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Simple Model of a BusinessSimple Model of a Business“The Firm”

INPUTS Value added

conversion

OUTPUTS

Capital (financing) Property, Plant, EquipmentRaw MaterialsLaborInventoryGoods & Services

Delivery of Product or Service

Acquisition/Payment Cycle Sales/Collection Cycle

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2

Because a corporation is a separate legal entity, it can . . . Own assets. Incur liabilities. Sue and be sued. Enter into contracts independent of the

stockholder owners.

Many Americans own stock through a mutual fund or pension program.

CorporationsCorporations

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Owners of common stock generally receive the following rights: Voting (in person or by proxy). Distributions of profits. Distributions of assets in a liquidation. Offers to purchase shares of a new stock

issue (pro rata basis).

Ownership of a CorporationOwnership of a Corporation

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Who needs accounting information?Who needs accounting information?

A) Management

B) Those with direct financial interest Current or potential investors Current or potential creditors

C) Those with an indirect financial interest » Tax Authorities» Regulatory Agencies» Economic Planners» Labor unions, financial advisors, others.

D) Employees

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Financial Accounting InformationFinancial 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

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Assets = Claims

Assets = Liabilities + Equity

Asset: something of value Liability: something owed (creditors’

share of the assets) Equity: what remains (owner’s share of

the assets)

The Accounting EquationThe Accounting Equation

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There are two sources of equity equity “contributed” by owners equity “earned” by operations

Expanded accounting equation:

ASSETS =ASSETS = LIABILITIESLIABILITIESCONTRIBUTED CONTRIBUTED

CAPITALCAPITALRETAINED RETAINED EARNINGSEARNINGS++ ++

Equity: The Owner’s ShareEquity: The Owner’s Share

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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 tothe firm’s assets.

ASSETS =ASSETS = LIABILITIESLIABILITIESCONTRIBUTED CONTRIBUTED

CAPITALCAPITALRETAINED RETAINED EARNINGSEARNINGS++ ++

Equity: The Owner’s ShareEquity: The Owner’s Share

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Four Basic Financial StatementsFour Basic Financial Statements

Balance SheetBalance SheetAssets = Liabilities + Equity

Income StatementIncome StatementRevenues - Expenses = Net income

Statement of Changes in Statement of Changes in Owner’s EquityOwner’s EquityBeginning equity + Contributions + Net income -

Distributions = Ending equity

Statement of Cash FlowsStatement of Cash FlowsCash inflow - Cash outflow = Net cash flow

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Tom’s Wear, Inc.Tom’s Wear, Inc.Income StatementIncome Statement

For the Month Ended Jan. 31, 2001For the Month Ended Jan. 31, 2001

Revenue

Sales $900

Expenses

Cost of sales 360

Advertising 50

Interest 5

Total expenses 415

Net income $485

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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Changes in Owner’s EquityStatement of Changes in Owner’s Equity

For the month ended Jan. 31, 2001For 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

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Tom’s WearTom’s WearBalance SheetBalance Sheet

At Jan. 31, 2001At Jan. 31, 2001

Assets Liabilities + Shareholder’s Equity

Cash $5,345 Note payable -0-

Inventory $ 40

Common stock, T. Phillips $5,000Total assets $ 5,385 Retained earnings 385

Total liabilities + $ 5,385SH’s Equity

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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Cash FlowsStatement of Cash Flows

For the month ending Jan. 31, 2001For the month ending Jan. 31, 2001

Cash from Operating Activities

Cash from Investing Activities

Cash from Financing Activities

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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Cash FlowsStatement of Cash Flows

For the month ended Jan. 31,2001For 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

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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Cash FlowsStatement of Cash Flows

For the month ended Jan. 31, 2001For 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-

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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Cash FlowsStatement of Cash Flows

For the month ended Jan. 31, 2001For 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

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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Cash FlowsStatement of Cash Flows

For the month ended Jan. 31, 2001For the month ended Jan. 31, 2001Cash 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 contributions 5,000

Dividends (100)

Total Cash from Financing 4,900

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Tom’s Wear, Inc.Tom’s Wear, Inc.Statement of Cash FlowsStatement of Cash Flows

For the month ended Jan. 31, 2001For the month ended Jan. 31, 2001Cash 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 contributions 5,000

Dividends (100)

Total Cash from Financing 4,900

Net Increase in Cash $ 5,345