Accounting Introduction

Acct 203NYC

Assignment 2 – Introducing Financial Accounting

Questions

1. The accounting equation (Assets = Liabilities + Equity) is a fundamental business concept. Explain what this equation reveals about a company’s sources and uses of funds and the claims on company resources.

This equation reveals how a company uses the funds received from equity holders and/or creditors to generate revenue and distributing such revenue back to equity holders in the form of additional shares of the business, actual cash contributions, or other such economic future benefits. The equation also reveals how effectively a company manages its obligations to creditors. For example, Target Corp.’s balance sheet as of November 1st, 2014, reveals that it holds inventory for sale in the amount of $11.1 billion, and buildings and improvements of $30.9 billion. This information illustrates that Target Corp. owns warehouses to house the inventory it sells and maybe owns the space it houses the employees that support the operations of the company. Target Corp.’s balance sheet also reveals how levered the company is and usually states the ratio of such liabilities classified as short-term (within 12-months) and long-term (greater than 12-months). This information allows the reader/potential investor how well Target Corp. is positioned in comparison to its competitors in the market.

Companies prepare 4 primary financial statements. What are those financial statements and what information is typically conveyed in each?

The balance sheet reports the financial position (amount of assets, liabilities, and stockholders’ equity) of a company at a particular point in time. The income statement is the accountant’s primary measure of performance of a business, revealing the revenues and expenses during the accounting period. The elements included in the income statement are revenues, expenses and net income. The third financial statement is the statement of stockholders’ equity, which reports...