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Investing and Financing Decisions and the Balance Sheet Understanding amounts on a company's balance sheet 1.

What business activities cause changes in the balance sheet? . !o" do speci#ic activities a##ect each balance? $. !o" do companies %eep trac% o# balance sheet amounts? &Primary objective of external financial reporting: to provide use#ul economic in#ormation to e'ternal users #or decision ma%ing and assesing #uture cash #lo"s Important De#initions asset: economic resource "ith probable #uture bene#its liability: probable #uture scri#ices o# economic resources stockholders' equity: #inancin provided by o"ners and business operations revenue: increase in assets or settlement o# liabilities #rom ongoing operations expense: decrease in assets or settlement o# liabilities #rom ongoing operations gain: increase in assets or settlement o# liabilities #rom peripheral operations loss: decrease in assets or settlement o# liabilities #rom peripheral operations (evie" o# )lements o# the Balance Sheet* in more detail assets: economic resource "ith probable #uture bene#its o"ned or controlled by the entity. +easured by historic cost principle liabilities: probable debts or obligations that result #rom a compay's past transactions and "ill be paid "ith assets or services. stockholders' equity: #inancing provided by o"ners and business operations. o"ner provided cash is called contributed capital ,hree Basic -ssumptions 1. separate entity assumption. business transactions are accounted #or separately #rom o"ner transactions . unit/o#/measure assumption. accountin in#o measured and reported in national monetary unit $. continuity assumption. businesses assumed to continue to operate into the #oreseeable #uture historic cost principle: re0uires assets to be recorded at historical cost/cash paid plus current dollar value o# all noncash considerations given on date o# e'change current assets: resources that a company "ill use or turn into cash "ithin a year. all other assets are considered long/term current liabilities: obligations that "ill be settled "ithin a year retained earnings: earnings that are reinvested in the company and not distributed to stoc%holders /generally* stoc%holders hope to ma%e money either through dividends or capital gains materiality: small amounts that are not lie%ly to in#luence user's decision are accounted #or in most cost/bene#icial manner. usually this means this item is simply recorded as an e'pense "hen purchased conservatism: care should be ta%en not to overstate assets and revenues or understate liabilities and e'penses 1ature o# Business ,ransactions

+ost transactions "ith e'ternal parties involve an e'change "here the business entity gives up something but receives something in return /signin a contract is not a transaction because it is an e'change o# promises and not o# assets

2rinciples o# ,ransaction -nalysis 1. every transaction a##ects at least t"o accounts . the accounting e0uation must remain in balance a#ter each transaction

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