Tuesday January 12th 1999
Announcements:

Syllabus is in packet available at SBS. See TA Mike for exam conflicts. Bring book to class on Thursday.

Lecture notes:

I) Objective: to provide information to users outside of the particular organization. This information is in the form of
financial statements.

A) Income Statement: a profitability statement prepared to represent a period of time which tells how much money the
business made. 
 
B) Balance Sheet: a listing of assets liabilities and stockholders equity at one point in time.
1) Assets (A): the resources a firm has control of.
2) Liabilities (L): debt (money borrowed or owed).
3) Stockholder's Equity (SE):
a) contributed capital: capital/assets given by the owners their investment in the organization
b) retained earnings: accumulative profits of the organization  

C) Statement of Retained Earnings: it is required but we will discuss this in a later class. 

D) Cash Flow Statement: provides information to users of the data regarding the cash flow (where the cash came
from and went).

*See page 24 of the textbook for examples.

III) The Accounting Cycle:

A) The sequence of events which must occur in order to provide a financial statement.

B) Seven Steps:
1) a transaction takes place.
examples: buying supplies borrow money sell product or services loan money pay employees.
2) the transaction is analyzed (by an accountant). They look at the information and find out what is going on.
3) a journal entry is prepared.
4) the journal entry is posted to the general ledger.
5) adjusting journal entries are made.
6) closing journal entries are made.
7) the financial statements are prepared

*We will go over steps 3-6 in the next few days.

IV) The Balance Sheet or Accounting Equation:

ASSETS = LIABILITIES + STOCKHOLDER'S EQUITY (A = L + SE)


Example Using the Equation:

You are going to start a business.
1) You deposit $10 000 into your business checking account.
A = L + SE: $10 000 = 0 + $10 000
2) The business borrows $5 000 from a bank.
A = L + SE: $15 000 = $5 000 + $10 000
3) The business purchases $2 000 computer. The business pays cash.
A = L + SE: $15 000 = $5 000 + $10 000
The equation stays the same because the computer is still an asset. However the $15 000 in assets now
consists of $13 000 cash and a $2 000 computer.
4) The business provides services on account to a customer. The customer was billed $1 500.
A = L + SE: $16 500 = $5 000 + $11 500
The $16 500 in assets is made up of $13 000 cash $2 000 computer and $1 500 in accounts receivable (AR)
(money owed to the company). The SE is now made up of $10 000 contributed capital (CC) and $1 500 in
retained earnings (RE).
5) Employees are paid $300 cash.
A = L + SE: $16 200 = $5 000 + $11 200
Paying employees is an expense which causes profits and retained earnings to fall. Assets are now made up of
$12 700 cash $2 000 computer and $1 500 in AR. SE consists of $10 000 CC and $1 200 RE.
Examples of expenses: rent utilities advertising employees
6) The company pays $500 cash rent on the office building.
A = L + SE: $15 700 = $5 000 + $10 700
Rent is another expense so assets now consist of $12 200 cash $2 000 computer and $1 500 AR. SE is
made up of $10 000 CC and $700 RE.
7) The client pays the $1 500 due to the business (see transaction 4).
A = L + SE: $15 700 = $5 000 + $10 700
Assets now consist only of $13 700 cash and the $2 000 computer because the money was paid.