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Stockholders Owners of the company (receive dividends a portion earned)

Creditors Loaners / Banks Interest expense

Business Activities:
1. Operating Activities (A): Collecting payments (cash, accounts receivable),
purchasing short-term assets for day-to-day operation (inventories,
supplies), manufacturing and delivering goods, paying suppliers (L)(cost of
goods sold)
2. Investment Activities (A): Buying and selling long-term assets (long-term
investment advertisement, plants and buildings, land, equipment)
3. Financing Activities (L, SE): Borrowing or paying back money to creditors
(cash, accounts payable), receiving capital (common stock, additional
paid-in capital)from stockholders, paying dividends

The four basic financial statements:

1. Balance Sheet / Statement of Financial Position At a point of time
Balance Sheet Equation: A = L + SE
Balancing Debit account and Credit account
Resources the company owns with economic value that are
expected to provide future economic benefits
Current assets
Cash, short-term accounts receivable / accrued revenue (within accounting
period), inventories, supplies, oil and gas, accumulated depreciation (XA), shortterm investments, prepaid expense / deferred expense
Long-term assets
Long-term accounts receivable, land, plants and buildings, equipment, longterm investments (advertisements), intangibles

Liabilities and stockholders equity:

Obligations, loans / debts to creditors, suppliers and buyers,
future sacrifices for economic benefits

Current liabilities
Short-term accounts payable, short-term notes payable, accrued expenses
payable (wages payable, dividends payable, interest payable), unearned revenue /
deferred revenue
Long-term liabilities
Long-term accounts payable, Long-term notes payable

Stockholders equity
terms of net assets

Book value of the company, interest of shareholders in

Common stock ($k par per share x no. of shares = total monetary amount),
additional-paid in capital, retained earnings

2. Income Statement in an accounting period

Income Statement Equation:
Revenues expenses = net income
Sales revenue,
Cost of goods sold, administrative expense, interest expense, advertising
expense, wages expense, insurance expense, rental expense, income tax expense
(pretax income income tax expense = net income)

3. Statement of Stockholders Equity

Statement of Stockholders Equity Equation:
Ending balance last period (Beginning retained earnings) + net income dividends = current retained earnings balance
Ending balance last period (Beginning common stock) + stock issuance =
current common stock balance

4. Statement of Cash Flows

Cash Flow Equation: Cash flows from O + I + F = Change in cash
Net increase (decrease) in cash + cash balance last period = current cash

Relationships between the four basic financial statements:

Income Statement (Net income) Statement of Stockholders Equity
Statement of Stockholders Equity (Retained earnings) Balance Sheet
Statement of Cash Flows (Cash) Balance Sheet

Making adjusting entries, recording revenues and expenses:

Unearned revenue / deferred revenue received payment but has not yet
rendered the services
Accrued revenue services have been rendered and revenue is recognized, but
has not yet received payment (accounts receivable)
Prepaid expense / deferred expense paid money and received supplies but has
not yet used the supplies
Accrued expense used the services but has not yet paid for them (e.g. accounts
payable for goods, accrued wages payable)

*Cost of goods sold / inventories expense is only recognized when goods are
sold - not equal to the price sold!!

Recognizing unearned revenue:

Cash is received
Dr: Cash (+A)
Cr: Unearned revenue

Service is rendered
Dr: Unearned revenue (-L)
Cr: Revenue (+SE)

Recognizing accrued revenue:

Service is rendered
Dr: Receivables (+A)
Cr: Revenue (+SE)

Cash is received
Dr: Cash (+A)
Cr: Receivables (-A)

Recognizing prepaid expense:

Cash is paid

Services are received

Dr: Prepaid expense (+A)

Cr: Cash (-A)

Dr: Expense (-SE)

Cr: Prepaid expense (-A)

Supplies situation:
Cash is paid
Dr: Supplies (+A)
Cr: Cash (-A)

Supplies are used

Dr: Expense (-SE)
Cr: Supplies (-A)

Recognizing accrued expense:

Services are received
Dr: Expense (-SE)
Cr: Payables (+L)

Cash is paid
Dr: Payables (-L)
Cr: Cash (-A)

Accumulated depreciation (asset X)

Net asset X = Asset X last period - accumulated depreciation