(A.K.A. Creditor)

Debt investment (you are borrowing money to the company, who is obligated to pay you back, usually with fixed interest rate) 

1. Obligated to repay the principal
2. Guaranteed a fixed rate of interest
3. Does not share in the profits/losses of the company
4. Company is legally obligated to make payments and to make them on time 

Owner;

Characteristics of an owner

Equity Investment (you are investing your money into the company)

1. The company is not obligated to repay the amount invested
2. No guarantee of interest
3. Does share in the profits/losses of company

Hopefully...

Net income (profit) INCREASES -->

Value of company INCREASES -->

Value of investment INCREASES 

1) Sole Proprietorship;

2) Partnership;

3) Corporation 

A type of general form of ownership;

ONE owner, quite easily formed

A type of general form of ownership;

TWO or MORE owners. They share in the profits/losses of company,

fairly easily formed 

A type of general form of ownership;

ONE OR MORE owners;

Very difficult to start; Paperwork, formal requirements, meetings, etc 

 ((i.e. AAPL, GE, IBM, etc))

One unit of ownership.

(If you own 10 of all 20 total shares being sold, you are a 50% owner & are entitled to 50% of all profits/losses)

• Interest, Principal (both = cash)

• ***Information about cash!

Profit (A.K.A. "net income") INCREASES -->

Value of company INCREASES -->

Value of your investment INCREASES 

The four financial statements;

And # of yrs required on the statements 

1. Balance Sheet (2 years)
2. Income Statement (3 years)
3. Statement of Changed in Owners' Equity (3)
4. Statement of Cash Flows (3)

Issue all four financial statements to the public each year

One of the four financial statements;

Shows the financial status of a company at a particular point in time 

1. Economic resources (aka Assets) of the company
2. Claims against the economic resources (sources of the resources) 

A.K.A. "assets";

Items a company uses that are expected to benefit future operations (help business make money in the future)

Items to be sold to consumers

Service Co.: NO inventory

Merchandising Co.: inventory 

Hypothetical Balance Sheet for Lawnatics Corporation

On a particular date........

List: Economic Resources 

(A.K.A. ASSETS!)

• Equipment
• Employees (NOT on business sheet)
• Supplies (trucks as well)
• Land,
• Building,
• CASH,
• Prepaid...advertising, insurance, rent;
• Accounts Receivable ("A/R") 

"Accounts Receivable"

When you borrow money--

the interest starts the next day 

A/R = Assets

A/P = Liability (Obligation) 

Hypothetical Balance Sheet for Lawnatics Corporation

On a particular date........

List: Claims against the Assets- by CREDITORS:

• Loans = Notes Payable = N/P
• Wages / Salaries Payable
• Accounts Payable = A/P
• Interest Payable
• Taxes Payable
• Unearned Revenue 

Claims against the economic resoureces (i.e., claims against the assets)

Two different groups of people who have claims against the assets:

1. Creditors (Lendors)

2. Owners 

Claims against the assets by Creditors-

Remember, who are the creditors?

Claims against the assets by OWNERS-

Remember, who are the owners?

Contributed cash to company in exchange for stock (ownership interest)

--They do share in the profits/losses of the company

Profits INC -> value of investment INC -> Sell for profit 

What are the two ways an owner can acquire equity (claims against the assets) in a company: 

1) Contribute cash to comany in exchange for STOCK

2) From PROFIT 

The equity section is, therefore, divided into two major sections to represent the two sources of equity: 

1) Contributed Capital

2) Retained Earnings 

Represents claims against the assets by the owners contributing cash to company in exchange for stock

Capital = Stock! 

Represents claims against the assets by the owners from profits
 

On a hypothetical Balance Sheet, explain what would happen to the following transaction:

 An owner invests $10,000 cash in the business in exchange for stock

An owner invests $10,000 cash in the business in exchange for stock;

1) Since it is cash, you add $10k to "cash" under ASSETS

2) You would add $10k to C.C. of EQUITY of LIABILITIES

On a hypothetical Balance Sheet, explain what would happen to the following transaction:

 The business purchases equipment for $2k on credit

1) Equipment is not inventory, and you add $2k to "cash" under ASSETS

2) Add $2k to "A/P" under LIABILITIES 

On a hypothetical Balance Sheet, explain what would happen to the following transaction:

 The business purchases equipment for $5k with cash

1) Subtract $5k from "cash" under ASSETS

2) Add $5k to "equipment" under ASSETS 

On a hypothetical Balance Sheet, explain what would happen to the following transaction:

The business borrows $3k cash from a bank 

The business borrows $3k cash from a bank

1) Add $3k to "cash" under ASSETS

2) Add $3k to N/P under LIABILITIES 

On a hypothetical Balance Sheet, explain what would happen to the following transaction:

The business purchases $1k of inventory on credit 

The business purchases $1k of inventory on credit

1) On credit equals cash; add $1k to "inventory" under ASSETS

2) Add $1k to "A/P" under ASSETS 

On a hypothetical Balance Sheet, explain what would happen to the following transaction:

The business pays for the $1k worth of inventory bought in the other transaction 

The business pays for the $1k worth of inventory bought in the other transaction

1) Subtract $1k from "cash" under ASSETS

2) subtract $1k from "A/P" under LIABILITIES 

One of the four financial statements:

Provides a measure of the firm's accomplishments (profit) for a specified period of time

Theoretically there are two wasy one can measure the firm's accomplishments 

1) Net Operating Cash Flow

2) Net Income (N/I) 

Cash receipts from providing goods/services to customers

- Cash disbursements from providing goods/services to customers

Net operating cash flow (cash from operations) 

This way recognizes accomplishments according to change in cash. 

Revenue

- Expenses

Net Income 

Cash is irrelevant in measuring accomplishments 

Revenue are EARNINGS;

Earned when the service is provided

-or-

When sale/delivery of inventory has taken place (whether cash is received is irrelevant) 

This is called the "Revenue Recognition Principle" 

COST of making the revenue;

Costs are dedeucted from the income statement and becomes expenses in the period of which they help to generate revenue.

This is called "The Matching Principle" 

"Revenue Recognition Principle";

"Matching Principle"

"Revenue Recognition Principle" is when to recognize revenue;

Measuring accomplishments per "Revenue Recognition Principle" & "Matching Principle"

This is a better way to measure a company's actions, it appears on the B/S, I/S and Change in Equity  financial statements

Point in time vs. Period of time description;

Balance and Income Statement use which type? 

B/S is what we call a Point-in-time description

(B/S is prepared on the last day of the acctg period); 

I/S is what we call a Period-of-time description 

The Statement of Changes in [Owners'] Equity

Beginning Contributed Capital (from last yr)

+ Stock Issued

Ending Contributed Capital 

Beginning Retained Earnings (from last yr)

+ Net Income

- Dividends

Ending Retained Earnings

Ending R.E. goes onto the Balance Sheet 

Distributions of accumulated profits that are paid to the owners (usually in the form of cash), as a return on their investment

1. Not on Income Stmt
2. Not an expense (does not increase revenue)
3. No obligation to pay dividends (some companies choose to) 

Explains the change in cash from one balance sheet date to the next balance sheet date by showing all sources and uses of cash for the company over the specified period of time

EX: Comparative Balance Sheet

Year 2    Year 1

Cash:        $15k     $10k              

The Statement of Cash Flows is Divided into 3 major sections:

Cash flows from operating activities

Cash flow from investing activities

Cash flow from financing activities