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CHAPTER 2

Assets, Liabilities and Equity.


The Accounting Equation
(Introduction to Financial Statements)

THE ACCOUNTING EQUATION




The accounting equation presents the


resources of the business and the claims to
those resources

Economic Resources = Claims to Economic Resources


or

ACCOUNTING EQUATION

Total Assets
=
Total Liabilities
+
Total Stockholders Equity
3

The Accounting Equation


Assets = Liabilities + Owners Equity

Economic
Resources

Claims to
Economic
Resources

ACCOUNTING EQUATION


IT SHOWS THE EQUALITY BETWEEN THE ASSETS


(what the company owns) AND THE CLAIMS TO THEM

FINANCIAL STATEMENTS ARE BASED ON THE


ACCOUNTING EQUATION

THE ACCOUNTING EQUATION




Assets are the economic resources of a


business that are expected to be of benefit in
the future

Claims to assets come from





Liabilities
Owners equity (capital)

The Accounting Equation




Liabilities are debts payable to outsiders, called


creditors

Owners Equity represents the ownership of the


owners




It is the owners claim on the entitys assets


Also known as Stockholders equity
It can be obtained by substracting::


Assets Liabilities = Owners Equity


7

THE ACCOUNTING EQUATION




In a corporation, Owners equity is knows as


Stockholders equity

Stockholders equity consists of two main


categories:



Paid-in capital
Retained earnings

Assets = Liabilities + Stockholders Equity


or
Assets = Liabilities + Paid-in Capital + Retained Earnings
8

THE ACCOUNTING EQUATION




Paid-in (contributed) capital is




The amount invested in the corporation by its


owners
Comprised basically of common stock

THE ACCOUNTING EQUATION




Retained earnings


Is the amount earned by income-producing


activities and kept for use in the business
Is affected by


Revenues - increases in retained earnings from


delivering goods or services
Expenses - decreases in retained earnings that result
from operations

10

COMPONENTS OF RETAINED EARNINGS

Revenues for the


Period

Expenses for the


Period
Start of the
Period
Beginning Balance
of Retained
Earnings

End of the
Period

=
+
-

Net Income (Loss)


for the Period

Dividends for the


Period

Ending Balance of
Retained
Earnings

11

OTHER IMPORTANT ACCOUNTING CONCEPTS




Net income (net earnings)




Net loss


Total revenues exceed total expenses


Total expenses exceed total revenues

Dividends


Distributions to stockholders (usually cash)


generated by net income

12

OWNERS EQUITY


REVENUESINCREASE NET INCOME


RETAINED EARNINGS

EXPENSESDECREASE NET INCOME


RETAINED EARNINGS

DIVIDENDSDECREASE RETAINED EARNINGS


13

OWNERS EQUITY SPECIAL


SITUATIONS


The owners equity of proprietorships and


partnerships


Makes no distinction between paid-in capital and


retained earnings


It does not distinguish what is invested from what is


earned

Accounts for the equity of each owner under the


single heading of Capital

14

FINANCIAL STATEMENTS


THEY ARE:





INCOME STATEMENT
STATEMENT OF RETAINED EARNINGS
BALANCE SHEET
STATEMENT OF CASH FLOWS

EACH OF THEM PROVIDES A DIFFERENT


INFORMATION ABOUT THE COMPANY

15

Question

Answer

Financial Statement

1. How well did the


company perform
during the period?

Revenues
-Expenses
Net income (loss)

Income statement
(Statement of
operations or
Statement of
earnings)

2. Why did the


companys retained
earnings change
during the period?

Beginning R.E.
+Net income (-loss)
-Dividends
Ending R.E.

Statement of retained
earnings (Statement
of stockholders
equity)

Assets = Liabilities +
3. What is the
companys financial
Owners
position at the end of
Equity
the period?

4. How much cash did


the company
generate and spend
during the period?

