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Learning Objectives
1. Nature of a Business
2. The Role of Accounting in Business
3. Profession of Accounting
4. Generally Accepted Accounting Principles
5. Assets, Liabilities, and Owner’s Equity
6. Business Transactions
7. Financial Statements
8. Financial Analysis and Interpretation
Ch 01 Introduction to accounting and business
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1. Nature of a Business
In general, a business is an organization in which basic resources(inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.
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2. The objective of a business
The objective of most businesses is to maximize profits.
Revenue – expense = profit
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3. The types of a business
Manufacturing business Merchandising business Service business
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three types :1. a proprietorship (not a legal entity)
2. a partnership (not a legal entity)
3. a corporation (a legal entity)
Example: The Coca-Cola Company has 3.5 billion shares of stock owned by stockholders.
4.The types of business organizations
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ProprietorshipsProprietorshipsProprietorshipsProprietorships
• What are some advantages?
– total undivided authority
– no restrictions on type of business – must be legal
• What are some disadvantages?
– unlimited liability
– limitation on size – fund raising power
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Partnerships
• What are some advantages?– better credit standing – possibly– more brain power, but consultation with
partners required• What are some disadvantages?– unlimited personal liability for general
partners– need for written partnership agreement
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Corporations
• What are some advantages?
– separate legal existence
– limited liability of stockholders
– transferability of ownership relatively easy
• What are some disadvantages?
– taxes – possible double taxation
– extensive governmental regulation
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5. The role of accounting in business
Accounting is an information system that provides reports to stakeholders about the economic activities and condition of a business.
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Identificationof Users
UserInformation
Needs
AccountingSystem
Accounting — An Information Process Accounting — An Information Process
Accounting — An Information Process Accounting — An Information Process
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Identificationof Users
UserInformation
Needs
AccountingSystem
Economic Dataand Activities
Accounting — An Information Process Accounting — An Information Process
Accounting — An Information Process Accounting — An Information Process
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Identificationof Users
UserInformation
Needs
AccountingSystem
Economic Dataand Activities
Reports
Accounting — An Information Process Accounting — An Information Process
Accounting — An Information Process Accounting — An Information Process
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Identificationof Users
UserInformation
Needs
AccountingSystem
Reports
Economic Dataand Activities
UserDecisions
Accounting — An Information Process Accounting — An Information Process
Accounting — An Information Process Accounting — An Information Process
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EXTERNAL USERS
Financial AccountingFinancial Accounting• investors• creditors• regulators• customers• competitors
• owners• managers• employees
INTERNAL USERS
ManagerialManagerial AccountingAccounting
6. Users of Accounting Information6. Users of Accounting Information6. Users of Accounting Information6. Users of Accounting Information
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IndustryIndustry
Vice PresidentFinance
CPA FirmsCPA Firms
ChiefAccountant
StaffAccountant
Controller
Partner
Manager
SeniorAccountant
JuniorAccountant
College Graduates
7. The Accounting Profession 7. The Accounting Profession
Private Accounting
Public Accounting
and
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Private Sector(FASB)
Private Sector(FASB)
Private Sector(AICPA) (IMA)
Private Sector(AICPA) (IMA)
GAAPGAAP
8. The GAAP
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The entity concept
The activities of a business are recorded separately from the activities of the stakeholders.
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The Cost Principle
Assets and servicesacquired
should be recordedat their actual cost.
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Resources
The Accounting EquationThe Accounting Equation
What are an organization’s resources called?
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Assets
Resources = Sources
The Accounting EquationThe Accounting Equation
What are the sources of the assets?
Cost of resources usedin the business
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Assets
Liabilities
Owner’sEquity
Resources = Sources
Cost of resources usedin the business
Resources supplied by
creditors and owners
The Accounting EquationThe Accounting Equation
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a. On November 1 2002, Chris Clark deposits $25,000 in a bank account for NetSolutions.
ASSETS
=
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
OWNER’S EQUITY
LIABILITIES
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a. Chris Clark deposits $25,000 in a bank account for NetSolutions.
ASSETS
=
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
OWNER’S EQUITYCash Cash 25,00025,000
LIABILITIES
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a. Chris Clark deposits $25,000 in a bank account for NetSolutions.
