Owner’s equity

Remember that owner s equity represent the funds that an owner puts up to start the business. WHP s balance sheet indicates that the owners started with 300,000 of their own money. At the end of year 1, the owners have increased this amount by 200,000 to 500,000 owing to profitable operations during year 1. The owners could leave this extra 200,000 of profit to be used in the business (known as retained earning.s), or they could take some or all of the money to pay themselves (known as dividends). 

Return on equity (ROE) = net income average owner s equity... 

Shows the expected end-of-period balances for the company s assets, liabilities, and owner s equity, assuming that planned operations are carried out... 

Numerous activities occur on a daily basis that can change assets (things that we own, e.g., a computer), liabilities (debts that we owe, e.g., notes payable), and the owner s equity (the worth of the owner, e.g., Amy Harris, capital). These changing events must be entered in accmmting records. Developing a set of financial records is the responsibility of the firm s owner, and a system should be developed that is compatible with the company s owner and managers who use this information. 

Harris Pharmacy Statement of Owner s Equity For the month ended May 31, 20-... 

Assets are things of value that the business owns. Liabilities are amounts that the firm owes to others such as suppliers. For example, the amount owed on the purchase of a computer is a liability. Finally, owner s equity represents claims of fhe owner, wherein claims can increase by personal investments from oufside the business and by earning revenue as the result of conducting business. Equity that is accumulated from a successful business and kept by the firm is included in the retained earnings account. Table 9.5 shows the balance sheet for Harris Pharmacy. 

Assets Harris Pharmacy Balance Sheet May 31, 20- Liabilities and Owner s Equity ... 

Total Assets 55,500 Total Liabilities and Owner s Equity 55,500... 

The cash flows involved m operating activities concern changes in the current asset and Hability accounts whereas investing relates to changes in fixed assets, except accumulated depreciation and financing activities involve changes in owner s equity accounts. 

Prepare the financial statements (income statement, statement of owner s equity, balance sheet, statement of cash flows, etc.). 

In a balance sheet, total assets and total liabilities should be used as denominators to determine the percentage of specific assets, liabilities, and owner s equity, respectively. All financial statement users, including shareholders, will exhibit concern because this drop in gross profit may make the firm report a net loss on the current income statement. Table 9.9 illustrates a sample of vertical analysis for a balance sheet. 

Note (1) The vertical analysis of the balance sheet reflects any account selected as the numerator and the amount of total assets as the base or denominator (e.g., cash account 32,000/ 186,330). (2) Each liability or owner equity account is divided by the total of liabilities and owner s equity. 

Criterion 1. Investors asks three sets of questions. The first set is concerned with present performance and how it compares with recent past performance. Is the company making money and paying a dividend Is the price of the stock rising Does the company have a good net income as measured by profit per dollar of sales, profit per dollar of investor s equity, and profit per dollar of owner s equity plus long-term debt ... 

Capital structure is concerned with the ratio of borrowed capital to owner s equity. When inflation is low and the economy is stable, it is frequently cheaper to use borrowed money, if a company can secure lenders. However, a highly leveraged company—that is, one with a high debt-to-equity ratio—faces downside risk when business is bad. Stockholders receive high dividends when profits are good but bondholders expect the interest and principal to be paid on time, with the threat to a firm of insolvency and bankruptcy. Section 8.4.3 shows the effect of debt-to-equity ratio on company operations. Financial officers of companies are concerned with the optimum debt-to-equity ratio. 

---