Ch6 Financial reports.pptVIP

The equities of an entity include investments by owners, withdrawals by owners, and earnings retained by the business. 3 The basic accounting equation states that assets are equal to liabilities plus equity of a company. The equation makes sense because it states that assets must be equal to the claims against those assets. There are two broad categories of claims against an asset: Claims by creditors (called liabilities), or after all creditor claims are satisfied, the residual owners (the stockholders) have a claim on those assets. There are three general forms of business operations. A proprietorship is a business owned by just one individual. A partnership is owned by two or more individuals. Some partnerships have several thousand partners. A corporation is owned by individuals who normally are not active in the day-to-day operations of that business. For example, you may become an owner of IBM by purchasing shares of stock on the New York Stock Exchange. While you are a part owner, you do not necessarily work for IBM nor are you active in the operations of the company. Part I The owners’ equity section of the balance sheet will look different for each type of business entity. For a sole proprietorship, there will be a capital account for the owner, and a drawing account to record payments to the owner. Part IIFor a partnership, each partner has a separate account, where changes are tracked over time. There’s also a separate drawing account for payments made to each partner. Part IITo review, a corporation will show owners’ contributions in the capital stock account and accumulated earnings of the company in the retained earnings account. You should be able to tell the form of business by looking at the equity section of a balance sheet. The Statement of Cash Flows helps users determine how a company obtains its cash and where the cash is spent. Providing this information helps explain changes in the cash balance from the beginning to the end o