ASSETS
=
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
OWNER’S EQUITYCash Cash 25,00025,000
LIABILITIES
Chris Clark, Chris Clark, Capital Capital 25,00025,000
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
b. NetSolutions buys land for $20,000.
ASSETS
=OWNER’S EQUITY
LIABILITIES
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
b. NetSolutions buys land for $20,000.
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash (20,000)(20,000)
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
b. NetSolutions buys land for $20,000.
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash (20,000)(20,000)
Land Land 20,00020,000
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
c. NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Supplies Supplies 1,3501,350
c. NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
c. NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.
Accounts PayableAccounts Payable1,3501,350
Supplies Supplies 1,3501,350
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
d. NetSolutions earns fees of $7,500, receiving cash.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash 7,5007,500
d. NetSolutions earns fees of $7,500, receiving cash.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash 7,5007,500
Fees Earned Fees Earned 7,5007,500
d. NetSolutions earns fees of $7,500, receiving cash.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
e. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash (3,650)(3,650)
e. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash (3,650)(3,650)
ExpensesExpenses(3,650)(3,650)
e. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
f. NetSolutions pays $950 to creditors on account.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash (950)(950)
f. NetSolutions pays $950 to creditors on account.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash (950)(950)
Accounts PayableAccounts Payable(950)(950)
f. NetSolutions pays $950 to creditors on account.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
g. At the end of the month, the cost of supplies on hand is $550.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Supplies Supplies (800)(800)
g. At the end of the month, the cost of supplies on hand is $550.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Supplies Supplies (800)(800)
Supplies ExpenseSupplies Expense(800)(800)
g. At the end of the month, the cost of supplies on hand is $550.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
h. Chris Clark withdraws $2,000 in cash.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash (2,000)(2,000)
h. Chris Clark withdraws $2,000 in cash.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash (2,000)(2,000)
Chris Clark, Chris Clark, DrawingDrawing(2,000)(2,000)
h. Chris Clark withdraws $2,000 in cash.
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• Questions:1. Does the business get the profit or loss? How
much?
2. What the total assets of the business?
3. How much cash flow in and out?
4. What is balance of the cash?
5. How to do the financial reports?
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Transaction SummaryTransaction SummaryTransaction SummaryTransaction Summary
ASSETS
= OWNER’S EQUITY
LIABILITIES
CashCash 5,9005,900SuppliesSupplies 550550LandLand 20,00020,000
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Transaction SummaryTransaction SummaryTransaction SummaryTransaction Summary
ASSETS
= OWNER’S EQUITY
LIABILITIES
CashCash 5,9005,900SuppliesSupplies 550550LandLand 20,00020,000
Accts. PayableAccts. Payable 400400
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Transaction SummaryTransaction SummaryTransaction SummaryTransaction Summary
ASSETS
= OWNER’S EQUITY
LIABILITIES
CashCash 5,9005,900SuppliesSupplies 550550LandLand 20,00020,000 26,450 26,450
Accts. PayableAccts. Payable 400400
C. Clark, CapitalC. Clark, Capital 25,00025,000C. Clark, DrawingC. Clark, Drawing (2,000)(2,000)Fees EarnedFees Earned 7,5007,500Wages ExpenseWages Expense (2,125)(2,125)Rent ExpenseRent Expense (800)(800)Supplies ExpenseSupplies Expense (800)(800)Utilities ExpenseUtilities Expense (450)(450)Misc. ExpenseMisc. Expense (275)(275)
26,05026,050
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
decreased bydecreased by
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Owner’s withdrawals
Expenses
decreased bydecreased by
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
increased byincreased by
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Owner’s investments
Revenues
increased byincreased by
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Owner’s withdrawals
Expenses
Owner’s investments
Revenues
decreased bydecreased by increased byincreased by
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Owner’s withdrawals
Expenses
Owner’s investments
Revenues
decreased bydecreased by increased byincreased by
NET INCOME
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10. Financial Statements10. Financial Statements10. Financial Statements10. Financial Statements
NetSolutionsIncome Statement
For the Month Ended November 30, 2002
Fees earned $7,500Operating expenses: Wages expense $2,125 Rent expense 800 Supplies expense 800 Utilities expense 450 Miscellaneous expense 275 Total operating expenses 4,450Net income $3,050
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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
NetSolutionsIncome Statement
For the Month Ended November 30, 2002
Fees earned $7,500Operating expenses: Wages expense $2,125 Rent expense 800 Supplies expense 800 Utilities expense 450 Miscellaneous expense 275 Total operating expenses 4,450Net income $3,050
