Chapter01 UML 2007

Chapter 1
Introduction: Reporting About Resources

In this chapter you will begin learning about the purpose and process of
accounting. You will see that the information produced by a company's accounting
system is aimed at answering specific questions about the company's resources.
Information for answering the questions is often provided in the form of
financial statements.
Goals
A goal is something to work toward. It is something you try to achieve.
For example, right now you may be trying to prepare yourself to earn a high grade
in this accounting course. On the other hand, your goal for the next few minutes
might simply be to stay awake until it's time to go to dinner! People have
numerous goals. Many people strive to develop and maintain happy families. Some
people work to get the highest paying job possible. Some people try to be in
perfect health, or at least in great physical shape. Still other people have
earning a high-quality education as their goal.
Similar to people, companies have goals. Health centers and medical
practices have as their goal the providing of quality, affordable health care.
Broadway theaters strive to provide diverse, live entertainment. Clothing stores
try to sell blouses, slacks, shirts, pants, and sweaters to customers.
Automobile companies attempt to manufacture and sell cars. For an example of one
company's goals, see the following brief discussion of AT&T Inc.
AT&T Inc.
In its 2006 annual report to owners, AT&T listed the following goals. Build on
our success in wireless by continuing to add subscribers, generating higher data
revenues and boosting margins. Deliver the value of the BellSouth acquisition.
Strengthen our ability to compete in the video market as we scale our new video
services. Grow our enterprise business. Continue to build AT&T as the brand that
our current and future customers rely on to meet all of their communications and
entertainment needs. Most important, well continue to work hard to deliver
value to our stockholders.
Goals and Resources
How do people and companies achieve their goals? The obvious answer is
through hard work. However, if hard work is the only requirement many more
people and companies would be successful. Some of the most important
requirements for companies and people to achieve their goals are resources.
Resources are the things you have to work with. Personally, your resources
consist of things like cash, textbooks, pencils, notebooks, clothes, car, stereo,
and CDs. A company's resources include cash, land, buildings, and machines.
Resources and Personal Goals Why do people want resources? If cash is a
resource in which you are interested, consider what you can do with more of it.
If you had only $25, you would be quite concerned about how you could buy food,
clothes, gasoline, or pay your rent. On the other hand, if you had $10,000,
buying food or clothes probably wouldn't be a problem for a while. Furthermore,
if you had $10,000,000, you would definitely not be concerned about food or
clothes, but would be able to consider such things as buying property, taking
2Ch.1:ReportingAboutResources
trips, providing for your relatives, or helping friends.

How do resources help you achieve your goals? Consider, for example, your
goal of achieving a high-quality education. Without sufficient resources you
might have to work at a part-time job 15-20 hours per week to attend school. If
you had sufficient resources, you could avoid the part-time job and use the hours
to study. The availability of enough resources would give you more time to study
and could lead to the achievement of your goal of earning a high-quality
education.
Resources and Business Goals Companies want resources for the same basic reason
people do: the more resources a company has, the more alternatives the company
has and the better are its chances of achieving its goals. For example, if a
company has resources of only $50,000, it may be limited in the size of the
building space it can buy or rent, the number of employees it can hire, and the
volume of products and services it can buy. If the same company had $50,000,000
of resources, it could afford to buy or rent much more space, hire many more
employees, and buy many more products and services.
In a simplistic way, a company's desire for resources can be understood by
remembering your experiences with the game Monopoly. To win at Monopoly, you
either eliminated all other players or accumulated more cash at the end of the
game than any other player. As you played the game, you tried to acquire
property, houses, and hotels so that you could charge more rent. Without
property, you could not charge rent. Without buildings, you could only charge a
small amount of rent. In other words, as you acquired more resources, the
alternatives available to you increased. As you acquired more property and
buildings and if you were fortunate enough to avoid your competitors' property
while they landed on yours, your resources increased. If your resources
increased enough, you eventually won the game.
Businesses want resources for the same reason you wanted property, houses,
and hotels when you played Monopoly. The more resources a company has, the more
alternatives or opportunities it has. Without resources, it is virtually
impossible for a company to achieve its goals. A health center cannot provide
medical care without examining rooms and medical supplies. An automobile
manufacturer cannot produce cars without buildings, equipment, and materials.
To get an idea of the importance of resources to companies, examine Exhibit
1-1, in which the December 31, 2006 resources of three companies are shown. The
three companies had very large amounts of resources, with Citigroup alone having
over $1.8 trillion in resources.
Exhibit 1-1
Company Resources
as of December 31, 2006
Company
Citigroup
General Motors
Verizon Communications
Resources in Billions
$1,884.3
$186.2
$188.8
Sources of Resources
Companies obtain resources in three ways: (1) some resources are borrowed,
(2) some resources are invested by owners, and (3) some resources are generated
through management's operation of the companies.
Borrowed Resources Borrowing is one important way companies obtain resources.
When resources are borrowed, the resources or an equal amount of cash must be
Ch.1:ReportingAboutResources3
repaid to the person or company from whom the resources were borrowed. In many
cases, an additional dollar amount, called interest, is paid by the borrower for
the use of the resources. Companies borrow resources in several ways, such as
bank loans, issuing bonds and notes, and credit purchases.
Bank Loans Banks commonly lend money to companies. To obtain a loan, a
company usually must present an organized plan detailing what the money will be
used for and how the money will be repaid. An important feature of a loan is the
fee, or interest, charged for the amount loaned by the bank. For example, if a
company borrows $10,000 from a bank at the rate of 8% per year, the company would
have to pay the bank $800 ($10,000 x .08) per year interest for the use of the
bank's money. At some agreed upon time, the company would also have to return
the $10,000 to the bank. An idea of the importance of borrowing as a source of
resources can be seen by examining Exhibit 1-2, in which the December 31, 2006
amounts loaned to companies by three banks are presented. For example, Wachovia
Corporation had provided over $171 billion of resources to companies.
Exhibit 1-2
Commercial Loans
as of December 31, 2006
Bank
J. P. Morgan Chase
Wachovia
Wells Fargo
Loans in Billions
$121.2
$171.3
$70.4
Bonds and Notes Companies often borrow resources from other companies and
individuals by issuing bonds and notes. Bonds and notes are agreements or
contracts in which companies promise to pay interest and a certain lump sum
amount in return for cash. For example, a bond might require a company to pay
interest of $5,000 a year and a lump sum payment of $50,000 at the end of five
years. The process of issuing bonds or notes and obtaining cash is very
organized in the United States and is covered in detail in Chapter 11. Exhibit
1-3 shows the large amounts of resources obtained by three companies through
long-term debt, such as bonds and notes. For example, IBM had obtained
approximately $14 billion of resources through the use of long-term debt.
Exhibit 1-3
Resources Obtained through Long-term
Debt as of December 31, 2006
Company
Coca-Cola
IBM
United Parcel Service
$1.3
$13.8
$3.1
Credit Purchases A third way companies often borrow resources is to