Balance sheet
(Statement of
financial position)

Operating cash flows Statement of cash


+ Investing cash flow flows
+Financing cash flow
Increase (decrease)
in cash during the
period
16

Income Statement
How well did the company perform during the
month?
Revenues
Expenses
Net Income (Loss)

17

INCOME STATEMENT


It is also known as Statement of Operations

It reports the companys revenues, expenses,


and net income or net loss for the period

It is referred to one fiscal year (12 months)




It may be different from the calendar year

18

Income Statement


Two main categories of items on the Income


Statement:



Revenues and Gains


Expenses and Losses

Net Income = Revenues and Gains - Expenses and Losses

19

INCOME STATEMENT
A IR & S E A T R A V E L , IN C .
In c o m e S ta te m e n t
M o n th E n d e d A p ril 3 0 , 2 0 0 1
Revenue:
S e rv ic e re v e n u e
Expenses:
S a la ry e x p e n s e
Rent expense
U tilitie s
T o ta l e x p e n s e s
N e t In c o m e

$ 8 ,5 0 0
$ 1 ,2 0 0
1 ,1 0 0
400
2 ,7 0 0
$ 5 ,8 0 0

20

INCOME STATEMENT


Revenues are


Increases in retained earnings from delivering


goods or services to customers or clients
Its main source are the companys sales

Expenses are


Decreases in retained earnings that result from


operations
Company incurs in them in order to operate

21

INCOME STATEMENT


REVENUE RECOGNITION PRINCIPLE




The revenue recognition principle dictates that


revenue should be recognized in the accounting period
in which it is earned. But applying this general principle
in practice can be difficult. Some companies improperly
recognize revenue on goods that have not been shipped
to customers. Similarly, until recently, financial
institutions immediately recorded a large portion of their
loan fees as revenue rather than spreading those fees
over the life of the loan
22

INCOME STATEMENT


When a sale is involved, revenue is recognized at the


point of sale. This sales basis involves an exchange
transaction between the seller and the buyer.The sales
price is an objective measure of the amount of revenue
realized. However, two exceptions to the sales basis for
revenue recognition have become generally accepted
the percentage-of-completion method and the
installment method.These methods are left for more
advanced courses

23

INCOME STATEMENT


MATCHING PRINCIPLE (EXPENSE RECOGNITION)




Expense recognition traditionally is tied to revenue


recognition: Let the expense follow the revenue. As you
will learn in Chapter 4, this practice is referred to as the
matching principle. It dictates that expenses be
matched with revenues in the period in which efforts are
made to generate revenues. Expenses are not
recognized when cash is paid, or when the work is
performed, or when the product is produced. Rather,
they are recognized when the labor (service) or the
product actually makes its contribution to revenue.
24

INCOME STATEMENT


But, it is sometimes difficult to determine the


accounting period in which the expense
contributed to revenues. Several approaches
have therefore been devised for matching
expenses and revenues on the income
statement.

25

INCOME STATEMENT


To understand these approaches, you need to


understand the nature of expenses. Costs are the source
of expenses. Costs that will generate revenues only in
the current accounting period are expensed immediately.
They are reported as operating expenses in the income
statement. Examples include costs for advertising, sales
salaries, and repairs. These expenses are often called
expired costs

26

INCOME STATEMENT


Costs that will generate revenues in future


accounting periods are recognized as assets.
Examples include merchandise inventory,
prepaid expenses, and plant assets. These
costs represent unexpired costs. Unexpired
costs become expenses in two ways:

27

INCOME STATEMENT


Expenses include


Cost of goods sold (cost of sales)




The cost of the goods that a company sold to its


customers

Operating expenses


The costs of operating the business

28

INCOME STATEMENT


Operating expenses


Advertising


Depreciation


The expense of using company-owned buildings,


equipment, and furniture

Other operating expenses




The cost to promote the companys products

The costs of salaries, utilities, rent, and supplies

Interest expense


The cost of borrowed money

29

INCOME STATEMENT

30

Statement of Retained Earnings


Beginning Retained Earnings
+ Net Income ( Net Loss)
- Cash Dividends Declared
= Ending Retained Earnings

31

STATEMENT OF
RETAINED EARNINGS


The Statement of Retained Earnings reports


that portion of net income the company has
retained, or kept for use in the business



Net income increases retained earnings


Dividends paid to stockholders decrease retained
earnings


The Board of Directors decides if to pay dividends or not


and in which amount

32

STATEMENT OF
RETAINED EARNINGS
AIR & SEA TRAVEL, INC.
Statement of Retained Earnings
Month Ended April 30, 2001
Retained earnings, April 1, 2001
Add: Net income for the month
Less: Dividends
Retained Earnings, April 30, 2001

0
5,800
$5,800
(2,100)
$3,700

33

Balance Sheet
What is the companys financial position at the
end of a period?
Assets = Liabilities + Owners Equity

34

BALANCE SHEET


It reports the companys assets, liabilities,


and owners equity.
This reflects the companys financial position
at a specific moment in time.
It is dated as of the last day of the period


e.g.: 31-December

35

Balance Sheet


Items are listed within each category in order


by liquidity, with the most liquid listed first.
Assets




Current Assets
Property, Plant and, Equipment
Other Assets

36

Balance Sheet (cont.)




