o These claims arise from two sources Paid in capital the owners have a claim

O these claims arise from two sources paid in capital

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o These claims arise from two sources: Paid-in capital : the owners have a claim on amounts they contributed directly to the company in exchange for its stock (Common Stock) Earned capital : the owners have a claim on profits the company has earned for them through its business operations (Retained Earnings) - Revenues : o Earned by selling goods or services to customers - Expenses: o All costs of doing business that are necessary to earn revenues o i.e. advertising, utilities, rent, salaries and wages, insurance, and supplies used up in the office o expenses are said to be “incurred” to generate revenues incurred: the activities giving rise to a cost (e.g., running an ad, using electricity) have occurred in the period in which the related revenues have been generated - Net Income: o Calculated as revenues minus expenses o For a company to be profitable, its revenues must be greater than its expenses o By generating net income, a company increases its stockholders’ equity .
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This income can be left in the company to accumulate (with earnings that have been retained from prior years) or it can be paid out to the company’s stockholders for their own personal use (called dividends). - Dividends : o A company’s profits are accumulated in Retained Earnings until a decision is made to distribute them to stockholders in what is called a dividend. o The simplest type, and most common for a small business, is a dividend paid in cash. o Reported as a reduction in Retained Earnings o Dividends are not an expense incurred to generate earnings. o An optional distribution of earnings to stockholders, approved by the company’s board of directors FINANCIAL STATEMENTS 1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows - Financial statements are most commonly prepared monthly, every 3 months (quarterly reports), and at the end of the year (annual reports). - Calendar year-end (Mattel) on December 31, or fiscal year-end (Green Bay Packers) on a day other than December 31 - Income Statement: o Heading identifies who, what, and when: the name of the business, the title of the report, and the time period covered by the financial statement Larger businesses add a fourth line under the date to indicate if the reported numbers are rounded to the nearest thousand or million International companies use the fourth line to report the currency used in the report o
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