purchase items on credit. For example, a company might buy $3,000 of supplies by
promising to pay the $3,000 within 30 days after the supplies are purchased. In
effect, the company buying the supplies is borrowing $3,000 of resources. Of
course, if the company does not pay for the supplies within the 30 days, it could
be charged interest or, under certain conditions, may be required to return the
supplies. Exhibit 1-4 shows the large amounts of resources three companies
purchased in 2006 to sell to their customers. For example, Wal-Mart obtained
resources of approximately $266 billion through purchases.
Exhibit 1-4
Merchandise Purchased in 2006
Company
Home Depot
Kroger
Wal-Mart
$62.5
$50.3
$265.9
Owner Invested Resources The second major way in which companies obtain
resources is through investments by owners. One important reason people invest
their money in companies is that, as owners of the companies, they have a right
to all the resources generated through management operations. For example, if a
company starts with $100,000 and management generates an additional $20,000 by
providing services or products to customers, the owners have a right to the
$20,000. The more resources management generates through operations, the more
the rights of the owners increase. It is important to note that owners do not
have a right to borrowed resources. The companies from which the resources were
borrowed have a right to those. Exhibit 1-5 reports the dollar amount of
resources invested by owners of three companies. The data show that owners
provide companies with many resources. For example, owners provided AT&T with
approximately $98 billion of resources as of December 31, 2006.
Exhibit 1-5
Resources Obtained from Owners
As of December 31, 2006
Company
AT&T
Xerox
Mattel
$97.8
$4.7
$2.1
Resources Generated Through Management Operations The third major way companies
obtain resources is they generate them through management's daily operations.
For example, in 2006, Exxon Mobil's management generated resources of over $39
billion by doing such things as refining oil and distributing gasoline and oil to
companies and individuals. Exxon Mobil's owners have a right to this $39 billion
of resources generated through management operations in 2006. It is important to
note that Exxon Mobil's owners did not actually receive the $39 billion in cash.
The owners received approximately $8 billion, called dividends, and the company
kept the remaining amount, approximately $31 billion, in the company for
management to use to generate more resources in future years. Examples of the
amounts of resources generated through management operations of three companies
are shown in Exhibit 1-6.
Exhibit 1-6
Resources Generated Through Management Operations
for the 12 Months Ended December 31, 2006
Company
Exxon Mobil
General Electric
Intel
Resources and Financial Reporting
$39.5
$20.8
$5.1
The importance of resources to the goals of companies has had a significant

impact on the development of financial reporting. Financial reporting is
concerned with gathering, organizing, and communicating information about a
company. Resources and where they came from are at the heart of modern financial
reporting systems. They are the basis around which the accounting system
explored in this text is organized.
Since a company's resources must have come from somewhere, the accounting
system can be represented as the following simple equation.
The total dollar amount of a
company's resources
The total dollar amount of

resources obtained from its
sources of resources
or, more simply

Resources
As stated earlier, a company may acquire resources in three ways: resources

may be borrowed, resources may be invested by owners, or resources may be
generated through management's operation of the company. Thus, the above
equation can be expanded to the following.
The total dollar

amount of a
company's
resources
the dollar
amount of
resources
borrowed
the dollar
amount of
resources
invested by
owners
the dollar
amount of
resources
generated
through
management
operations
or, more simply

Total
Resources
Sources of
Borrowed
Resources
Sources of
Owner
Invested
Resources
Sources of
Management
Generated
Resources
The above equation, by showing the relationship between resources and their
sources, provides information used to answer four basic questions: (1) what is
the company's total dollar amount of resources, (2) where did the company get its
resources (were they borrowed, invested by owners, or generated through
management operations), (3) what did the company's management do with the
resources (did they use them to generate more resources), and (4) what did the
company do with the resources generated through management operations (were the
resources given to owners or were they kept in the business). Each of these
questions will be examined more fully in the following sections. A fifth
question, which is concerned specifically with the company's cash resources, will
be discussed in detail in Chapter 14.
** You now have the background to do exercises 1.1 and 1.2.
Financial Reporting Illustrated
Let's assume that Nick Parks decides to use his knowledge of computers by
starting his own computer repair company on July 1. We will examine how several
events of the Parks Computer Service Corporation can be viewed in terms of the
company's resources and sources of resources. You will see how the financial
reporting system generates information to show what the company's resources are
on July 31, where they came from, what the company's management did with the
resources during July, and what the company did with the resources generated by
management. Before we examine the Parks Computer Service Corporation it is
important that you notice that our questions relate to a specific time period or
point in time. We are interested in what happened to the company during July and
how the company is at the end of July. As a result, the accounting reports we
will produce will relate directly to the company's July activities. We will not,
for example, consider what happens to the company in August or December.
Getting resources from the owner On July 1, Nick Parks invests $5,000 of his own
cash in his new company, Parks Computer Service Corporation. Nick invests his
cash by opening a checking account in the company's name at the Somerville
National Bank. This event will have the following effects on the company's
resources and sources of resources.
Resources
+ $5,000
=
=
Sources of resources
+ $5,000
As shown above, when the company receives the $5,000 its resources
increase. This effect seems pretty straightforward: the company's resources go
from $0 to $5,000. Similarly, the resources must come from somewhere: the $5,000
do not just magically appear. Thus, the sources of resources must also increase
by $5,000. Since the company receives the $5,000 as a result of the owner's
investment, the effects could be shown as follows.
Event
Owner's cash investment
Totals
Total
Resources
+ $5,000
$5,000
Sources
of
Borrowed
Resources
$0 +
Sources
of Owner
Invested
Resources
+ $5,000
$5,000
Sources of
Management
Generated
Resources
$0
After the first event occurred, you can see the equation shows that the company
has $5,000 of resources and that the $5,000 were obtained from the owner. At
this point, the company has not borrowed any resources, nor has it generated any
resources through management providing computer services.
Suppose that in addition to wanting to know the company's total resources
and where they came from, we want to know more about what the specific resources
are and where they came from. In other words, does the company have cash
resources or does it have a building or a car? To answer these questions, we
might want to change our equation to include more detail, as follows.
Event
Totals
Total
Resources
Cash
+ $5,000
$5,000
=
=
Sources
of
Borrowed
Resources
$0 +
Sources
of Owner
Invested
Resources
Common
Stock
+ $5,000
$5,000
Sources of
Management
Generated
Resources
$0
Notice in the above equation, the $5,000 increase in resources is shown as a +

$5,000 in the cash column and the $5,000 increase in sources of resources is
shown as a + $5,000 in the common stock column. The equation is in balance
because we added $5,000 to both sides: $5,000 were added to resources and $5,000
were added to sources of resources. Using this system, we can see the company
has resources of $5,000 cash. The resources came from the owner's investment.
In return for his $5,000, since the company was established as a corporation, the
owner received shares of common stock. Corporations and common stock are
examined in detail in Chapter 12. At this point you should simply be aware of
the fact that the owner's interest in a corporation is represented by stock
certificates. Stock certificates may be printed on paper or recorded in computer
files. Hopefully, by the end of Chapter 12 you will know much more about stock
and corporations.
In accounting systems, the terms cash and common stock are known as
accounts. An account can be anything about which you want to gather information.
As you will see as we examine more events of the Parks Computer Service
Corporation, we can add appropriate accounts as we need them.
Using resources to buy other resources On July 3, the Parks Computer Service
Corporation pays $25 cash for supplies to be used to service customers. Nick
needs supplies such as paper, pens, pencils, envelopes, stamps, and books. Most
of the supplies will be used up in two or three months. Since cash and supplies
are both resources, but are not the same resource, this event increases resources
when the supplies are bought and decreases resources when the cash is paid, as
follows.
Resources
$5,000
+ $25
- $25
$5,000
=
=
$5,000
$5,000
In order to provide information about the cash resource separate from information
about the supplies resource, we would add a supplies account to our system, as
follows.
Cash
+ Supplies =
+ $5,000
Sources
Sources of
of Owner
Management
Invested + Generated
Resource
Resources
s
Common
Stock
+ $5,000
- $25
+ $25
$4,975 +
$25 =
[---- $5,000 -----] =
$0 +
$5,000 +
$0
[------------ $5,000 -------------]
=
Total Resources
Event
Supplies purchased for
cash
Totals
Sources
of
Borrowed
Resource
s
Notice in the above equation, the $25 decrease in cash is shown as a - $25 in the
cash column and the $25 increase in supplies is shown as a + $25 in the supplies
column. The equation is in balance because the totals of both sides were
unchanged: $25 were added to resources and $25 were subtracted from resources.
After the supplies purchase, the equation shows the company has $5,000 of
resources and they were obtained from the owner (common stock). We can also see
the company's resources consist of $4,975 cash and $25 supplies. Thus, the use
of one resource to purchase another did not change the company's total resources,
but merely changed the form of the resources. The $5,000 cash was converted into
$4,975 cash and $25 supplies. From a business standpoint, converting cash into
supplies was necessary if the company needs supplies to provide service to its
customers. At this point, the company has not borrowed any resources, nor has it
generated any resources through management providing computer services.
Borrowing resources On July 7, the company buys additional supplies of $135.
The company does not immediately pay cash for the supplies, but agrees to pay
cash within the next 30 days. Buying supplies by promising to pay for them in
the future means, in effect, the company borrows the resources from a company
that sells supplies. When the Parks Computer Service Corporation gets the
supplies, its resources increase. Since the supplies must be paid for in the
future, the source of resources is considered to be borrowing. Thus, the
company's resources and sources of resources both increase by $135, as shown
below.
Resources
$5,000
+ $135
$5,135
=
=
=
=
$5,000
+ $135
$5,135
To clearly identify the $135 source of resources, a new account called accounts
payable would be added to the accounting system, showing the Parks Computer
Service Corporation owes $135 to a supplier. The result of this transaction is
as follows.
=
Total Resources
Event
cash
Supplies purchased on
account
Totals
Cash
+ Supplies =
+ $5,000
- $25
Sources
of
Borrowed
Resource
s
Accounts
Payable
Sources
Sources of
of Owner
Management
Resource
Resources
s
Common
Stock
+ $5,000
+ $25
+ $135
$4,975 +
$160 =
[---- $5,135 -----] =
+ $135
$135 +
$5,000 +
$0
[------------ $5,135 -------------]
Notice in the above equation, the $135 increase in supplies is shown as a + $135
in the supplies column and the $135 increase in accounts payable is shown as a +
$135 in the accounts payable column. The equation is in balance because we added
$135 to both sides: $135 were added to resources and $135 were added to sources
of resources. After this supplies purchase, the equation shows the company now
has $5,135 of resources. $135 of the resources were obtained through borrowing
(accounts payable) and $5,000 were obtained from the owner (common stock). We
can also see the company's resources consist of $4,975 cash and $160 supplies.
At this point, the company has still not generated any resources through
management providing computer services.
Generating resources through management operations On July 10, Nick advises a
customer on the customer's needs for a computer system. In return for this
service, the Parks Computer Service Corporation receives $200 cash. The act of
providing service to a customer and receiving cash increases the company's