Liabilities



Current Liabilities
Long Term Liabilities

Shareholders Equity



Paid-in Capital
Retained Earnings

37

BALANCE SHEET
AIR & SEA TRAVEL, INC.
Balance Sheet
Assets

Liabilities

Cash
$33,300
Accounts receivable
2,000
Office supplies
500
Land
18,000

Total assets

$53,800

Accounts payable

100

Stockholders Equity
Common stock
50,000
Retained earnings
3,700
Total stockholders equity 53,700
Total liabilities and
stockholders equity
$53,800

38

ASSETS


Current assets are




Those assets which the company expects to convert to


cash, sell, or consume during the next 12 months or within
the business's normal operating cycle if longer than a year

Current assets include:





Cash
Accounts receivable


Merchandise inventory


Amount to be collected from customers who bought


merchandise on credit
The stock of goods the company has for selling to its
customers

Prepaid expenses


Amounts paid but not yet used (e.g. rent, insurance, )


39

ASSETS


Long-term assets are




Those assets which the company expects to hold


longer than the next 12 months or the businesss
normal operating cycle if longer than one year

Long-term assets include






Property: e.g. buildings


Plant: e.g. land
Equipment: e.g. machinery, vehicles,


These are Tangible assets

40

ASSETS


Intangible assets are




Those with no physical form, e.g.:





Trademarks
Patents

Other assets are




Those with small values which do not fall within


any other standard asset category

41

LIABILITIES


Current liabilities are




Debts payable within one year or within the businesss normal


operating cycle if longer than a year

Current liabilities include




Notes payable:


Accounts payable


Amounts owed for goods and services purchased but not yet paid

Short-term expenses payable




Amounts borrowed that the company promises to pay back within


the year

Amounts owed to employees, to the government and interest

Income taxes payable




Amounts owed to the government for income taxes


42

LIABILITIES


Long-term liabilities are




Debts not payable within one year or within the


businesss normal operating cycle if longer than a
year

Long-term liabilities include





Notes payable, long term


Bonds payable

43

OWNERS EQUITY


Owners equity


Represents the shareholders ownership of the


assets of the business

Owners equity of a corporation consists of




Common stock


Amount that owners have paid into the company

Retained earnings

44

BALANCE SHEET (EXAMPLE)

ASSETS
Cash$
Accounts receivable
Supplies
Furniture
Building
Land

Total assets

Hercules, Inc.
Balance Sheet
December 31, 20X8
LIABILITIES
10,000
Accounts payable$
19,000
12,000
Salary payable
1,000
3,000
Note payable
185,000
20,000
Total liabilities
205,000
150,000
STOCKHOLDERS
98,000
EQUITY
Common stock
40,000
Retained earnings
48,000
Total stockholders equity 88,000

$293,000

Total liabilities and


stockholders equity

$293,000

45

Statement of Cash Flows


How much cash did the company generate and
spend during the year?
Operating cash flows
+ Investing cash flows
+ Financing cash flows
Increase (decrease) in cash

46

STATEMENT OF CASH FLOWS




The Statement of Cash Flows reports the


companys cash inflows and outflows from its
major activities as a business:




operating
investing
financing activities

47

Statement of Cash Flows




Three Basic Types of Activities




Cash flows from Operating Activities




Cash flows from Investing Activities




Cash earned from the companys business, buying


goods and services and selling them to customers
Buying and selling long term assets and investments

Cash flows from Financing Activities




It refers to the way the company acquires funds used in


its investing and operating activities. For example:




Borrowing and repaying loans from banks or other lenders


Selling or issuing stock
Paying dividends
48

AIR & SEA TRAVEL, INC.


