Investing and Financing Decisions and the Balance SheetUnderstanding amounts on a company's balance sheet1. What business activities cause changes in the balance sheet?2. How do specific activities affect each balance?3. How do companies keep track of balance sheet amounts?*Primary objective of external financial reporting: to provide useful economic information to external users for decision making and assesing future cash flowsImportant Definitionsasset: economic resource with probable future benefitsliability: probable future scrifices of economic resourcesstockholders' equity: financin provided by owners and business operationsrevenue: increase in assets or settlement of liabilities from ongoing operationsexpense: decrease in assets or settlement of liabilities from ongoing operationsgain: increase in assets or settlement of liabilities from peripheral operationsloss: decrease in assets or settlement of liabilities from peripheral operationsReview of Elements of the Balance Sheet, in more detailassets: economic resource with probable future benefits owned or controlled by the entity. Measured by historic cost principleliabilities: probable debts or obligations that result from a compay's past transactions and will be paid with assets or services.stockholders' equity: financing provided by owners and business operations. owner provided cash is called contributed capitalThree Basic Assumptions1. separate entity assumption: business transactions are accounted for separately from owner transactions2. unit-of-measure assumption: accountin info measured and reported in national monetary unit3. continuity assumption: businesses assumed to continue to operate into the foreseeable futurehistoric cost principle: requires assets to be recorded at historical cost-cash paid plus current dollar value of all noncash considerations given on date of exchangecurrent assets: resources that a company will use or turn into cash within a year. all other assets are considered long-termcurrent liabilities: obligations that will be settled within a yearretained earnings: earnings that are reinvested in the company and not distributed to stockholders-generally, stockholders hope to make money either through dividends or capital gainsmateriality: small amounts that are not liekly to influence user's decision are accounted for in most cost-beneficial manner. usually this means this item is simply recorded as an expense when purchasedconservatism: care should be taken not to overstate assets and revenues or understate liabilities and expensesNature of Business TransactionsMost transactions with external parties involve an exchange where the business entity gives up something but receives something in return-signin a contract is not a transaction because it is an exchange of promises and not of assetsPrinciples of Transaction Analysis1. every transaction affects at least two accounts2. the accounting equation must remain in balance after each transaction