resources. The increased resources are not borrowed nor invested by the owner.
They are generated through management's operation of the company. As a result,
the company's resources and sources of resources both increase by $200, as shown
below.
Resources
$5,135
+ $200
$5,335
=
=
=
=
$5,135
+ $200
$5,335
To clearly identify the $200 source of resources, a new account called retained
earnings is added to our accounting system. The retained earnings account is
used to show the increase in resources is the result of management providing
services to customers. Later we will see the retained earnings account is also
used to show decreases as resources are used up by management in providing
services to customers or given to owners.
=
Total Resources
Event
cash
account
Service provided to
customer
Totals
Cash
+ Supplies =
+ $5,000
- $25
Sources
of
Borrowed
Resource
s
Accounts
Payable
Sources
Sources of
of Owner
Management
Resource
Resources
s
Common
Retained
Stock
+
Earnings
+ $5,000
+ $25
+ $135
+ $135
+ $200
$5,175 +
$160 =
[---- $5,335 -----] =
+ $200
$135 +
$5,000 +
$200
[------------ $5,335 -------------]
Notice in the above equation, the $200 increase in cash is shown as a + $200 in
the cash column and the $200 increase in retained earnings is shown as a + $200
in the retained earnings column. The equation is in balance because we added
$200 to both sides: $200 were added to resources and $200 were added to sources
of resources. After providing service to a customer, the equation shows the
company now has $5,335 of resources. $135 of the resources were obtained through
borrowing (accounts payable), $5,000 were obtained from the owner (common stock),
and $200 were obtained through management providing computer services (retained
earnings). We can also see the company's resources consist of $5,175 cash and
$160 supplies.
Paying for borrowed resources On July 16, the company pays $70 of the $135 owed
for supplies purchased on July 7. The remaining $65 will be paid in August. The
$70 cash payment reduces resources (cash) and the amount owed (accounts payable)
for such resources by $70. In other words, the company's resources and sources
of resources both decrease by $70.
Resources
$5,335
- $70
$5,265
=
=
=
=
$5,335
- $70
$5,265
After the $70 cash is paid, only $65 of resources (supplies) were obtained from
borrowing. Remember, $135 of supplies were purchased on account. Once the
company pays the $70, in effect, the $135 supplies came from $70 of the company's
cash and $65 of borrowing. This event affects our accounting system as follows.
=
Total Resources
Event
cash
account
Service provided to
customer
Cash payment on account
Totals
Cash
+ Supplies =
+ $5,000
- $25
Sources
of
Borrowed
Resource
s
Accounts
Payable
Sources
Sources of
of Owner
Management
Resource
Resources
s
Common
Retained
Stock
+
Earnings
+ $5,000
+ $25
+ $135
+ $135
+ $200
- $70
$5,105 +
$160 =
[---- $5,265 -----] =
+ $200
- $70
$65 +
$5,000 +
$200
[------------ $5,265 -------------]
cash column and the $70 decrease in accounts payable is shown as a - $70 in the
accounts payable column. The equation is in balance because we subtracted $70
from both sides: $70 were subtracted from resources and $70 were subtracted from
sources of resources. After paying part of what the company owed, the equation
shows the company now has $5,265 of resources. $65 of the resources were
obtained through borrowing (accounts payable), $5,000 were obtained from the
owner (common stock), and $200 were obtained through management providing
computer services (retained earnings). We can also see the company's resources
consist of $5,105 cash and $160 supplies.
Generating resources through management operations On July 20, Nick assists in
the design of a computer system for another customer. In return for this
service, the Parks Computer Service Corporation does not receive cash, but the
customer agrees to pay $250 by August 19. The act of providing service to a
customer and receiving a promise of cash increases the company's resources.
Customer promises of cash are called accounts receivable. Such promises are
resources because the Parks Computer Service Corporation can benefit from them.
One way the company can benefit is to simply wait until August 19, when the
promise will be turned into cash. A second benefit of accounts receivable is
they can be used as collateral for borrowing money from banks or other financial
institutions. At this point, it is important that you realize customer promises
are valuable. They can be used. Thus, providing services to customers does
increase resources, even though those resources are not immediately in the form
of cash. The source of these resources is management's operation of the company.
Resources
$5,265
+ $250
$5,515
=
=
=
=
$5,265
+ $250
$5,515
To clearly identify the $250 resource, the accounts receivable account would be
added to the accounting system. Note also that since the $250 of resources
(accounts receivable) are being generated through management's operation of the
company, the source of the resources is again reported as part of retained
earnings. The retained earnings account is used to show the increase in
resources is the result of management providing services to customers.
Total Resources
Event
Owner's cash
investment
Supplies
purchased
for cash
Supplies
purchased
on account
Service
provided
customer
Cash payment
on account
Service
provided
to
customer
Totals
Accounts
+ Receivable
Cash
+ Supplies
Sources
of
= Borrowed
Resource
s
Accounts
= Payable
+ $5,000
- $25
Sources
of Owner
Invested
Resource
s
Common
Stock
Sources of
Management
Generated
Resources
Retained
Earnings
+ $5,000
+ $25
+ $135
+ $135
+ $200
+ $200
- $70
- $70
+ $250
+ $250
$5,105 +
$250 +
$160 =
$65 +
$5,000 +
$450
[------------ $5,515 ------------] = [------------- $5,515 -------------]
Notice in the above equation, the $250 increase in accounts receivable is shown
as a + $250 in the accounts receivable column and the $250 increase in retained
earnings is shown as a + $250 in the retained earnings column. The equation is
in balance because we added $250 to both sides: $250 were added to resources and
$250 were added to sources of resources. After providing services to customers,
the company now has $5,515 of resources. $65 of the resources were obtained
through borrowing (accounts payable), $5,000 were obtained from the owner (common
stock), and $450 were obtained through management providing computer services
(retained earnings). We can also see the company's resources consist of $5,105
cash, $250 accounts receivable, and $160 supplies.
Converting one resource into another On July 25, the company receives $100 of
cash from the customer serviced on July 20. No additional work is done for the
client on July 25. Since no additional work is performed for the customer, the
receipt of the $100 cash does not increase the Parks Computer Service
Corporation's resources. The form of the resources changes, however, as one
resource (cash) increases and another resource (accounts receivable) decreases,
as reflected below.
Resources
$5,515
+ $100
- $100
$5,515
=
=
=
$5,515
$5,515
The $100 change in the form of resources from accounts receivable to cash would
affect the accounting system as follows.
=
Total Resources
Event
Owner's cash
investment
Supplies
purchased
for cash
Supplies
purchased
on account
Service
provided
customer
Cash payment
on account
Service
provided
customer
Cash
collected
from
customer
Totals
Cash
Accounts
+ Receivable
+ Supplies =
Sources
of
Borrowed
Resource
s
Accounts
Payable
+ $5,000
Sources
of Owner
Invested
Resource
s
Common
Stock
Sources of
Management
+ Generated
Resources
Retained
Earnings
+ $5,000
- $25
+ $25
+ $135
+ $135
+ $200
+ $200
- $70
- $70
+ $250
+ $250
+ $100
- $100
$5,205 +
$150 +
$160 =
[------------- $5,515 ----------] =
$65 +
$5,000 +
$450
[------------- $5,515 ------------]
Notice in the above equation, the $100 increase in cash is shown as a + $100 in
the cash column and the $100 decrease in accounts receivable is shown as a - $100
in the accounts receivable column. The equation is in balance because the totals
of both sides were unchanged: $100 were added to resources and $100 were
subtracted from resources. After collecting from its customer, the company still
has $5,515 of resources. $65 of the resources were obtained through borrowing
(accounts payable), $5,000 were obtained from the owner (common stock), and $450
were obtained through management providing computer services (retained earnings).
We can also see the company's resources now consist of $5,205 cash, $150 accounts
receivable, and $160 supplies.
Using up resources in management operations On July 30, Nick examines his
supplies and determines that of the $160 supplies purchased, only $110 of
supplies are still left. In other words, the company's management used $50 of
supplies in providing services to customers in July. As the company's supplies
are used up, its resources decrease. Inasmuch as the resources must have gone
somewhere, in this case to customers serviced, the company's sources of resources
decrease as well, as reflected below.
Resources
$5,515
- $50
$5,465
=
=
=
=
$5,515
- $50
$5,465
As the company's supplies are used up, its resources decrease through a decrease
in the supplies account. Since the resources are used up in order to provide
services to customers, the retained earnings account would also decrease. This
decrease in retained earnings is often a difficult idea for students to accept.
However, remember how management generates resources through operations: it
generates resources by providing computer services to customers. When the
company received resources of $450 for services to customers in July, resources
increased and retained earnings increased. Logically then, when resources, such
as supplies are used up as part of providing services to customers, resources
should decrease and retained earnings should decrease. The accounting system
shows these effects as follows.
=
Total Resources
Event
Owner's cash
investment
Supplies
purchased
for cash
Supplies
purchased
on account
Service
provided
customer
Cash payment
on account
Service
provided
customer
Cash
collected
from
customer
Supplies
used
Totals
Cash
Accounts
+ Receivable
+ Supplies =
Sources
of
Borrowed
Resource
s
Accounts
Payable
+ $5,000
Sources of
Management
+ Generated
Resources
Retained
Earnings
+ $5,000
- $25
+ $25
+ $135
+ $135
+ $200
+ $200
- $70
- $70
+ $250
+ $100
Sources
of Owner
Invested
Resource
s
Common
Stock
+ $250
- $100
- $50
$5,205 +
$150 +
$110 =
[------------ $5,465 -----------] =
- $50
$65 +
$5,000 +
$400
[-------------- $5,465 -----------]
Notice in the above equation, the $50 decrease in supplies is shown as a - $50 in
the supplies column and the $50 decrease in retained earnings is shown as a - $50
in the retained earnings column. The equation is in balance because we
subtracted $50 from both sides: $50 were subtracted from resources and $50 were
subtracted from sources of resources. After using supplies to service its
customers, the company has $5,465 of resources. $65 of the resources were
obtained through borrowing (accounts payable), $5,000 were obtained from the
owner (common stock), and $400 were obtained through management providing
computer services (retained earnings). We can also see the company's resources
now consist of $5,205 cash, $150 accounts receivable, and $110 supplies.
Distributing resources to the owner Owners of companies have rights to the
resources they invest in the companies. They also have rights to the resources
generated through management operations. As the owner of Parks Computer Service