Statement of Cash Flows
Month Ended April 30, 2001
C a s h flo w s fro m o p e ra tin g a c tiv itie s :
C o lle c tio n s fro m c u s to m e rs
$ 6 ,5 0 0
P a y m e n ts to s u p p lie rs a n d e m p lo y e e s
(3 ,1 0 0 )
N e t c a s h in flo w fro m o p e ra tin g a c tiv itie s
3 ,4 0 0
C a s h flo w s fro m in v e s tin g a c tiv itie s :
A c q u is itio n o f la n d
$ (4 0 ,0 0 0 )
S a le o f la n d
2 2 ,0 0 0
N e t c a s h o u tflo w fro m in v e s tin g a c tiv itie s
(1 8 ,0 0 0 )
C a s h flo w s fro m fin a n c in g a c tiv itie s :
Is s u a n c e (s a le ) o f s to c k
$ 5 0 ,0 0 0
P a y m e n t o f d iv id e n d s
(2 ,1 0 0 )
N e t c a s h in flo w fro m fin a n c in g a c tiv itie s
4 7 ,9 0 0
N e t in c re a s e in c a s h
$ 3 3 ,3 0 0
C a s h b a la n c e , A p ril 1 , 2 0 0 1
0
C a s h b a la n c e , A p ril 3 0 , 2 0 0 1
$ 3 3 ,3 0 0

49

Relationships Among Financial Statements





Income Statement is completed first


Statement of Retained Earnings requires Net
Income to calculate an ending balance
Balance Sheet requires the ending balance of
retained earnings to balance.
Statement of Cash Flows reports increases
and decreases in cash and must agree with
the Cash balance on the balance sheet

50

Relationships Among
the Financial Statements
ABC Company
Income Statement
Year Ended December 31, 2006
Revenues
$700,000
Expenses
670,000
Net income
$ 30,000

51

Relationships Among
the Financial Statements
ABC Company
Statement of Retained Earnings
Year Ended December 31, 2006
Beginning retained earnings
$180,000
Net income
30,000
Cash dividends
(10,000)
Ending retained earnings
$200,000

52

Relationships Among
the Financial Statements
ABC Company
Balance Sheet
December 31, 2006
Assets
Cash
All other assets
Total assets

$ 25,000
275,000
$300,000
Liabilities

Total liabilities

$120,000
Stockholders equity

Common stock
Retained earnings
Other equity
Total liabilities and stockholders equity

40,000
200,000
(60,000)
$300,000
53

Relationships Among
the Financial Statements
ABC Company
Statement of Cash Flows
Year Ended December 31, 2006
Net cash provided by operating activities$ 90,000
Net cash used for investing activities
(110,000)
Net cash provided by financing activities 40,000
Net increase in cash
20,000
Beginning cash balance
5,000
Ending cash balance
$ 25,000

54

AIR & SEA TRAVEL, INC.


Statement of Cash Flows
Month Ended April 30, 2001
Cash flows from operating activities:
Collections from customers
Payments to suppliers and employees
Net cash inflow from operating activities
Cash flows from investing activities:
Acquisition of land
$(40,000)
Sale of land
22,000
Net cash outflow from investing activities
Cash flows from financing activities:
Issuance (sale) of stock
$ 50,000
Payment of dividends
(2,100)
Net cash inflow from financing activities
Net increase in cash
Cash balance, April 1, 2001
Cash balance, April 30, 2001

AIR & SEA TRAVEL, INC.


Statement of Retained Earnings
Month Ended April 30, 2001

Retained earnings, April 1, 2001


Add: Net income for the month

0
5,800
$5,800
Less: Dividends
(2,100)
Retained Earnings, April 30, 2001 $3,700

AIR & SEA TRAVEL, INC.


Income Statement
Month Ended April 30, 2001
$ 6,500
(3,100)
3,400

(18,000)

47,900
$ 33,300
0
$ 33,300

Revenue:
Service revenue
Expenses:
Salary expense
Rent expense
Utilities
Total expenses
Net Income

$8,500
$1,200
1,100
400
2,700
$5,800

AIR & SEA TRAVEL, INC.