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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
NetSolutionsIncome Statement
For the Month Ended November 30, 2002
Fees earned $7,500Operating expenses: Wages expense $2,125 Rent expense 800 Supplies expense 800 Utilities expense 450 Miscellaneous expense 275 Total operating expenses 4,450Net income $3,050
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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
NetSolutionsIncome Statement
For the Month Ended November 30, 2002
Fees earned $7,500Operating expenses: Wages expense $2,125 Rent expense 800 Supplies expense 800 Utilities expense 450 Miscellaneous expense 275 Total operating expenses 4,450Net income $3,050
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NetSolutionsStatement of Owner’s Equity
For the Month Ended November 30, 2002
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Chris Clark, capital, November 1, 2002 $ 0Investment on November 1, 2002 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2002 $26,050
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NetSolutionsStatement of Owner’s Equity
For the Month Ended November 30, 2002
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Chris Clark, capital, November 1, 2002 $ 0Investment on November 1, 2002 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2002 $26,050
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NetSolutionsStatement of Owner’s Equity
For the Month Ended November 30, 2002
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Chris Clark, capital, November 1, 2002 $ 0Investment on November 1, 2002 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2002 $26,050
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NetSolutionsStatement of Owner’s Equity
For the Month Ended November 30, 2002
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Chris Clark, capital, November 1, 2002 $ 0Investment on November 1, 2002 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2002 $26,050
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NetSolutionsStatement of Owner’s Equity
For the Month Ended November 30, 2002
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Chris Clark, capital, November 1, 2002 $ 0Investment on November 1, 2002 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2002 $26,050
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NetSolutionsBalance Sheet
November 30, 2002
AssetsCash $5,900Supplies 550Land 20,000 Total assets $26,450
LiabilitiesAccounts payable $ 400
Owner’s EquityChris Clark, capital 26,050 Total liabilities and owner’s equity $26,450
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
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NetSolutionsBalance Sheet
November 30, 2002
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
AssetsCash $5,900Supplies 550Land 20,000 Total assets $26,450
LiabilitiesAccounts payable $ 400
Owner’s EquityChris Clark, capital 26,050 Total liabilities and owner’s equity $26,450
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NetSolutionsBalance Sheet
November 30, 2002
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
AssetsCash $5,900Supplies 550Land 20,000 Total assets $26,450
LiabilitiesAccounts payable $ 400
Owner’s EquityChris Clark, capital 26,050 Total liabilities and owner’s equity $26,450
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NetSolutionsBalance Sheet
November 30, 2002
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
AssetsCash $5,900Supplies 550Land 20,000 Total assets $26,450
LiabilitiesAccounts payable $ 400
Owner’s EquityChris Clark, capital 26,050 Total liabilities and owner’s equity $26,450
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NetSolutionsStatement of Cash Flows
For the Month Ended November 30, 2002
Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000)Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
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NetSolutionsStatement of Cash Flows
For the Month Ended November 30, 2002
)
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900
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NetSolutionsStatement of Cash Flows
For the Month Ended November 30, 2002
)
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000)Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900
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NetSolutionsStatement of Cash Flows
For the Month Ended November 30, 2002
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900
)
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11. Ratio of Liabilities to Owner’s Equity11. Ratio of Liabilities to Owner’s Equity11. Ratio of Liabilities to Owner’s Equity11. Ratio of Liabilities to Owner’s Equity
Ratio of liabilitiesto owner’s equity =
FormulaFormula
Objective: Use the ratio of liabilities to owner’s equity to analyze the ability of a business to withstand poor business conditions and to pay its creditors.
Total liabilities
Total owner’s equity
NetSolutions =
ExampleExample
$400
$26,0500.015 or 1.5%
The lower the ratio of liabilities to owner’s equity, The better the financial position of the business.
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HOME WORK
READING:1. Illustrative problem2. Self- examination questions3. Multiple choice
Writing:1. Exercise 1-132. Problem 1-2A3. Problem 1-5A
Discussion:1. Activity 1-3 Forty-Love
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The end of Chapter 1. The end of Chapter 1.