Corporation, Nick has a right to the $400 of resources generated through
management operations in July. Owners usually receive the actual resources when
the companies distribute them as dividends. A dividend is the distribution to
owners of resources generated through management operations. When the Parks
Computer Service Corporation pays a $75 dividend to Nick, the company's resources
decrease and its sources of resources decrease as the resources go to Nick, as
shown below.
Resources
$5,465
- $75
$5,390
=
=
=
=
$5,465
- $75
$5,390
A cash dividend reduces resources (cash). The source of resources that is reduced
by a dividend is retained earnings. Remember, retained earnings is the account
we use to keep track of the source of resources generated through management
operations. Since management generated resources increase resources and retained
earnings, the distribution of some of these management generated resources to
owners reduces resources and retained earnings. A $75 cash dividend to Nick
would affect the accounting system as follows.
=
Total Resources
Event
Owner's cash
investment
Supplies
purchased
for cash
Supplies
purchased
on account
Service
provided
customer
Cash payment
on account
Service
provided
customer
Cash
collected
from
customer
Supplies
used
Cash
dividend
Totals
Cash
Accounts
+ Receivable
+ Supplies =
Sources
of
Borrowed
Resource
s
Accounts
Payable
+$5,000
Sources of
Management
+ Generated
Resources
Retained
Earnings
+ $5,000
- $25
+ $25
+ $135
+ $135
+ $200
+ $200
- $70
- $70
+ $250
+ $100
Sources
of Owner
Invested
Resource
s
Common
Stock
+ $250
- $100
- $50
- $75
$5,130 +
$150 +
$110 =
[------------ $5,390 -----------] =
- $50
- $75
$65 +
$5,000 +
$325
[-------------- $5,390 -----------]
cash column and the $75 decrease in retained earnings is shown as a - $75 in the
retained earnings column. The equation is in balance because we subtracted $75
from both sides: $75 were subtracted from resources and $75 were subtracted from
sources of resources. After paying the dividend to the owner, the company has
$5,390 of resources. $65 of the resources were obtained through borrowing
(accounts payable), $5,000 were obtained from the owner (common stock), and $325
were obtained through management providing computer services and kept (or
retained) in the company (retained earnings). You can now see why we use the
term retained earnings. After the company distributed $75 in dividends, $325 of
the $400 resources management generated were left or retained in the company. We
can also see the company's resources now consist of $5,130 cash, $150 accounts
receivable, and $110 supplies.
** You now have the background to do exercise 1.3.
Financial Statements
The information produced by financial accounting systems is often
communicated in the form of financial statements. A company's financial
statements provide information about its resources, where the resources came
from, what the company's management did with the resources, and what the company
did with resources generated through management operations.
Income Statement
The financial statement that provides information about what a company's
management did with its resources is the income statement. The income statement
reports the dollar amount of resources generated through management operations.
It shows the dollar amount of resources received from customers for providing
services to them and the dollar amount of resources used up by the company in
providing such services. Remember, the Parks Computer Service Corporation
generated resources of $400 by servicing its customers. The company received
resources of $450 from customers and used resources of $50 in providing the
services. An increase in resources through management operations is called a
revenue. Thus, the company's source of the $450 of resources received from
customers could be called Fees Revenue. A decrease in resources through
management operations is called an expense. Thus, the company's use of $50 of
supplies could be called Supplies Expense. The income statement for management
operations of the company in July would appear as follows.
Parks Computer Service Corporation
Income Statement
For the Month Ended July 31
Fees Revenue
Supplies Expense
Net Income
$450
$50
$400
From the Parks Computer Service Corporation's income statement we can see that
the company's management used the company's resources in July to generate $400 of
additional resources (net income). The income statement shows that the company
brought in resources of $450 (fees revenue) and used $50 of resources (supplies
expense). Remember, generating resources through management operations is one
important way that companies get resources. Company owners are very interested
in the amount of resources generated through management operations because the
owners have rights to such resources. The more a company's resources increase
through management operations, the more resources its owners have rights to.
One question often asked about income statements is: "Why are a company's
dividends not reported on its income statement?" The answer to this question is
that management is not responsible for dividends. The company's board of
directors is responsible for dividends. A company's board of directors is a
group of people elected by the company's owners to establish major business
policies for the company. Some of the specific responsibilities of directors are
to determine the dollar amount of dividends and when they will be paid to the
owners of the company. Since the income statement reports on what management did
with the company's resources, not what the directors did, the company's dividends
are not reported on the income statement. More information about the differences
between management's responsibilities and those of the board of directors is
presented in chapter 12.
Statement of Retained Earnings
The financial statement that provides information about what a company did
with the resources management generated through operating the company is the
statement of retained earnings. In its simplest terms, a company has two
alternatives from which to choose with regard to resources generated through
management operations: (1) the resources can be given to owners or (2) they can
be kept in the business. The dollar amount of resources given to owners is
called dividends. The dollar amount of resources kept in the company is called
retained earnings. The Parks Computer Service Corporation's July statement of
retained earnings would appear as follows.
for the Month Ended July 31
Retained Earnings, July 1
Plus: Net Income for July
Subtotal
Less: Dividends
$0
$400
$400
$75
$325
From the Parks Computer Service Corporation's statement of retained earnings we

