Page 439 - Introduction to Business

CHAPTER 12 Financial Reporting 413

Assets. Assets are the economic resources owned by the firm. They are catego- assets The economic resources owned
rized into current assets and long-term assets. Current assets are those that will be by the firm
used up, sold, or converted to cash within the year or the normal operating cycle if current assets The assets that will be
used up, sold, or converted to cash
longer than one year. Current assets for Cathy’s Candy Company include cash,
within the year or the firm’s normal
accounts receivable, inventory, and prepaid expenses. Accounts receivable (line 2) operating cycle if more than one year
is the amount owed to the firm by customers. Prepaid expenses (line 4) designates
prepayments for items such as rent, insurance, and advertising.
Property and equipment is the chief category of long-term assets. The total cost
of property and equipment owned by the firm on December 31, 2004, was $9,141
million (line 9). This property and equipment was partially used up, as shown by
the accumulated depreciation of $3,513 million (line 10). Depreciation is the depreciation The accounting process of
accounting process of allocating an asset’s cost to expense over the asset’s useful allocating an asset’s cost to expense
over the asset’s useful life
life. The net value, also called book value, of property and equipment at
December 31, 2004, is $5,628 million (line 11).

Liabilities. Liabilities are the debts or economic obligations of the firm. Like liabilities The debts or economic
assets, liabilities are categorized into current and long-term. Debts that are payable obligations of the firm
within one year or within the firm’s normal operating cycle if more than one year
are designated current liabilities. current liabilities The firm’s obligations
that are payable within one year or
within the firm’s normal operating cycle
Owners’ Equity. Owners’ equity is the residual interest in the assets of the firm
if more than one year
after subtracting the liabilities. Owners’ equity, also called stockholders’ equity in
owners’ equity The residual interest in
the case of a corporation, is simple to calculate. The accounting equation for own- the assets of the firm after subtracting
ers’ equity is the liabilities; also called stockholders’
equity
Assets liabilities owners’ equity accounting equation Assets
liabilities owners’ equity
The amount of total liabilities is subtracted from the amount of total assets.
Owners’ equity for Cathy’s Candy Company (line 26) is $4,719 million on December
31, 2004. Owners’ equity consists of common stock, retained earnings, treasury
stock, and other equity. Common stock consists of millions of shares that the firm
has sold to stockholders, which amounts to $1,194 million for Cathy’s Candy Com-
pany on December 31, 2004.

The owner of a gift baskets store
stands next to her inventory of spe-
cialty foods and candies.

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