copyright 2003 prentice hall publishing1 simple model of a business “the firm” inputs value...
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Copyright 2003 Prentice Hall Publishing
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Simple Model of a BusinessSimple Model of a Business“The Firm”
INPUTS Value added
conversion
OUTPUTS
Capital (financing) Property, Plant, EquipmentRaw MaterialsLaborInventoryGoods & Services
Delivery of Product or Service
Acquisition/Payment Cycle Sales/Collection Cycle
Copyright 2003 Prentice Hall Publishing
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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.
CorporationsCorporations
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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).
Ownership of a CorporationOwnership of a Corporation
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Who needs accounting information?Who needs accounting information?
A) Management
B) Those with direct financial interest Current or potential investors Current or potential creditors
C) Those with an indirect financial interest » Tax Authorities» Regulatory Agencies» Economic Planners» Labor unions, financial advisors, others.
D) Employees
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Financial Accounting InformationFinancial Accounting Information
Information related to: Various views of the data:
The Company’s Information
System
Financial data for external reports
Product information
Customer and vendor information
Sales
Purchases
Collections
Payments
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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)
The Accounting EquationThe Accounting Equation
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There are two sources of equity equity “contributed” by owners equity “earned” by operations
Expanded accounting equation:
ASSETS =ASSETS = LIABILITIESLIABILITIESCONTRIBUTED CONTRIBUTED
CAPITALCAPITALRETAINED RETAINED EARNINGSEARNINGS++ ++
Equity: The Owner’s ShareEquity: The Owner’s Share
Copyright 2003 Prentice Hall Publishing
Expanded accounting equation:
Together, these are called Shareholders’ Equity, Stockholders’ Equity, or Owners’ Equity. They are all names for the same thing--the owners’ claims tothe firm’s assets.
ASSETS =ASSETS = LIABILITIESLIABILITIESCONTRIBUTED CONTRIBUTED
CAPITALCAPITALRETAINED RETAINED EARNINGSEARNINGS++ ++
Equity: The Owner’s ShareEquity: The Owner’s Share
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Four Basic Financial StatementsFour Basic Financial Statements
Balance SheetBalance SheetAssets = Liabilities + Equity
Income StatementIncome StatementRevenues - Expenses = Net income
Statement of Changes in Statement of Changes in Owner’s EquityOwner’s EquityBeginning equity + Contributions + Net income -
Distributions = Ending equity
Statement of Cash FlowsStatement of Cash FlowsCash inflow - Cash outflow = Net cash flow
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Tom’s Wear, Inc.Tom’s Wear, Inc.Income StatementIncome Statement
For the Month Ended Jan. 31, 2001For the Month Ended Jan. 31, 2001
Revenue
Sales $900
Expenses
Cost of sales 360
Advertising 50
Interest 5
Total expenses 415
Net income $485
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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Changes in Owner’s EquityStatement of Changes in Owner’s Equity
For the month ended Jan. 31, 2001For the month ended Jan. 31, 2001
Beginning CC $ 0
Common stock issued 5,000
Total Contributed Capital $ 5,000
Beginning RE $ 0
Net income 485
Dividends (100)
Ending RE $ 385
Total Owners’ Equity $5,385
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Tom’s WearTom’s WearBalance SheetBalance Sheet
At Jan. 31, 2001At Jan. 31, 2001
Assets Liabilities + Shareholder’s Equity
Cash $5,345 Note payable -0-
Inventory $ 40
Common stock, T. Phillips $5,000Total assets $ 5,385 Retained earnings 385
Total liabilities + $ 5,385SH’s Equity
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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Cash FlowsStatement of Cash Flows
For the month ending Jan. 31, 2001For the month ending Jan. 31, 2001
Cash from Operating Activities
Cash from Investing Activities
Cash from Financing Activities
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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Cash FlowsStatement of Cash Flows
For the month ended Jan. 31,2001For the month ended Jan. 31,2001
Cash from operating activities
Cash from customers $ 900
Cash paid to vendor for T-shirts (400)
Cash paid for advertising (50)
Interest paid ( 5)
Total cash from operations $445
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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Cash FlowsStatement of Cash Flows
For the month ended Jan. 31, 2001For the month ended Jan. 31, 2001
Cash from operating activities
Cash from customers $ 900
Cash paid to vendor for T-shirts (400)
Cash paid for advertising (50)
Cash paid for interest ( 5)
Total cash from operations $445
Cash from investing activities -0-
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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Cash FlowsStatement of Cash Flows
For the month ended Jan. 31, 2001For the month ended Jan. 31, 2001
Cash from operating activities
Cash from customers $ 900
Cash paid to vendor for T-shirts (400)
Cash paid for advertising (50)
Cash paid for interest ( 5)
Total cash from operations $445
Cash from investing activities -0-
Cash from financing activities
Copyright 2003 Prentice Hall Publishing
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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Cash FlowsStatement of Cash Flows
For the month ended Jan. 31, 2001For the month ended Jan. 31, 2001Cash from operating activities
Cash from customers $ 900
Cash paid to vendor for T-shirts (400)
Cash paid for advertising (50)
Cash paid for interest ( 5)
Total cash from operations $445
Cash from investing activities -0-
Cash from financing activities
Owner’s contributions 5,000
Dividends (100)
Total Cash from Financing 4,900
Copyright 2003 Prentice Hall Publishing
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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Cash FlowsStatement of Cash Flows
For the month ended Jan. 31, 2001For the month ended Jan. 31, 2001Cash from operating activities
Cash from customers $ 900
Cash paid to vendor for T-shirts (400)
Cash paid for advertising (50)
Cash paid for interest (5)
Total cash from operations $445
Cash from investing activities -0-
Cash from financing activities
Owner’s contributions 5,000
Dividends (100)
Total Cash from Financing 4,900
Net Increase in Cash $ 5,345