can see that of the $400 resources generated through management operations in
July (net income), $75 were distributed to the owner (dividends). In other
words, the company retained in the business $325 of the resources generated
through management operations.
You should note that the Parks Computer Service Corporation's July 1
retained earnings balance was $0 because the company began operations in July.
The beginning retained earnings balance on the August statement of retained
earnings would be $325.
You should also note the company's net income for July appears on two
separate financial statements, the income statement and the statement of retained
earnings. As you become more familiar with financial statements you will see
they are closely related to one another.
Balance Sheet
The financial statement that provides information about what a company's
resources are and where they came from is the balance sheet. The balance sheet
reports the dollar amount of a company's resources (called assets), the amount of
borrowed resources (called liabilities), and both the amount of resources

obtained from owners and the amount of resources generated by management and kept
in the company (called stockholders' equity). The Parks Computer Service
Corporation's July 31 balance sheet would appear as follows.

Balance Sheet
July 31
Assets
Cash
Accounts Receivable
Supplies
Total Assets
$5,130
$150
$110
$5,390
Liabilities & Stockholders' Equity

Liabilities
Accounts Payable
Stockholders' Equity
Common Stock
Retained Earnings
Total Stockholders' Equity
Total Liabilities & Stockholders' Equity
$65
$5,000
$325
$5,325
$5,390
The company's balance sheet shows on July 31 the company had resources (assets)
of $5,390. $65 of the resources were borrowed (liabilities). $5,000 of the
resources were invested by the owner (common stock). $325 of resources were
generated through management operations and retained in the company (retained
earnings).
You should also note the company's July 31 retained earnings balance
appears on two separate financial statements, the statement of retained earnings
and the balance sheet. Once again, the financial statements are closely related
to one another.
Information from Financial Statements
The information produced by a company's accounting system is aimed at
answering specific questions about the company's resources. Using the financial
statements of the Parks Computer Service Corporation, we can see how a company's
financial statements provide information about its resources, where the resources
came from, what the company's management did with the resources, and what the
company did with resources generated by management.
The July income statement shows management used the company's resources to
generate an additional $400 of resources (net income). Through management's
action of providing services to customers, the company had $400 more resources at
the end of July than it did at the beginning.
The July statement of retained earnings shows that of the $400 of resources
generated by management, the company gave $75 to the owner. The company retained
for future use $325 of resources generated through management action.
The balance sheet shows on July 31 the company had resources of $5,390,
consisting of $5,130 cash, $150 accounts receivable, and $110 supplies. $65 of
the resources were borrowed, $5,000 came from the owner, and $325 were generated
through management operations and retained in the company.
** You now have the background to do exercise 1.4.
The Accounting Equation
As discussed earlier in this chapter, resources and where they came from
are at the heart of modern financial reporting systems. Since a company's
resources must come from somewhere, we represented the accounting system as the
following simple equation.
Resources
Since a company may acquire resources in three ways, borrowing, owners'

investments, or generating through management operations, the above equation was
expanded to the following.
Total
Resources
Sources of
Borrowed
Resources
Sources of
Owner
Invested
Resources
Sources of
Management
Generated
Resources
Using business terms, the above equation can be restated to its final form,
which has become known as the accounting equation, as follows:
Assets
Liabilities
The accounting equation shows a company's resources (assets) come from

either borrowing (liabilities) or from owners and management(stockholders'
equity). At this point it is very important that you notice stockholders' equity
includes both the dollar amount of resources invested by owners and the dollar
amount of resources generated through management operations and retained in the
company. Students often have a difficult time accepting the idea that the amount
of resources generated through management operations and retained in the company
should be included in stockholders' equity. Remember, one of the reasons owners
invest in a company is that owners have rights to all resources generated through
management operations of the company. Since the owners have rights to such
resources, the dollar amount of the source of such resources (retained earnings)
is included as part of stockholders' equity.
Importance of the Accounting Equation
to Financial Reporting
Remember the accounting process discussed earlier. Briefly, the process
involved (1) analyzing events that affected a company, (2) interpreting the
events' effects on the company and the accounting equation, and (3) preparing
financial statements by using the information in the equation. Of these three
steps, if step two is done properly, the financial statements (step 3) can be
prepared even if step one is done incorrectly. In other words, the proper use of
the assets = liabilities + stockholders' equity equation guarantees that logical
financial statements can be prepared even if events are incorrectly analyzed. To
illustrate this, consider the equation that resulted from the analysis of July's
events of the Parks Computer Service Corporation.
Sources of
=
Borrowed
Resources
Total Resources
Event
Owner's cash
investment
Supplies
purchased
for cash
Cash
Assets
Accounts
+ Receivable
= Liabilities
Accounts
+ Supplies =
Payable
+ $5,000
- $25
Sources
Sources of
of Owner
Management
+ Invested + Generated
Resource
Resources
s
+ Stockholders' Equity
Common
Retained
+
Stock
+
Earnings
+ $5,000
+ $25
Supplies
purchased
on account
+ $135
+ $135
Sources of
=
Borrowed
Resources
Total Resources
Event
Service
provided
to
customer
Cash payment
on account
Service
provided
to
customer
Cash
collected
from
customer
Supplies
used
Cash
dividend
Totals
Cash
Assets
Accounts
+ Receivable
= Liabilities
Accounts
+ Supplies =
Payable
Sources
Sources of
of Owner
Management
Resource
Resources
s
Common
Retained
+
Stock
+
Earnings
+ $200
+ $200
- $70
- $70
+ $250
+ $100
+ $250
- $100
- $50
- $50
- $75
- $75
$5,130 +
$150 +
$110 =
$65 +
$5,000 +
$325
[------------- $5,390 ----------] = [-------------- $5,390 -------------]
From the information in the equation we generated three financial

