basics-of-accounting-information-processing

720000 of stockholders equity the stockholders equity

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Unformatted text preview: $120,000 that was originally invested in Edelweiss Corporation by stockholders (i.e., capital stock), and the other $600,000 that was earned (and retained) by successful business performance over the life of the company. Need help with your dissertation? Get in-depth feedback & advice from experts in your topic area. Find out what you can do to improve the quality of your dissertation! Get Help Now Go to www.helpmyassignment.co.uk for more info Download free eBooks at bookboon.com 13 Basics of Accounting & Information Processing The Fundamental Accounting Equation Does the stockholders’ equity total mean the business is worth $720,000? No! Why not? Because many assets are not reported at current value. For example, although the land cost $125,000, the balance sheet does not report its current worth. Similarly, the business may have unrecorded resources to its credit, such as a trade secret or a brand name that allows it to earn extraordinary profits. If one is looking to buy stock in Edelweiss Corporation, they would surely give consideration to these important non-financial statement based valuation considerations. This observation tells us that accounting statements are important in investment and credit decisions, but they are not the sole source of information for making investment and credit decisions. E DELWEISS CORPORATION Balance Sheet December 31, 20X3 Assets Liabilities Cash $ 25,000 Accounts payable Accounts receivable * 50,000 Loans payable Inventories 35,000 $ 50,000 125,000 Total liabilities $175,000 Land 125,000 Stockholders’ equity Buildings 400,000 Capital stock Equipment 250,000 Retained earnings Other assets 10,000 Total assets ASSETS $895,000 $895,000 = $120,000 600,000 Total stockholders’ e quity 720,000 Total Liabilities and equity $895,000 + LIABILITIES $175,000 STOCKHOLDERS’ EQUITY $720,000 Download free eBooks at bookboon.com 14 4. How Transactions Impact the Accounting How Transactions Impact the Accounting Equation Equation Basics of Accounting & Information Processing The preceding balance sheet for Edelweiss was static. This means that it represented the financial condition at the noted date. But, each passing transaction or event brings about a change in the overall financial condition. Business activity will impact various asset, liability, and/or equity accounts; but, they will not disturb the equality of the accounting equation. So, how does this happen? To reveal the answer to this question,sheet for Edelweiss was static. This means Edelweiss Corporation. You will The preceding balance let’s look at four specific transactions for that it represented the financial see how each transaction impacts the individual asset, liability, and equity accounts, without upsetting condition at the noted date. But, each passing transaction or event brings about a change in the overall the basic equality of the overall balance sheet. financial condition. Business activity will impact various asset, liability, and/...
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