Balance Sheet
April 30, 2001
Assets

Liabilities

Cash
$33,300
Accounts receivable 2,000
Office supplies
500
Land
18,000

Total assets

_______
$53,800

Accounts payable

100

Stockholders Equity
Common stock
50,000
Retained earnings
3,700
Total stockholders equity 53,700
Total liabilities and
_______
stockholders equity
$53,800

55

Business Transactions


A business transaction is any event that:




Affects the financial position of the business (i.e. it has a financial impact
on it) and,

May be reliably recorded.




This implies that they should be measured with reliability.

Business Transactions involve give-get exchanges (e.g.:


 give merchandise (sale)
 get cash (collect)
Transactions must be stated in monetary terms to be entered in the
books.

56

THE ACCOUNT


The account is



Basic component of an accounting system


A detailed record of changes (increases and decreases)
that have occurred in a particular asset, liability, or
stockholders (owners) equity item during a period of time
Grouped into three categories, according to the accounting
equation:




Assets
Liabilities
Owners equity

57

ACCOUNTS CATEGORIES

ASSETS

LIABILITIES

STOCKHOLDERS
EQUITY

Cash
Accounts Receivables
Inventory
Prepaid Expenses
Land, Buildings
Equipment, etc.
Accounts Payables
Notes Payables
Bonds
Bank Loans, etc.
Common Stock
Retained Earnings
Dividends
Revenues
Expenses
58

THE ACCOUNT


Assets are the economic resources that benefit the


business now and in the future

There are different types of accounts


 Within current and long-term assets
 Each of them reflects the occurred business
transaction with that asset

59

THE ACCOUNT


The Cash account





The Accounts Receivable account




Shows the cash effects of a businesss transactions


Includes money and any medium of exchange that a
bank accepts at face value
Represents a promise for future receipt

The Inventory (Merchandise, Merchandise


Inventory) account


Is merchandise held for sale to customers

60

THE ACCOUNT


The Notes Receivable account




Is a written pledge that the customer will pay a fixed


amount of money by a certain date

Prepaid expenses accounts




Are expenses paid in advance

61

THE ACCOUNT


The Land account




The Buildings account




Is a record of the cost of land a business owns and uses


in its operation
Is the cost of a businesss buildings, e.g., office and
manufacturing plant

Equipment, Furniture, and Fixtures accounts




Record separate asset accounts for each type of


equipment

62

THE ACCOUNT


Liabilities are the debts of the company




The Notes Payable account




The Accounts Payable account




Includes the amounts that the business must pay on


promissory notes
Represents the promise to pay off debts arising from
credit purchases

Accrued Liability accounts




Are expenses that have not yet been paid, e.g., Interest
Payable, Salary Payable, and Income Taxes Payable

63

THE ACCOUNT


Stockholders (Owners) equity is the owners


claims to the assets of a corporation



A proprietorship uses a unique account


A partnership uses separate accounts for each
owners capital balance and withdrawals
A corporation uses separate capital accounts for
each source of capital

64

THE ACCOUNT


The Common Stock account




The Retained Earnings account




Represents the owners investment in the corporation


Shows the cumulative net income earned by the
corporation over its lifetime, minus cumulative net losses
and dividends

The Dividends account




Indicates a decrease in retained earnings when


dividends are paid by the corporation

65

THE ACCOUNT


Revenues


Are reported in a separate account for each type of


revenues originated as consequence of delivering goods
or services to customers, e.g., Sales Revenues, Service
Revenues, Rent Revenues, Interest Revenues

Expenses


Are reported in a separate account for each type of


expense, e.g., Cost of Sales, Salary Expense, Rent
Expense, Advertising Expense, Utilities Expense

66

ACCOUNTING FOR BUSINESS


TRANSACTIONS


A business transaction is any event that both


affects the financial position of the business
entity and can be reliably recorded

67

ACCOUNTING FOR BUSINESS


TRANSACTIONS

Consider the following transactions for


Air & Sea Travel, Inc., and their effect
on the accounting equation

68

ACCOUNTING FOR BUSINESS


TRANSACTIONS
TRANSACTION 1
The owners invest $50,000 of their money to begin
the business, and Air & Sea Travel issues common
stock to them

(1)

Assets
Cash
+50,000

Liabilities

Stockholders' Equity
Common Stock
+50,000

69

ACCOUNTING FOR BUSINESS


TRANSACTIONS
TRANSACTION 2
Air & Sea Travel purchases land for a future office
location, paying cash of $40,000

(1)
(2)

Assets
Cash + Land
50,000
-40,000 + 40,000
10,000
40,000

Liabilities
=

Stockholders' Equity
Common Stock
+50,000
_______
50,000

70

ACCOUNTING FOR BUSINESS


TRANSACTIONS
TRANSACTION 3
The business buys stationery and other office
supplies, agreeing to pay $500 to the office-supply
store within 30 days

Bal.
(3)
Bal.