statements. The income statement showed the company's management generated
resources of $400 by operating the company in July. The statement of retained
earnings showed the company distributed $75 of these $400 of generated resources
to the owners as dividends and retained the other $325 in the company. The
balance sheet reported that at the end of July, the company had $5,390 in
resources. $65 of the resources were obtained through borrowing, $5,000 were
obtained from the owner, and $325 were obtained through management providing
computer services and retained in the company.
Errors that do not result in an unbalanced accounting equation Suppose, however,
we made a mistake in our analysis of the July 10 event in which the Parks
Computer Service Corporation received $200 cash for providing services to a
customer. The equation below shows what would happen if we mistakenly used $500
instead of the correct $200.
Total Resources
Event
Owner's cash
investment
Cash
+ $5,000
Assets
Accounts
+ Receivable
Sources of
=
Borrowed
Resources
= Liabilities
Accounts
+ Supplies =
Payable
Sources
Management
of Owner
Generated
+ Invested + Resources
Resource
s
Common
Retained
+
Stock
+
Earnings
+ $5,000
Sources of
=
Borrowed
Resources
Total Resources
Event
Supplies
purchased
for cash
Supplies
purchased
on account
Service
provided
to
customer
Cash payment
on account
Service
provided
to
customer
Cash
collected
from
customer
Supplies
used
Cash
dividend
Totals
Cash
Assets
Accounts
+ Receivable
= Liabilities
Accounts
+ Supplies =
Payable
- $25
+ $25
+ $135
+ $135
+ $500
+ $500
- $70
- $70
+ $250
+ $100
Sources
Sources of
of Owner
Management
Resource
Resources
s
Common
Retained
+
Stock
+
Earnings
+ $250
- $100
- $50
- $50
- $75
- $75
$5,430 +
$150 +
$110 =
$65 +
$5,000 +
$625
[------------- $5,690 ----------] = [-------------- $5,690 -------------]
How did the error of using $500 instead of $200 affect the accounting
system? Cash, which we had previously correctly reported as $5,130 at the end of
July, now is incorrectly reported as $5,430 after the error. Similarly, retained
earnings we previously correctly reported as $325, now is incorrectly reported as
$625 after the error. Thus, the error results in two incorrect accounts.
But, what about the accounting equation? Do assets still equal liabilities
+ stockholders' equity? Since the error resulted in a $300 increase in cash
(from $5,130 to $5,430) and a $300 increase in retained earnings (from $325 to
$625), the accounting equation should still be in balance, even though some of
the dollar amounts are incorrect. In fact, as shown above, after the error total
assets were $5,690 and total liabilities plus stockholders' equity were $5,690.
Finally, what about the financial statements, which are presented below?
Are they still logical?
Income Statement
Fees Revenue
Supplies Expense
$750
$50
Net Income
$700
After the error the above income statement shows fees revenue of $750, supplies
expense of $50, and net income of $700. Remember, without the error, net income
was $400.
Subtotal
Less: Dividends
$0
$700
$700
$75
$625
After the error the above statement of retained earnings shows net income of
$700, dividends of $75, and an ending retained earnings balance of $625.
Remember, without the error, the ending retained earning balance was $325.
Balance Sheet
July 31
Assets
Cash
Accounts Receivable
Supplies
Total Assets
$5,430
$150
$110
$5,690

Liabilities
Accounts Payable
Common Stock
Retained Earnings
$65
$5,000
$625
$5,625
$5,690
After the error the above balance sheet shows assets of $5,690 and total
liabilities plus stockholders' equity of $5,690. Remember, without the error,
assets were $5,390 and liabilities and stockholders' equity totaled $5,390.
As seen from the above financial statements, even though the error resulted
in incorrect cash and retained earnings accounts, the financial statements were
still logical. That is, the information flowed from the income statement through
the statement of retained earnings to the balance sheet and, importantly, the
balance sheet balanced: assets = liabilities + owners' equity. From this you
should conclude that as long as the equality of the accounting equation is
maintained, you will be able to generate logical financial statements.
Furthermore, you should realize that while maintaining the equality of the
accounting equation will enable you to generate logical financial statements, the
information on the statements may not be correct. Remember, the $300 error
discussed above resulted in some information on all three financial statements
being incorrect. As you will learn in later chapters, there are additional parts
of the accounting process that will help produce correct information on the
Errors that result in an unbalanced accounting equation Now, suppose in our
analysis of the July 10 event in which the Parks Computer Service Corporation
received $200 cash for providing service to a customer we correctly increased the
cash account by $200, but we mistakenly increased the retained earnings account
by only $20. The equation below shows what would happen as a result of our
error.
Sources of
=
Borrowed
Resources
Total Resources
Event
Owner's cash
investment
Supplies
purchased
for cash
Supplies
purchased
on account
Service
provided
to
customer
Cash payment
on account
Service
provided
to
customer
Cash
collected
from
customer
Supplies
used
Cash
dividend
Totals
Cash
Assets
= Liabilities +
Accounts
Accounts
+ Receivable + Supplies =
Payable
+
+ $5,000
+ $5,000
- $25
+ $25
+ $135
+ $135
+ $200
+ $20
- $70
- $70
+ $250
+ $100
Sources
Sources of
of Owner
Management
Resource
Resources
s
Common
Retained
Stock
+
Earnings
+ $250
- $100
- $50
- $75
$5,130 +
$150 +
$110 =
[------------ $5,390 -----------] =
- $50
- $75
$65 +
$5,000 +
$145
[------------- $5,210 --------------]
How did the error affect the accounting system? The retained earnings we
had previously correctly reported as $325 at the end of July, now is incorrectly
reported as $145 after the error. All other accounts are correctly stated.
But, what about the accounting equation? Do assets still equal liabilities
+ stockholders' equity? Since the error resulted in only one incorrect account,
the accounting equation must be out of balance. In fact, as shown above, after
the error total assets were $5,390 and total liabilities plus stockholders'
equity were $5,210.
Finally, what about the financial statements, which are presented below?
Are they still logical?
Income Statement
Fees Revenue
Supplies Expense
Net Income
$270
$50
$220
After the error the above income statement shows fees revenue of $270, supplies
expense of $50, and net income of $220.
Remember, without the error, net
income was $400.
Subtotal
Less: Dividends
$0
$220
$220
75
$145
After the error the above statement of retained earnings shows net income of
$220, dividends of $75, and an ending retained earnings balance of $145.
Remember, without the error, the ending retained earning balance was $325.
Balance Sheet
July 31
Assets
Cash
Accounts Receivable
Supplies
Total Assets
$5,130
$150
$110
$5,390

