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MGTA02H3 (143)
Lecture

Chapter 4b.pdf

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Department
Management (MGT)
Course
MGTA02H3
Professor
Chris Bovaird
Semester
Summer

Description
Chapter 4 - Understanding Accounting Introduction Once a year, at least, at the end of th eir “fiscal” year accountants collect the financial information, analyse it and present it into the two principle “Financial Statements”: 1. The Balance Sheet 2. The Income Statement The Balance Sheet One way of judging the financial position, the wealth or the status of an individual, or an organization, is to ask: “How much stuff do they have?” or “How big is their house?” or “How many cars do they own?” While the possession of material things isn’t necessarily a proof of a good life, happiness, or current prosperity, the ability of any individual or organization (particularly an economic entity like a business) to rais e the money needed to acquire material thi ngs and resources is in some sense a proxy for a financial foundation. The Balance Sheet is the financial statement that attempts to answer the question: “What are the resources ava ilable to the business?” or put more simply “What things does the business own?” Balance Sheet – Purpose A balance sheet shows the resources owned and available to the business It shows the resources of the company - ASSETS. It shows their value. It shows how the ASSETS were acquired. The money to acquire ASSETS can be borrowed / owed – LIABILITIES Or the money to acquire assets can be money that you had already possessed or previously earned - OWNER’S EQUITY The Balance Sheet The Balance Sheet is like a snap shot. Shows information about a company at a moment in time. Chris' Investments Inc. Balance Sheet on 31 December 1994 ASSETS LIABILITIES House $250,000 Mortgage $210,000 EQUITY Inheritance 20,000 Life Savings 20,000 Total Assets $250,000 Liabs + Equity $250,000 Assets Assets are the resources available to a business. Assets include only things that can be SOLD or GIVEN AWAY. (In accounting terms, people are not assets.) Assets are generally good things to have. They represent a potential, future source of cash. Chris' Investments Inc. Balance Sheet on 1 January 1995 ASSETS LIABILITIES Car 20,000 Car Loan 20,000 House 250,000 Mortgage 210,000 Wife (not an asset) EQUITY Inheritance 20,000 Life Savings 20,000 Total Assets $270,000 = Liabs + Equity $270,000 Liabilities Liabilities are things that are BORROWED or OWED. Liabilities are one of the two ways of acquiring an asset. Example: To buy a house, you obtain a mortgage. Example: To buy a car, you get a car loan. Liabilities include: loans, obligations, promises to pay, contracts unfu lfilled, claims against an asset. Equity Repesents assets that have been PURCHASED or EARNED. Equity is the other way you acquire an asset. Example: To buy a house, you make a down payment. Example: To purchase a house, you use a family inheritance to supply 20% of the purchase price. The Balance Sheet The things you have (ASSETS) must have been financed. Either you borrowed the finance (LIABILITIES). Or you paid from your own efforts or resources (EQUITY). Therefore: ASSETS = LIABILITIES + EQUITY Two sides must be equal. They must "balance". What A Balance Sheet Can Tell Us Shows resources (ASSETS) available to business. It shows their value. Is a company BIG or SMALL? Is a company growing? Or is it shrinking? It shows how the ASSETS were acquired. Has the company borrowed heavily (LIABILITIES)? Or are they owned (EQUITY)? The Balance Sheet The Balance Sheet is like a snap shot. It shows information about a company at a moment in time. It shows the resources of the company - ASSETS. It shows their value. It shows how the ASSETS were acquired. borrowed or owed - LIABILITIES. ASSETS can be < owned or earned - EQUITY. Chris' Real Estate Investments Inc. Balanhceet on 31 December 1994 ASSETS LIABILE IQIEITY S E I T I L I B A I L | House $250,0|0M0ortga$210,000 | Y T I U Q E | | | | Total Assets $250,000 | Liabs + Equity $250,000 s e c r u o S = s e c r u o s e R Assets Assets are the resources available to the company. Assets only include things that can be SOLD or GIVEN AWAY. (In accounting terms, people are not assets.) Assets are generally good things to have. They represent a potential, future source of cash. Chris' Investments Inc. Balance Sheet on 31 December 1994 + S E I T I L I B A I L S T E S S A EQUITY | S E I T I L I B A I L | Car 20,000 | Car Loan House 250,000 | Mortgage Wife (not an asset) | Y T I U Q E | | Inheritance | Life Savings | Total Assets $270,000 = Liabs + Equity Liabilities Liabilities are things that are BORROWED or OWED. Liabilities are one of the two ways of acquiring an asset. Examples: To buy a house, you obtain a mortgage. To buy a car, you get a car loan. Liabilities are like vice: good only in moderation. Liabilities include: loans, obligations, promises to pay, contracts unfulfilled, claims against an asset. Example: You own your house, but if it's financed by a mortgage you are obliged to send the bank a monthly payment. Equity Equity represents assets that have been PURCHASED EAoRNED. Equity is the other way you acquire an asset. Example: To buy a house, you make a down payment. Equity is like virtue: over reliance limits your fun. Equity includes: assets (or portion of an asset) that are financed by savings, assets free of debt or obligation, assyou have earned. Example: To purchase a house, you use a family inheritance to supply 20% of the purchase price. The Balance Sheet The things that you have (ASSETS) must have been financed. Either you borrowed the finance (LIABILITIES). Or you paid from your own efforts or resources (EQUITY). Therefore: ASSETS = LIABILITIES + EQUITY The two sides must be equal. They must "balance". Chris' Investments Inc. Balance Sheet on 31 December 1994 ASSETSLIABILE ITQIEITY | S E I T I L I B A I L | Car 20,000 | Car Loan 20,000 House 250,000 | Mortgage 210,000 | Y T I U Q E | | Inheritance | Life Savings | Total Assets $270,000 = Liabs + Equity $270,000 What A Balance Sheet Can Tell Us REMEMBER: Balance sheet is an inventory of the resources (ASSETS) available to a company. It shows their value. It is a snap shot taken at a moment in time. It shows how the ASSETS were acquired. Were they borrowed (LIABILITIES)? Or are they owned (EQUITY)? A BALANCE SHEET TELLS US: Is a company BIG or SMAL
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