Accounting Chapter 2 Notes

School: Indiana University, Bloomington - Course: BUS A100 - Subject: Accounting

Chapter 2: The Basic Financial Statements GAAP and IRFS must present these 4 at least once a year 1.Balance sheet 2.Income statement 3.Statement of retained earnings 4.Statement of cashflows Balance Sheet Assets = liabilities + equity Assets - Liabilities = Equity Assets: what the business owns Liabilities: what the business owes Equity: portion of the assets that the company owns outright (no debt) Outright: no debt is associated with the assets Double entry bookkeeping: two entries for each transaction of a business 3 categories in a balance sheet Assets: -Current assets: include cash and assets that are expected to be converted into cash or used up in one year or less (cash, inventory, prepaid insurance) -Long term investments: assets purchased and to be held as an investment (stocks and bonds) -Fixed assets: assets purchased to be used in operations but expected to last longer than one year and not resold (equipment, buildings, land) -Intangible assets: no physical substance (patents, copyrights, trademarks) Liabilities: -Current liabilities: debts expected to become due within one year of the balance sheet date (utility bills, wages payable) -Long term liabilities: amounts that will not be needed to be paid until after one year of the balance sheet date (loans from a bank) Equity: measure of the portion of assets that are owned outright -Equity accounts are called stockholders equity and can be split into 2 oCommon stock: basic stock Shows money received when company sells shares to investors Outstanding: when a stock is in hands of investors

oRetained earnings: total profits of the company minus any amounts that have been paid to stockholders *Liquidity of an asset: a measure of how fast it is expected to be converted into cash *Current assets: assets to be used up or converted into cash within one year (listed at the top of balance sheets) Income Statement Revenue - expenses = net income -Revenue: the amounts the company earns by doing what is in business to do Selling companies send an invoice at the end of a period -Invoice: lists all charges the purchaser made during the period and is now due to the seller Accrual method of accounting: recording revenue when it is earned regardless of when cash is received Cash Basis of Accounting: revenue is recorded when cash is received Matching: expenses are shown as deductions from the associated revenue Statement of retained earnings Beginning retained earnings + net income (or - net loss) - dividends = ending retained earnings Statement of cash flows Cash, beginning of period +/- operating cash flows +/- financing cash flows +/- investing cash flows