Liabilities
Accounts Payable
Common Stock
Retained Earnings
$65
$5,000
$145
$5,145
$5,210
After the error the above balance sheet shows assets of $5,390 and total
liabilities plus stockholders' equity of only $5,210. Remember, without the
error, assets were $5,390 and liabilities and stockholders' equity totaled
$5,390. The incorrect financial statements report the company has more resources
(assets = $5,390) than it has borrowed (liabilities = $65), obtained from owners
(common stock = $5,000), and were generated by management and kept in the company
(retained earnings = $145). From a business standpoint, it is impossible for a
company to have more resources than it has borrowed, obtained from owners, or
generated by management and kept in the company. Resources do not magically
appear. Thus, errors resulting in only one incorrect account (in this case,
retained earnings) cause the financial statements to be illogical. From this you
should conclude that if the equality of the accounting equation is not
maintained, you will be unable to generate logical financial statements.
In summary, then, we can say that the accounting equation is important in
financial reporting because if it is in balance it guarantees that the financial
statements will be logical. That is, the income statement will relate to the
statement of retained earnings, the statement of retained earnings will relate to
the balance sheet, and the balance sheet will in fact balance. If the accounting
equation is not in balance, the financial statements will be illogical because
the balance sheet will not balance.
If financial statements are not logical, they cannot be relied upon to
provide useful information about a company's resources. For example, decision
makers would not use the Parks Computer Service Corporation's financial
statements if its balance sheet reported assets of $5,390 but liabilities and
stockholders' equity of only $5,210, as shown above. This balance sheet is
obviously incorrect because it reports that the company has more resources
($5,390) than it obtained from borrowing, owners' investments, and management
operations ($5,210). Where did the company get the other $180 of resources
($5,290 - $5,210)? Did they just magically appear? Obviously there is a problem
with the company's financial statements and they should not be relied upon.
Finally, it is important to again note that just because financial
statements are logical, does not mean the information in them should be used.
Maintaining the equality of the accounting equation is necessary for useful
financial statements, but it is not the only requirement. As you will see in the
following chapters, in order to provide useful information, there is more to the
accounting system than just maintaining the balance in the accounting equation.
** You now have the background to do exercises 1.5, 1.6, 1.7, 1.8, and problems
1.1 and 1.2.
Chapter 1 Critical Points
One of the most important requirements for companies to achieve their

goals is resources.
Financial accounting systems are designed to provide information to
answer four questions about a company's resources.
What is the company's total dollar amount of resources?
Where did the company get its resources (were they borrowed,
invested by owners, or generated through management operations)?
What did the company's management do with the resources (did they
use them to generate more resources)?
What did the company do with the resources generated through
management operations (were the resources given to owners or were
they kept in the company)?
Financial accounting systems provide information in the form of
The income statement provides information about what a company's
management did with its resources.
The statement of retained earnings provides information about what
a company did with the resources management generated through
operating the company.
The balance sheet provides information about a company's resources
and where they came from.
The accounting equation, assets = liabilities + stockholders' equity is
important in financial reporting because if it is in balance it
guarantees that the financial statements are logical.
Chapter One Questions

1.
List four of your personal resources.
2.
Why do businesses want resources?
3.
List three ways that companies get resources.
4.
When companies borrow money from banks, what is the name of the fee that
the companies are charged for using the banks' money?
5.
Why do owners invest their money in companies?
6.
List the four questions for which financial reporting systems provide
information.
7.
Identify the two things that a company can do with any resources
management generates through operations.
8.
What are the pieces of paper called that owners receive when they invest
in corporations?
9.
What is the name of the source of resources account that shows a company
owes money to a supplier?
10. What is the name of the resource account that shows a company's customers
owe it money?
11. What is the name of the source of resources account that shows the dollar
amount of resources generated through operations and kept in the
business?
12. How do owners actually receive from companies some of the resources
generated through management operations?
13. What is the name of the financial statement that provides information
about what management did with the company's resources?
14. Define the term revenue.
15. Define the term expense.
16, What is the difference between revenues and expenses called?

17. Why are a company's dividends not reported on its income statement?
about what the company did with resources generated by management's
operation of the business?
19. What is the dollar amount of resources generated through management
operations and given to owners called?
20. What is the dollar amount of resources generated through management
operations and kept in the business called?
21. Name the two financial statements on which a company's net income
appears.
about the company's resources and where they came from?
23. What is the term used to identify a company's resources?
24. What is the term used to identify the dollar amount of a company's
borrowed resources?
25. What is the term used to identify the dollar amount of a company's
resources obtained from owners or to which owners have rights?
26. Name the two financial statements on which a company's retained earnings
appears.
27. Why is retained earnings considered a part of stockholders' equity?
28. Why is it so important that the accounting equation, assets = liabilities

+ stockholders' equity, is always maintained?
Chapter One Exercises

Exercise 1.1: Resources = Sources of Resources
Curven Corporation began business on September 3. During its first
year, the corporation acquired total resources of $130,000. At the end of its
second year, the corporation's total sources of resources were $180,000.
During its third year, the corporation acquired an additional $40,000 in
resources.
1. Determine the Curven Corporation's total sources of resources at the end of
its first year.
2. Determine the Curven Corporation's total resources on at the end of its

second year.
3. Determine the Curven Corporation's total sources of resources at the end of

its third year.
Exercise 1.2: Sources of Resources

Determine the dollar amount of the Ng Corporation's sources of resources
for each of the following independent situations.
1. On February 5, the Ng Corporation's total resources were $245,000. $50,000
of resources had been invested by owners and $23,000 of resources had been
generated through management's operation of the business. What is the
dollar amount of borrowed resources?
2. On February 5, the Ng Corporation's total resources were $452,000.

$250,000 of resources had been borrowed and $93,000 of resources had been
generated through management's operation of the business. What is the
dollar amount of resources invested by owners?
3. On February 5, the Ng Corporation's total resources were $524,000.

$306,000 of resources had been borrowed and $120,000 of resources had been
invested by owners. What is the dollar amount of resources generated
through management's operation of the business?
Exercise 1.3: Resources = Sources of Resources

During the first week in March, the Hale Corporation experienced the
events presented below. For each event, determine the effects on the
corporation's resources and sources of resources. The first event has been
done for you.
1. The owners invested $10,000 in the business.
Resources
=
+ $10,000
+ $10,000
2. The corporation purchased $2,000 of supplies for cash.
Resources
=
3. The corporation provided $1,200 services to a customer. The customer

promised to pay for the services within 30 days.
Resources
=
4. The corporation purchased $500 of supplies on account.
Resources
=
5. The corporation paid its employees wages of $800.
Resources
=
6. The corporation paid a $100 dividend to its owners.
Resources
=
Exercise 1.4: Sources of Resources: Retained Earnings

During the year, the Stryker Corporation's resources increased by
$95,000. $20,000 of this increase was from borrowing and $75,000 was from
resources generated by management's operations and kept (or retained) in the
business. The $20,000 increase in resources also increased the corporations
liabilities by $20,000, while the $75,000 increase in resources also increased
retained earnings by $75,000. Determine the appropriate dollar amounts for
each of the following independent situations.
1. An analysis of the Stryker Corporation's retained earnings account showed
revenues of $180,000 and expenses of $100,000. Determine the corporation's
dividends for the year.

revenues of $220,000 and dividends of $30,000. Determine the corporation's
expenses for the year.

expenses of $140,000 and dividends of $25,000. Determine the corporation's
revenues for the year.
Exercise 1.5: Assets = Liabilities + Stockholders' Equity

Calculate the appropriate amount for the Ruiz Corporation in each of the
following independent situations.
1. The corporation's liabilities are $300,000 and its stockholders' equity is
$100,000. Determine the corporation's assets.
2. The corporation's assets are $900,000 and its stockholders' equity is

$360,000. Determine the corporation's liabilities.
3. The corporation's assets are $675,000 and its liabilities are $250,000.
Determine the corporation's stockholders' equity.
4. At the beginning of the year, the corporation's assets were $580,000 and
its liabilities were $370,000. During the year, assets increased by
$90,000 and stockholders' equity increased by $20,000. Determine the
corporation's liabilities at the end of the year.
Exercise 1.6: Accounting Equation

During the first week in August, the Sok Corporation experienced the
events presented below. For each event, determine the effects on the
corporation's assets, liabilities, and stockholders' equity. The first event
has been done for you.
1. The owners invested $18,000 in the business.
Assets
=
Liabilities
+ $18,000
+ $18,000
2. The corporation provided $1,800 services to a customer for cash.

