Stockholders – Owners of the company (receive dividends – a portion earned)

Creditors – Loaners / Banks Interest expense

Business Activities:

1. Operating Activities (A): Collecting payments (cash, accounts receivable), purchasing short-term assets for day-to-day operation (inventories, supplies), manufacturing and delivering goods, paying suppliers (L)(cost of goods sold)

2. Investment Activities (A): Buying and selling long-term assets (long-term investment – advertisement, plants and buildings, land, equipment)

3. Financing Activities (L, SE): Borrowing or paying back money to creditors (cash, accounts payable), receiving capital (common stock, additional paid-in capital)from stockholders, paying dividends

The four basic financial statements:

1. Balance Sheet / Statement of Financial Position – At a point of timeBalance Sheet Equation: A = L + SEBalancing Debit account and Credit account

Format

Assets: – Resources the company owns with economic value that are expected to provide future economic benefits

Current assets

Cash, short-term accounts receivable / accrued revenue (within accounting period), inventories, supplies, oil and gas, accumulated depreciation (XA), short-term investments, prepaid expense / deferred expense

Long-term assets

Long-term accounts receivable, land, plants and buildings, equipment, long-term investments (advertisements), intangibles

Liabilities and stockholders’ equity:

(Liabilities) – Obligations, loans / debts to creditors, suppliers and buyers, future sacrifices for economic benefits

Current liabilities

Short-term accounts payable, short-term notes payable, accrued expenses payable (wages payable, dividends payable, interest payable), unearned revenue / deferred revenue

Long-term liabilities

Long-term accounts payable, Long-term notes payable

Stockholders’ equity – Book value of the company, interest of shareholders in terms of net assets

Common stock ($k par per share x no. of shares = total monetary amount), additional-paid in capital, retained earnings

2. Income Statement – in an accounting periodIncome Statement Equation: Revenues – expenses = net income

Format

Revenue

Sales revenue,

Expense

Cost of goods sold, administrative expense, interest expense, advertising expense, wages expense, insurance expense, rental expense, income tax expense (pretax income – income tax expense = net income)

3. Statement of Stockholders’ EquityStatement of Stockholders’ Equity Equation: Ending balance last period (Beginning retained earnings) + net income - dividends = current retained earnings balanceEnding balance last period (Beginning common stock) + stock issuance = current common stock balance

4. Statement of Cash Flows

Cash Flow Equation: Cash flows from O + I + F = Change in cashNet increase (decrease) in cash + cash balance last period = current cash balance

Relationships between the four basic financial statements:

Income Statement (Net income) Statement of Stockholders’ Equity Statement of Stockholders’ Equity (Retained earnings) Balance Sheet

Statement of Cash Flows (Cash) Balance Sheet

Making adjusting entries, recording revenues and expenses:

Unearned revenue / deferred revenue – received payment but has not yet rendered the services

Accrued revenue – services have been rendered and revenue is recognized, but has not yet received payment (accounts receivable)

Prepaid expense / deferred expense –paid money and received supplies but has not yet used the supplies

Accrued expense – used the services but has not yet paid for them (e.g. accounts payable for goods, accrued wages payable)

*Cost of goods sold / inventories expense is only recognized when goods are sold - not equal to the price sold!!

Recognizing unearned revenue:

Cash is received Service is renderedDr: Cash (+A) Dr: Unearned revenue (-L)Cr: Unearned revenue (+L) Cr: Revenue (+SE)

Recognizing accrued revenue:

Service is rendered Cash is receivedDr: Receivables (+A) Dr: Cash (+A)Cr: Revenue (+SE) Cr: Receivables (-A)

Recognizing prepaid expense:

Cash is paid Services are receivedDr: Prepaid expense (+A) Dr: Expense (-SE)Cr: Cash (-A) Cr: Prepaid expense (-A)

Supplies situation:

Cash is paid Supplies are usedDr: Supplies (+A) Dr: Expense (-SE)Cr: Cash (-A) Cr: Supplies (-A)

Recognizing accrued expense:

Services are received Cash is paidDr: Expense (-SE) Dr: Payables (-L)Cr: Payables (+L) Cr: Cash (-A)

Accumulated depreciation (asset X)

Net asset X = Asset X last period - accumulated depreciation