Cash
10,000
_____
10,000

Assets
Office
+ Supplies +
+500
500

Land
40,000 =
_____
40,000

Liabilities
Accounts
Payable
+500
500

Stockholders' Equity

Common Stock
50,000
_____
50,000

71

ACCOUNTING FOR BUSINESS


TRANSACTIONS
TRANSACTION 4
Air & Sea Travel earns service revenue of $5,500
and collects this amount in cash

Bal.
(4)
Bal.

Cash
10,000
+5,500
15,500

Assets
Office
+ Supplies +
500
_____
500

Land
40,000
_____
40,000

Liabilities
Accounts
Payable
500
_____
500

+
+

Stockholders' Equity
Retained
Common Stock
+
Earnings
50,000
_____
+5,500
50,000
5,500

72

ACCOUNTING FOR BUSINESS


TRANSACTIONS
TRANSACTION 5
Air & Sea Travel performs services for customers on
account for $3,000
Assets

Liabilities

Accounts
Cash
Bal.

15,500

(5)

_____

Bal.

15,500

Receivable

Office
+

Supplies

Stockholders' Equity

Accounts
+

Land

500

40,000

+3,000

_____

3,000

500

Payable

Retained
+

Common Stock

Earnings

500

50,000

5,500

_____

_____

_____

+3,000

40,000

500

50,000

8,500

73

ACCOUNTING FOR BUSINESS


TRANSACTIONS
TRANSACTION 6
Air & Sea Travel pays $2,700 for the following cash
expenses: office rent $1,100, employee salary
$1,200, and utilities $400
Assets
Accounts
Cash +
Bal.

15,500

(6)

-1,100

Receivable
3,000

Liabilities
Office

Supplies
500

Stockholders' Equity

Accounts
+

Land

Payable

40,000

500

Retained
+

Common Stock
50,000

Earnings
8,500
-1,100

-1,200

Bal.

-1,200

-400

_____

_____

_____

_____

_____

-400

12,800

3,000

500

40,000

500

50,000

5,800

74

ACCOUNTING FOR BUSINESS


TRANSACTIONS
TRANSACTION 7
Air & Sea Travel pays $400 to the store from which it
purchased $500 worth of office supplies in
Transaction 3
Assets
Accounts
Cash +

Receivable

Liabilities
Office

Supplies

Stockholders' Equity

Accounts
+

Land

Bal.

12,800

3,000

500

40,000

(7)

-400

_____

_____

Bal.

12,400

3,000

500

Payable

Retained
+

Common Stock

Earnings

500

50,000

5,800

_____

-400

_____

_____

40,000

100

50,000

5,800

75

ACCOUNTING FOR BUSINESS


TRANSACTIONS
TRANSACTION 8
The owners remodel their home at a cost of
$30,000, paying cash from personal funds
This event is a transaction of the personal
entity, not the business entity
No transaction is recorded for Air & Sea Travel

76

ACCOUNTING FOR BUSINESS


TRANSACTIONS
TRANSACTION 9
The business collects $1,000 from a customer on
account
Assets
Accounts
Cash +

Receivable

Bal.

12,400

3000

(9)

+1,000

-1,000

Bal.

13,400

2000

Liabilities
Office

Supplies

Stockholders' Equity

Accounts
+

Land

500

40,000

_____
500

Payable

Retained
+

Common Stock

Earnings

100

50,000

5,800

_____

_____

_____

_____

40,000

100

50,000

5,800

77

ACCOUNTING FOR BUSINESS


TRANSACTIONS
TRANSACTION 10
Air & Sea Travel sells land for a price of $22,000,
which is equal to the amount it paid for the land
Assets
Accounts
Cash +

Receivable

Liabilities
Office

Supplies

Bal.

13,400

2,000

500

(10)

+22,000

_____

_____

Bal.

