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7-14 Accounting [CH 7

that are against real estate are fixed liabilities. They are often represented by a
mortgage and are classified as long‑term liabilities.

Owners' Equity
The last category of the balance sheet is the Owners’ Equity. Owners’ equity
long-term liabilities represents the claims of the owners, partners, and shareholders against the assets of the
Debts that come due one firm minus any debt owed. The calculation for this is:
year or more after the date
of the balance sheet. Owners’ Equity = Assets - Liabilities
An easy way to recall this is to note that it is an arithmetic calculation that
represents that portion of the business assets not incumbered by debt (liability). It is

comprised of three elements: residual investments made by the owners of the firm,
retained earnings that are left in the business rather than distributed to the owners and
the unencumbered value of the assets.
The specific listings in the owners' equity section of the balance sheet varies with
the form of business ownership. Unincorporated businesses record the direct
investment of the owners in a capital account with the name of the proprietor or
partners. For partnerships, the capital account reflects the exact investment claims of
each partner. Corporate investment is reflected by issuing common stock to the
owners (or shareholders). In the case of Sierra Quality Canner, the corporation was
formed by issuing 122,000 shares of common stock to the firm's shareholders at a

price of $1 per share. This direct investment of $122,000 is listed on the firm's balance
sheet as Common Stock.
The profits of the corporation can be distributed to the shareholders in the form of
cash dividends, or they can be retained by the corporation and reinvested in the
business. Retained earnings can be used for expansion and growth and can be invested

in such assets as land, buildings, machinery and equipment. Sierra Quality Canner's
retained earnings of $81,000 represent the accumulated earnings that have been left in
the firm.

The Income Statement

The income statement, which is also referred to as the Net Income Statement, an
operating statement, and a Profit and Loss (P&L), identifies a firm’s revenue,
expenses, and net income over some period of time, typically one year.
The P&L is useful for enabling decision makers to focus on overall revenues and
income statement
Financial record of the costs involved in generating these revenues. This statement provides specific
revenues, expenses, and indications of the ability of the organization's revenues to cover the costs involved in
profits of a company over a its operation. Finally, the income statement provides much of the basic data needed to
period of time. calculate numerous ratios used by management in planning and controlling the

organization. Figure 7.8 shows the 20xx income statement for Sierra Quality Canner.

Major Components of the Income Statement
The income statement summarizes the income and expenses of the firm over a
period of time. The basic format shows the deduction of costs and expenses, including

taxes, from income in order to determine the net profit of the firm for that period. The
equation for the income statement is:

Revenues — Expenses = Net Profit (or Loss)

Figure 7.8 may be divided into the following major sections:

Net Sales $442,000
Minus: Cost of Goods Sold - 132,000
Equals: Gross Profit $310,000

Minus: Total Operating Expenses - 128,000
Equals: Net Income before Taxes $ 182,000
Minus: Income Taxes - 75,000
Equals: Net Income $ 107,000

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