Chapter 1 – Class Notes
Organizational Forms
Sole Proprietorship: Owned by one person, owner personally liable for all debts.
Partnership: 2 or more owners, still personally liable for business debts, profits are taxed by
owners.
Corporation: Separate legal entity, shareholders,
The Basic Accounting Equation
Resources Owned by the company
=
Resources Owed to creditors and to shareholders
Assets
=
Liabilities + Shareholders’ Equity
Assets = resources controlled by the company that have measurable value, and
expected to provide future benefits.
Liabilities= amounts owed by the business to creditors.
Shareholders equity= Owners claim on the business resources.
- Contributed capital= owners amount directly invested in the company in
exchange for shares.
- Retained earnings= the amount the company has earned that we have
retained in our business; profits.
Revenue= amount earned for providing goods and services.
Expenses= cost of doing business to earn that revenue (rent, equipment, marketing)
Revenue = expenses= net income
Dividends= Distribution of profits to shareholders as a return on their investment.
- Dividends are not an expense
Ch. 1 - p. 1
Ch. 1 - p. 2
The Financial Statements
The Balance Sheet
The Income Statement
-
Shows if business made a profit,
Unlike the balance sheet which is dated at a point in time, the headings on
the three other financial statements are for a period of time. Ex, month
quarter or year.
The Statement of Retained Earnings
- Amount of this years earnings (net income) that have either been paid out to
stockholders (dividends) or retained for the business.
-
Beginning R/E+ net income- dividends= Ending R/E
The Statement of Cash Flows
- Shoes how a business’s operating investing and financing activates caused its
cash balance to increase/decrease over time.
- Negative amounts (cash outflows) are reported in parentheses.
Ch. 1 - p. 3
Describe how the financial statements relate to one another:
1.
2.
3.
Ch. 1 - p. 4
Ch. 1 - p. 5
Construct a set of financial statements.
World Enterprises reported that its Retained Earnings was $4,000 at August 31, 2017. Prepare
an income statement, statement of retained earnings, and balance sheet, from the following
amounts at August 31, 2018:
Contributed capital
Current assets
Current liabilities
$3,000
2,000
1,000
Dividends
Noncurrent assets
Noncurrent liabilities
2,000
7,000
2,000
Retained earnings
TBD
Total revenues
9,000
Total expenses
8,000
Ch. 1 - p. 6
Distinguishing among f/s items (preparing for post-class HW)
In their recent financial statements, Intel Corporation and Activision Blizzard, Inc. reported the
following amounts (in billions and millions). Solve for the missing information.
Contributed Capital
Dividends
Net Income (Loss)
Retained Earnings, Beginning of Year
Retained Earnings, End of Year
Total Assets
Total Expenses
Total Liabilities
Total Revenues
Intel Corp.
$17
16
(a)
33
(b)
(c)
41
25
54
Activision Blizzard Inc.
$9,544
194
(d)
57
(e)
13,277
(f)
2,785
4,755
Ch. 1 - p. 7
Ch. 1 - p. 8