Assets
=
Liabilities
+
3. The corporation purchased $1,400 of supplies on account.
Assets
=
Liabilities
+
4. The corporation paid its employees wages of $500.
Assets
=
Liabilities
+
5. The corporation paid for half the supplies purchased on account in part 3.
Assets
=
Liabilities
+
6. The corporation paid a $90 dividend to its owners.
Assets
=
Liabilities
+
Exercise 1.7: Financial Statements

Determine the dollar amounts that correspond to the letters in the financial
statements of the Farina Corporation.
Income Statement
Revenues
Expenses
Net Income
Year 1
$2,400
$1,800
A=
Year 2
H=
$2,200
G=
Year 3
$3,700
Q=
$1,300

Beginning Balance
Net Income
Subtotal
Dividends
Ending Balance
$4,300
B=
C=
$200
$4,700
I=
R=
S=
T=
$22,000
$9,300
M=
$9,500
$25,000
Y=
$8,000
D=
P=
$5,300
$9,000
V=
Balance Sheet
Assets
Liabilities
Common Stock
Retained Earnings
$900
J=
L=
K=
$500
U=

Total Liabilities and Stockholders' Equity
E=
F=
N=
$23,300
W=
X=
Exercise 1.8: Financial Statements

The following information concerning the Darling Corporation became
available at the end of its first year of operations. Accounts Payable,
$5,600; Accounts Receivable, $9,500; Cash, $5,000; Common Stock, $8,500;
Dividends, $400; Expenses, $18,500; Revenues, $21,000; Supplies, $1,700.
Determine the following for the Darling Corporation.
1. Net income for the year.
2. Retained earnings at the end of the year.
3. Total assets at the end of the year.
4. Total liabilities at the end of the year.
5. Total stockholders' equity at the end of the year.
Chapter One Problem

Problem 1.1: Accounting Equation: Effects of Transactions
Belanger's Consulting, Inc. engaged in the following transactions in June.
A.
Dan Belanger invested $6,500 in Belanger's Consulting, Inc. Dan received

6,500 shares of $1 par common stock in return for his investment.
B.
Belanger's Consulting provided $1,300 of consulting services to a customer.

The customer did not pay cash for the services, but agreed to pay cash
within the next the next 30 days.
C.
Belanger's Consulting purchased $260 of supplies. No cash was paid for the
supplies, but Belanger's Consulting agreed to pay cash within the next 30
days.
D.
Belanger's Consulting paid $390 to Kim Worthington for assistance in

providing services on the consulting project mentioned in part B above.
E.
$975 cash was received from the customer mentioned in part B above.
remaining $325 will be paid by the customer next week.
The
F.
Belanger's Consulting provided $1,040 of consulting services to a customer

who paid cash for the services.
G.
Belanger's Consulting declared and paid a $65 cash dividend.
H.
Belanger's Consulting paid the phone bill for $40 of telephone services
used during June.
I.
Belanger's Consulting paid cash for one-half of the supplies purchased in

part C above. The company will pay the remaining amount due next month.
1. By addition and subtraction, show the effects of the transactions on

Belanger's Consulting, Inc.'s resources and sources of resources. Notice that
the first two transactions have been processed for you.
A
B
C
Subtotals
D
E
F
Subtotals
G
H
I
Totals
Total
Resources
Total
+ $6,500
+ $1,300
________
__$8,060
________
________
________
__$8,710
________
________
________
__$8,475
+ $6,500
+ $1,300
________
__$8,060
________
________
________
__$8,710
________
________
________
__$8,475
2. By addition and subtraction, show the effects of the transactions on the

accounting equation of Belanger's Consulting, Inc. Notice that the first two
transactions have been processed for you.
A
B
C
Subtotals
D
E
F
Subtotals
G
H
I
Total Resources
Sources of
Borrowed
Resources
Assets
Liabilities
Sources
of Owner
Invested
Resources
Sources of
Management
Generated
Resources
Stockholders
Equity
Cash
Accounts
Receivable
Supplies
Accounts
Payable
Common
Stock
Retained
Earnings
+ $6,500
________
_______
_$6,500
_______
_______
_______
_$8,125
_______
_______
_______
________
+ $1,300
________
__$1,300
________
________
________
____$325
________
________
________
_______
_______
_______
___$260
_______
_______
_______
___$260
_______
_______
_______
_______
_______
_______
___$260
_______
_______
_______
___$260
_______
_______
_______
+ $6,500
________
________
__$6,500
________
________
________
__$6,500
________
________
________
________
+ $1,300
________
__$1,300
________
________
________
__$1,950
________
________
________
Totals
_$7,890
____$325
___$260
___$130
__$6,500
$1,845
3. The dollar amount of Belanger's Consulting, Inc.'s total resources at the end
of June is $_______________.
4. The dollar amount of resources on hand at the end of June that Belanger's
Consulting, Inc. obtained through borrowing is $_______________.
Consulting, Inc. obtained through owner's investments is $_______________.
6. Belanger's Consulting, Inc.'s net income for June is $_______________.
7. The net dollar amount of resources that Belanger's Consulting, Inc. generated
through management operations in June is $_______________.
Consulting, Inc. obtained through management operations and kept in the
company is $_______________.

Chapter01 UML 2007

Enviado por

Dados do documento

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Chapter01 UML 2007

Enviado por

Direitos autorais:

Formatos disponíveis

Chapter 1

Introduction: Reporting About Resources

trips, providing for your relatives, or helping friends.

Credit Purchases A third way companies often borrow resources is to

The importance of resources to the goals of companies has had a significant

The total dollar amount of

or, more simply

As stated earlier, a company may acquire resources in three ways: resources

The total dollar

or, more simply

Notice in the above equation, the $5,000 increase in resources is shown as a +

providing service to a customer and receiving cash increases the company's

generated through management operations. As the owner of Parks Computer Service

From the Parks Computer Service Corporation's statement of retained earnings we

borrowed resources (called liabilities), and both the amount of resources

Parks Computer Service Corporation

Liabilities & Stockholders' Equity

Since a company may acquire resources in three ways, borrowing, owners'

The accounting equation shows a company's resources (assets) come from

From the information in the equation we generated three financial

Liabilities & Stockholders' Equity

Liabilities & Stockholders' Equity

One of the most important requirements for companies to achieve their

Chapter One Questions

List four of your personal resources.

Why do businesses want resources?

List three ways that companies get resources.

Why do owners invest their money in companies?

15. Define the term expense.

16, What is the difference between revenues and expenses called?

27. Why is retained earnings considered a part of stockholders' equity?

28. Why is it so important that the accounting equation, assets = liabilities

Chapter One Exercises

2. Determine the Curven Corporation's total resources on at the end of its

3. Determine the Curven Corporation's total sources of resources at the end of

Exercise 1.2: Sources of Resources

2. On February 5, the Ng Corporation's total resources were $452,000.

3. On February 5, the Ng Corporation's total resources were $524,000.

Exercise 1.3: Resources = Sources of Resources

3. The corporation provided $1,200 services to a customer. The customer

Exercise 1.4: Sources of Resources: Retained Earnings

2. An analysis of the Stryker Corporation's retained earnings account showed

3. An analysis of the Stryker Corporation's retained earnings account showed

Exercise 1.5: Assets = Liabilities + Stockholders' Equity

2. The corporation's assets are $900,000 and its stockholders' equity is

Exercise 1.6: Accounting Equation

2. The corporation provided $1,800 services to a customer for cash.

Exercise 1.7: Financial Statements

Statement of Retained Earnings

Total Stockholders' Equity

Exercise 1.8: Financial Statements

2. Retained earnings at the end of the year.

3. Total assets at the end of the year.

4. Total liabilities at the end of the year.

5. Total stockholders' equity at the end of the year.

Chapter One Problem

Dan Belanger invested $6,500 in Belanger's Consulting, Inc. Dan received

Belanger's Consulting provided $1,300 of consulting services to a customer.

Belanger's Consulting paid $390 to Kim Worthington for assistance in

Belanger's Consulting provided $1,040 of consulting services to a customer

Belanger's Consulting declared and paid a $65 cash dividend.

Belanger's Consulting paid cash for one-half of the supplies purchased in

1. By addition and subtraction, show the effects of the transactions on

2. By addition and subtraction, show the effects of the transactions on the