(Conceptual Issues—Equity) Statements of Financial Accounting Concepts set forth
ID: 2424093 • Letter: #
Question
(Conceptual Issues—Equity) Statements of Financial Accounting Concepts set forth financial accounting and reporting objectives and fundamentals that will be used by the Financial Accounting Standards Board in developing standards. Concepts Statement No. 6 defines various elements of financial statements.
Instructions
Answer the following questions based on SFAC No. 6.
a. Define “distributions to owners” and provide examples of this type of transaction. What financial statement element other than equity is typically affected by distributions?
b. What are examples of changes within owners’ equity that do not change the total amount of owners’ equity ?
Explanation / Answer
Equity (finance), the value of an ownership interest in property, including shareholders' equity in a business
Stock, the generic term for common equity securities is called stocks
Home equity, the difference between the market value and unpaid mortgage balance on a home
Private equity, stock in a privately held company
Equity in income of affiliates, an accounting term referring to the consolidated or unconsolidated ownership in affiliate companies
I have a new business with high start-up costs. I do have a business checking account and make deposits from my savings and other income which are equity injections far beyond the business' generated income.
However, for various reasons I also use personal bank accounts, credit cards and brokerage accounts to pay for items ranging from office supplies to buying several pieces of property to making capital improvements on the property -- not standard practice I know -- but it's just me and I'm scrambling to get my business off the ground.
I handled this in my previous paper-books business by calling all cash injections petty cash, but several hundred thousand for a property is not exactly petty cash, and my books were actually a kludge.
When an owner invests money or property in a business, the transaction affects various financial statement elements. These elements are part of a statement of financial position, a statement of cash flows and a statement of changes in shareholders' equity. Only the statement of profit and loss doesn't see changes after a cash inflow.
Payment of earnings to owners of a business organization in the form of a dividend. A dividend is a distribution to a corporation's stockholders usually in cash; sometimes in the corporation's stock, called a stock dividend ; and much less frequently in property (usually other securities), called a dividend in kind.
DISTRIBUTION TO OWNERS is payment of earnings to owners of a business organization in the form of a dividend. A dividend is a distribution to a corporations stockholders usually in cash; sometimes in the corporations stock and much less frequently in property (usually other securities).
The income statement for the calendar year 2011 will explain a portion of the change in the owner’s equity between the balance sheets of December 31, 2010 and December 31, 2011. The other items that account for the change in owner’s equity are the owner’s investments into the sole proprietorship and the owner’s draws (or withdrawals). A recap of these changes is the statement of changes in owner’s equity. Here is a statement of changes in owner’s equity for the year 2011 assuming that the Accounting Software Co. had only the eight transactions that we covered earlier.
Accounting Software Co.
Statement of Changes in Owner’s Equity
For the Year Ended December 31, 2011
Owner’s Equity at December 31, 2010 $ 0
Add: Owner’s Investment 10,000
Net Income 180
Subtotal 10,180
Deduct: Owner’s Draws 100
Owner’s Equity at December 31, 2011 $ 10,080
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