ACCOUNTING 101-chapter Flashcards


Bankers often consider the Operating Activities section to be most important because it indicates the company’s ability to generate cash from sales to meet its current cash needs. Any amount left over can be used to pay back the bank debt or expand the company. Stockholders will invest in a company only if they believe that it will eventually generate more cash from operations than it uses so that cash will become available to pay dividends and expand. Current liabilities similarly are short term in nature and are used to finance short term assets of the company.

  • Billie Nordmeyer works as a consultant advising small businesses and Fortune 500 companies on performance improvement initiatives, as well as SAP software selection and implementation.
  • Machinery and buildings are also depreciated.
  • They are generally liquid and can easily be converted to cash.
  • Because there are two or more accounts affected by every transaction carried out by a company, the accounting system is referred to as double-entry accounting.
  • The owner’s equity increases or decreases by the net profit or loss reported for that particular year.
  • Liabilities are debt obligations that the company owes other companies, individuals, or institutions.

A company’s financial risk increases when liabilities fund assets. As a result, only the assets and liabilities elements of the basic accounting equation are affected by the transaction. In this instance, both the assets and liabilities are decreased, while the owner’s equity remains unchanged. The balance is maintained because every business transaction affects at least two of a company’s accounts. The statement of financial position is another term for the balance sheet.

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Data from your balance sheet can also be combined with data from other financial statements for an even more in-depth understanding of your practice finances. Exeter Investors was interested in Maxidrive’s debts because of its concern about whether the company has sufficient sources of cash to pay its debts. Maxidrive’s debts were also relevant to American Bank’s decision to lend money to the company because existing creditors share American Bank’s claim against Maxidrive’s assets.

Shareholder represents the net or book value of a business. Note that each of the three cash flow sources can be positive or negative. Maxidrive overstated the amount of income it reinvested in the company for future growth. Need a deep-dive on the concept behind this application?

Contents of the Statement of Financial Position

The concepts and rules that govern accounting practice. Identify which of the following statements is correct as to why accounting is important. We live in an information age whereby accounting information impacts everyone. From the following statements, select the one that describes the effect of dividends on equity. Given the following list accounts, identify which are classified as assets. Regardless of how the accounting equation is represented, it is important to remember that the equation must always balance.

You will notice that’ equity increases as new shares in the business are issued and as revenues grow; and decreases from dividend payouts and expenses. Shareholders’ equity is reported on the balance sheet in the form of share equity and retained earnings. For example, assume a company purchases office supplies on credit for $6 thousand and a credit is entered to the vendor payable account.

Sean O’Rourke
About Sean O’Rourke 242 Articles
Sean O’Rourke is a Cyber Liability Insurance (CLI) consultant for Combs & Company, a full service insurance brokerage firm headquartered in NYC. Sean works with small- and mid-sized businesses to mitigate the myriad of risks posed to their technology and data. Sean has worked in the technology arena for 20 years, so he has a unique approach when discussing the value of CLI to businesses. Sean can be reached at [email protected] or 646.736.3737.