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Chapter 1

ACCT 1201 Chapter Notes - Chapter 1: Sole Proprietorship, Cash Flow Statement, Financial Statement

Course Code
ACCT 1201
Ganesh Krishnamoorthy

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Accounting Chapter 1 Four Financial Statements
Creditors make money by charging interest on loans
Dividends cash payments made to stockholders.
The Accounting System
Managers (Internal Decision makers)
Stockholders & Creditors (External Decision Makers)
Financing Activities borrowing or paying back money to lenders and
receiving additional funds form stockholders or paying them dividends
Investing Activities buying or selling equipment used in the
production process
Operating Activities the day-to-day processes that ensure the
operations of the company to function.
Marketing Managers and Credit Managers use customers financial
statements to decide whether to extend credit to their customers
Supply Chain Managers analyze suppliers’ financial statements to
see whether the suppliers have the resources to meet demand and invest in
future development.
Human Resource Managers use financial statements as a basis for
contract negotiations over pay rates
The Four Basic Financial Statements
Balance Sheet reports the financial postion of a company at a
point in time such as assets, liabilities, and stockholders equity.
oUsed to judge whether the company has sufficient resources
to operate and tells how much money they will get if they sell
oDebts are important because creditors and stockholders are
concerned about whether the company has sufficient sources
of cash to pay its debts.
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Basic Accounting Equation (Balance Sheet Equation) Assets =
Liabilities + Stockholders Equity
Assets are the economic resources owned by the entity
Accounts Receivables product sold on credit
Liabilities indicate the amount of financing provided by creditors
Stockholders Equity indicates the amount of financing provided
by owners of the business and reinvested earnings
oActs as a protective cushion in the case that the company has
to sell all of tis assets.
Common Stock the investment of cash and other assets from
stockholders is common stock (increases when owners give money
to the company in exchange for stock_
Retained Earnings The amount of profits reinvested into the
business. (Increases when the company earns and keeps its profits)
The Income Statement
Income Statement reports the accountant’s primary measure of
performance of a business, revenue less expenses during the
accounting period.
Net income = Profit
Accounting period the time period covered by the financial
Revenue cash earned for the sale of a good counted as revenue
whether or not the customer has paid for the product yet
Expenses represent the dollar amount of resources used to earn
revenue. Expenses from one accounting period may be paid for in
another period.
Net Income (bottom line) total revenue – total expenses
oBecause of some expenses that had not been paid yet or
because of credits that have not been collected net income
normally does not equal the net cash generated by
Statement of Stockholders’ Equity = Assets - Liabilites
Reports the changes in each of the company’s stockholders equity
accounts during that period.
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