UT Knoxville ACCT 200 - Chapter 8 & 9 (31 pages)

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Liabilities and Stockholders Equity Chapter 8 and Chapter 9 A200 Survey of Accounting University of Tennessee 2 Ch 8 Debt Financing or Equity Financing Debt Financing Creates a liability principal must be repaid Creates an additional cost Interest Equity Financing Stock issued Dilutes control of the business by creating new owners stockholders Stockholders expect to receive a return on their investment Increase in market price per share of stock Dividends share of business profit Equity Financing Retained Earnings Creates no liability or new owners Creates no additional costs Only earnings not distributed to owners as dividends are retained Leverage Using borrowed funds debt rather than owner funds equity to finance asset purchases and operations A high Debt to Equity ratio means high risk levels for stockholders slide 29 3 Ch 8 Current Liabilities CL are increased when a business purchases goods or services prior to making payment expense is incurred before cash is paid Transaction 1 Simba Corporation s employees worked through the end of the month which ended on Tuesday Simba will pay the 12 000 of wages on Friday STATEMENT OF CASH FLOWS INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET Assets Liabilities Equity Wages Payable Retained Earnings 12 000 12 000 12 000 Wages Expense 4 Ch 8 Current Liabilities CL are decreased when the business satisfies them Transaction 2 Simba Corporation pays the amount owed to employees STATEMENT OF CASH FLOWS 12 000 Cash out Operating INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET Assets Liabilities Cash Wages Payable 12 000 12 000 Equity 5 Ch 8 Current Liabilities CL are increased when a business receives cash from a customer before rendering a service or providing goods cash is received before revenue is earned Transaction 3 Simba Corporation received 300 000 from a customer for whom Simba performed services this year and 5 000 from a customer as an advance on work Simba will do next year