stockholders Equity 1 000 5 000 200 6 200 Total Assets Total Liabilities S H E 6 000 6 200 Net Increase in Cash Cash from Investing Activities Cash from Financing Activities Cash from Operating Activities If it s not cash doesn t belong here 300 100 5 000 1 000 0 STATEMENT OF CASH FLOWS Cash from Customers Cash paid for Utilities Net Cash from Operations Net Cash from Investing Issue of Stock Proceeds from Loan Dividends Paid Net Cash from Financing Plus Beginning Cash Balance 200 0 0 Bad month because not much of net increase came from operating but from debt financing Cash has nothing to do with income Income statement Cash is NOT net income The Classified Balance Sheet To improve understanding companies group similar assets and similar liabilities together Current Assets Long Term Investments Property Plant Equipment Intangible Assets Using Financial Statements Ratio Analysis Ratio Analysis expresses the relationship among selected items of financial statement data A Ratio expresses the mathematical relationship between one quantity and another A single ratio by itself is not very meaningful Note payable 10 year note some will be paid each year for 10 years Portion paid in
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