Simple Model of a Business
“The Firm”
INPUTS
Value
added
conversion
Acquisition/Payment Cycle
Capital (financing)
Property, Plant, Equipment
Raw Materials
Labor
Inventory
Goods & Services
OUTPUTS
Sales/Collection Cycle
Delivery of
Product or Service
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Corporations

Because a corporation is a separate
legal entity, it can . . .
Own assets.
 Incur liabilities.
 Sue and be sued.
 Enter into contracts independent of the
stockholder owners.


Many Americans own stock through a mutual
fund or pension program.
Copyright 2003 Prentice Hall Publishing
2
Ownership of a Corporation

Owners of common stock generally
receive the following rights:
Voting (in person or by proxy).
 Distributions of profits.
 Distributions of assets in a liquidation.
 Offers to purchase shares of a new stock
issue (pro rata basis).

Copyright 2003 Prentice Hall Publishing
3
Who needs accounting information?
A)
B)
Management
Those with direct financial interest
 Current or potential investors
 Current or potential creditors
C)
Those with an indirect financial interest
»
»
»
»
D)
Tax Authorities
Regulatory Agencies
Economic Planners
Labor unions, financial advisors, others.
Employees
Copyright 2003 Prentice Hall Publishing
4
Financial Accounting Information
Information related to:
Various views of the data:
Financial data for
external reports
Sales
Purchases
Collections
The
Company’s
Information
System
Product
information
Customer and
vendor information
Payments
Copyright 2003 Prentice Hall Publishing
5
The Accounting Equation
Assets = Claims
Assets = Liabilities + Equity
Asset: something of value
 Liability: something owed (creditors’
share of the assets)
 Equity: what remains (owner’s share of
the assets)

Equity: The Owner’s Share

There are two sources of equity



equity “contributed” by owners
equity “earned” by operations
Expanded accounting equation:
ASSETS =
LIABILITIES
+
CONTRIBUTED
+
CAPITAL
RETAINED
EARNINGS
Equity: The Owner’s Share
Expanded accounting equation:
ASSETS =
LIABILITIES +
CONTRIBUTED
+
CAPITAL
RETAINED
EARNINGS
Together, these are called Shareholders’ Equity,
Stockholders’ Equity, or Owners’ Equity. They are
all names for the same thing--the owners’ claims to
the firm’s assets.
Four Basic Financial Statements

Balance Sheet
Assets = Liabilities + Equity

Income Statement
Revenues - Expenses = Net income

Statement of Changes in
Owner’s Equity
Beginning equity + Contributions + Net income Distributions = Ending equity

Statement of Cash Flows
Cash inflow - Cash outflow = Net cash flow
Tom’s Wear, Inc.
Income Statement
For the Month Ended Jan. 31, 2001
Revenue
Sales
Expenses
Cost of sales
Advertising
Interest
Total expenses
Net income
$900
360
50
5
415
$485
Copyright 2003 Prentice Hall Publishing
10
Tom’s Wear, Inc.
Statement of Changes in Owner’s Equity
For the month ended Jan. 31, 2001
Beginning CC
Common stock issued
Total Contributed Capital
$
0
5,000
Beginning RE
Net income
Dividends
Ending RE
$
$ 5,000
0
485
(100)
$ 385
Total Owners’ Equity
Copyright 2003 Prentice Hall Publishing
$5,385
11
Tom’s Wear
Balance Sheet
At Jan. 31, 2001
Liabilities + Shareholder’s Equity
Assets
Cash
Inventory
Total assets
$5,345
$ 40
$ 5,385
Note payable
-0-
Common stock, T. Phillips
Retained earnings
$5,000
385
Total liabilities +
SH’s Equity
$ 5,385
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12
Tom’s Wear, Inc.
Statement of Cash Flows
For the month ending Jan. 31, 2001
Cash from Operating Activities
Cash from Investing Activities
Cash from Financing Activities
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13
Tom’s Wear, Inc.
Statement of Cash Flows
For the month ended Jan. 31,2001
Cash from operating activities
Cash from customers
Cash paid to vendor for T-shirts
Cash paid for advertising
Interest paid
Total cash from operations
Copyright 2003 Prentice Hall Publishing
$ 900
(400)
(50)
( 5)
$445
14
Tom’s Wear, Inc.
Statement of Cash Flows
For the month ended Jan. 31, 2001
Cash from operating activities
Cash from customers
Cash paid to vendor for T-shirts
Cash paid for advertising
Cash paid for interest
Total cash from operations
Cash from investing activities
Copyright 2003 Prentice Hall Publishing
$ 900
(400)
(50)
( 5)
$445
-0-
15
Tom’s Wear, Inc.
Statement of Cash Flows
For the month ended Jan. 31, 2001
Cash from operating activities
Cash from customers
Cash paid to vendor for T-shirts
Cash paid for advertising
Cash paid for interest
Total cash from operations
Cash from investing activities
Cash from financing activities
Copyright 2003 Prentice Hall Publishing
$ 900
(400)
(50)
( 5)
$445
-0-
16
Tom’s Wear, Inc.
Statement of Cash Flows
For the month ended Jan. 31, 2001
Cash from operating activities
Cash from customers
Cash paid to vendor for T-shirts
Cash paid for advertising
Cash paid for interest
Total cash from operations
Cash from investing activities
Cash from financing activities
Owner’s contributions
Dividends
Total Cash from Financing
Copyright 2003 Prentice Hall Publishing
$ 900
(400)
(50)
( 5)
$445
-05,000
(100)
4,900
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Tom’s Wear, Inc.
Statement of Cash Flows
For the month ended Jan. 31, 2001
Cash from operating activities
Cash from customers
Cash paid to vendor for T-shirts
Cash paid for advertising
Cash paid for interest
Total cash from operations
Cash from investing activities
Cash from financing activities
Owner’s contributions
Dividends
Total Cash from Financing
Net Increase in Cash
Copyright 2003 Prentice Hall Publishing
$ 900
(400)
(50)
(5)
$445
-05,000
(100)
4,900
$ 5,345
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