Copyright 2003 Prentice Hall Publishing1 Simple Model of a Business “The Firm” INPUTS Value added conversion OUTPUTS Capital (financing) Property, Plant, Equipment Raw Materials Labor Inventory Goods & Services Delivery of Product or Service Acquisition/Payment CycleSales/Collection Cycle

Copyright 2003 Prentice Hall Publishing2 l Because a corporation is a separate legal entity, it can... n Own assets. n Incur liabilities. n Sue and be sued. n Enter into contracts independent of the stockholder owners. l Many Americans own stock through a mutual fund or pension program. Corporations

Copyright 2003 Prentice Hall Publishing3 l Owners of common stock generally receive the following rights: n Voting (in person or by proxy). n Distributions of profits. n Distributions of assets in a liquidation. n Offers to purchase shares of a new stock issue (pro rata basis). Ownership of a Corporation

Copyright 2003 Prentice Hall Publishing4 Who needs accounting information? A) Management B) Those with direct financial interest lCurrent or potential investors lCurrent or potential creditors C) Those with an indirect financial interest »Tax Authorities »Regulatory Agencies »Economic Planners »Labor unions, financial advisors, others. D) Employees

Copyright 2003 Prentice Hall Publishing5 Financial 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

Assets = Claims Assets = Liabilities + Equity l Asset: something of value l Liability: something owed (creditors’ share of the assets) l Equity: what remains (owner’s share of the assets) The Accounting Equation

l There are two sources of equity n equity “contributed” by owners n equity “earned” by operations l Expanded accounting equation: ASSETS = LIABILITIES CONTRIBUTED CAPITAL RETAINED EARNINGS ++ Equity: The Owner’s Share

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 to the firm’s assets. ASSETS = LIABILITIES CONTRIBUTED CAPITAL RETAINED EARNINGS ++ Equity: The Owner’s Share

Four Basic Financial Statements l Balance Sheet Assets = Liabilities + Equity l Income Statement Revenues - Expenses = Net income l Statement of Changes in Owner’s Equity Beginning equity + Contributions + Net income - Distributions = Ending equity l Statement of Cash Flows Cash inflow - Cash outflow = Net cash flow

Copyright 2003 Prentice Hall Publishing10 Tom’s Wear, Inc. Income Statement For the Month Ended Jan. 31, 2001 Revenue Sales $900 Expenses Cost of sales 360 Advertising 50 Interest 5 Total expenses 415 Net income $485

Copyright 2003 Prentice Hall Publishing11 Tom’s Wear, Inc. Statement of Changes in Owner’s Equity For 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

Copyright 2003 Prentice Hall Publishing12 Tom’s Wear Balance Sheet At Jan. 31, 2001 Assets Liabilities + Shareholder’s Equity Cash$5,345Note payable -0- Inventory$ 40 Common stock, T. Phillips $5,000 Total assets$ 5,385 Retained earnings 385 Total liabilities + $ 5,385 SH’s Equity

Copyright 2003 Prentice Hall Publishing13 Tom’s Wear, Inc. Statement of Cash Flows For the month ending Jan. 31, 2001 Cash from Operating Activities Cash from Investing Activities Cash from Financing Activities

Copyright 2003 Prentice Hall Publishing14 Tom’s Wear, Inc. Statement of Cash Flows For 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

Copyright 2003 Prentice Hall Publishing15 Tom’s Wear, Inc. Statement of Cash Flows For 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-

Copyright 2003 Prentice Hall Publishing16 Tom’s Wear, Inc. Statement of Cash Flows For 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 Publishing17 Tom’s Wear, Inc. Statement of Cash Flows For 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 Owner’s contributions5,000 Dividends (100) Total Cash from Financing4,900

Copyright 2003 Prentice Hall Publishing18 Tom’s Wear, Inc. Statement of Cash Flows For 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 Owner’s contributions5,000 Dividends (100) Total Cash from Financing4,900 Net Increase in Cash $ 5,345