Owners’ Equity•Amount owners’ invested in entity.•= Assets – Liabilities = Net assets•For a corporation: shareholders’ or stockholders’ equity .–Shares of stock evidence ownership interest.•Could be invested in any assets on Balance Sheet.
Two Categories ofShareholders’ Equity•Paid-in or contributed capital.•Retained earnings.
Paid-in Capital•Capital stock (at stated or par value) + additional paid-in-capital.•Amount owners have paid in to purchase shares of stock.
Retained Earnings•Reinvested earnings from inception to date less dividends to date. If negative, deficit.•Residual interest in assets.•No necessary relation between RE and Cash.
Unincorporated Businesses•Proprietorship.–Business owned by one person.•Partnership.–Business owned jointly by two or more persons.•Capital (not SE) account.–Separate for each partner.–Drawings.•Withdrawals by owner(s).
Ratios•One number divided by another.•Example: Current ratio.•Current Assets / Current liabilities•A measure of liquidity or ability to pay short-term obligations.•For some industries, 2 to 1 is believed desirable.
Balance Sheet ChangesMusic Mart Start Up•Assets = liabilities + Paid-in capital + Retained earnings•Dual effect of transactions.•Transactions:–On 1/1 Owner invests $25,000 for stock.–On 1/2 borrows $12,500 from bank.–On 1/3 purchases $5,000 of mdse for cash.–On 1/4 sells mdse for $750 cash that cost $500.
The Income Statement
3-85Balance Sheet - Review•Status report.•Financial position at point in time.•Assets = liabilities + shareholders’ equity.
3-88Nature of Income•Summarizes results of operations for a period of time.•Flow report.•Flows are continuous.•Focuses on earnings activities (or operating activities).–Reports nature and magnitude.
3-89Elements of Income Statement•Revenues•Inflows or creation of assets that result from sales of goods or services.•Expenses•Outflows or consumption of resources to generate revenues.•Revenues - expenses = income = net income (loss) = earnings = profit = net earnings (loss).
3-90Concept #6: Accounting Period•Net income for life of company:–= Money in - money out.•Accounting period:–Specified arbitrary interval of time.•Accounting year = fiscal year = calendar year (if fiscal YE is 12/31).•Natural business year (1/31 for retailers).
3-91Interim Reports•Reports on periods less than fiscal year.•SEC requires quarterly.•Management may require monthly (or weekly, or daily).
3-92Income and Owners’ Equity•Owners’ equity = Stockholders’ equity (for a corporation) = Paid-in-capital + Retained earnings.