35,400

2,000

500

Stockholders' Equity

Accounts
+

Land
40000
-22,000
18000

Payable
=

Retained
+

Common Stock

Earnings

100

50,000

5,800

_____

_____

_____

100

50,000

5,800

78

ACCOUNTING FOR BUSINESS


TRANSACTIONS
TRANSACTION 11
The corporation declares a dividend and pays
$2,100 cash to the stockholders
Assets
Accounts
Cash +

Receivable

Liabilities
Office

Supplies

Stockholders' Equity

Accounts
+

Land

Bal.

35,400

2,000

500

18,000

(11)

-2,100

_____

_____

Bal.

33,300

2,000

500

Payable

Retained
+

Common Stock

Earnings

100

50,000

5,800

_____

_____

_____

-2,100

18,000

100

50,000

3,700

79

ACCOUNTING FOR BUSINESS


TRANSACTIONS


The table on the next slide summarizes the 11


preceding transactions and provides the data
that Air & Sea Travel will use to create its
financial statements


Data for the Statement of cash flows are aligned under the
Cash account
Income statement data appear as revenues and expenses
under Retained Earnings
The Balance sheet data are composed of the ending
balances of the assets, liabilities, and stockholders equities
The Statement of retained earnings, which shows net income
(loss) and dividends, can be prepared from the Retained
Earnings column
80

ANALYSIS OF TRANSACTONS

Assets
Accounts
Cash +
(1)

+50,000

(2)

-40.000

Receivable

(7)

Supplies

Stockholders' Equity

Accounts
+

Land

Payable

Retained
+

Common Stock

Earnings

+40,000
+500

+500

+5,500

(5)
(6)

Office

+50,000

(3)
(4)

Liabilities

+5,500
+3,000

+3,000

-1.100

-1.100

-1.200

-1.200

-400

-400

-400

-400

(8) Not a transaction of the business


(9)

+1,000

-1.000

(10)

+22,000

(11)

-2.100

_____

_____

_____

_____

_____

-2.100

Bal.

33.300

2.000

500

18.000

100

50.000

3.700

-22.000

Statement of Cash Flow Data

Balance Sheet Data

81

FINANCIAL STATEMENTS OF
AIR & SEA TRAVEL, INC.
A IR & S E A T R A V E L , IN C .
In c o m e S ta te m e n t
M o n th E n d e d A p r il 3 0 , 2 0 0 1
R evenue:
S e r v ic e r e v e n u e
Expenses:
S a la r y e x p e n s e
Rent expense
U t ilitie s
T o ta l e x p e n s e s
N e t In c o m e

$ 8 ,5 0 0
$ 1 ,2 0 0
1 ,1 0 0
400
2 ,7 0 0
$ 5 ,8 0 0
82

FINANCIAL STATEMENTS OF
AIR & SEA TRAVEL, INC.
AIR & SEA TRAVEL, INC.
Statement of Retained Earnings
Month Ended April 30, 2001
Retained earnings, April 1, 2001
Add: Net income for the month
Less: Dividends
Retained Earnings, April 30, 2001

0
5,800
$5,800
(2,100)
$3,700

83

FINANCIAL STATEMENTS OF AIR & SEA TRAVEL,


INC.

AIR & SEA TRAVEL, INC.


Balance Sheet
April 30, 2001
Assets

Liabilities

Cash
$33,300
Accounts receivable
2,000
Office supplies
500
Land
18,000

Total assets

_______
$53,800

Accounts payable

100

Stockholders Equity
Common stock
50,000
Retained earnings
3,700
Total stockholders equity 53,700
Total liabilities and
stockholders equity
$53,800
84

AIR & SEA TRAVEL, INC.


Statement of Cash Flows
Month Ended April 30, 2001
Cash flows from operating activities:
Collections from customers
Payments to suppliers and employees
Net cash inflow from operating activities
Cash flows from investing activities:
Acquisition of land
$(40,000)
Sale of land
22,000
Net cash outflow from investing activities
Cash flows from financing activities:
Issuance (sale) of stock
$ 50,000
Payment of dividends
(2,100)
Net cash inflow from financing activities
Net increase in cash
Cash balance, April 1, 2001
Cash balance, April 30, 2001

$ 6,500
(3,100)
3,400

(18,000)

47,900
$ 33,300
0
$ 33,300
85