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Financial Statement Components
This week’s assignment will focus on financial statements, a critical component in the decision-making process for various stakeholders. To demonstrate your comprehension of this, you will identify the key components of financial statements, explain their significance in reflecting a company’s financial position, and describe how different stakeholders use this information.
Financial statements are composed of various transactions. Please review Urban Path Co.’s transaction below and address the following questions:
- Categorize each transaction into one or more of the following categories: equity, assets, liabilities, income, and expenses. Use the table in this template to organize your categorizations and ensure that every transaction is properly accounted for with debits and credits.
- Provide a brief overview of the company’s total assets, liabilities, and equity. Explain how each figure reflects the company’s financial position.
- Which financial statement do you consider most valuable as an investor when making investment decisions? Support your choice with relevant examples.
- Explain how the financial statements resulting from Urban Path Co.’s transactions might be used by various stakeholders (i.e., investors, creditors, and management).
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Financial Statement Components
1. Categorizing Each Transaction
The categorization of Urban Path Co.’s transactions is vital for maintaining an accurate set of financial statements. Below is the table that categorizes each transaction according to equity, assets, liabilities, income, and expenses:
| Transaction | Category | Debit | Credit |
|---|---|---|---|
| Example 1: Received $50,000 from investors | Assets (Cash) | $50,000 | Equity (Capital) |
| Example 2: Purchased equipment worth $20,000 on credit | Assets (Equipment) | $20,000 | Liabilities (Accounts Payable) |
| Example 3: Paid $5,000 in wages | Expenses (Wages) | $5,000 | Assets (Cash) |
| Example 4: Earned revenue of $10,000 from sales | Income (Revenue) | $10,000 | Assets (Cash) |
| Example 5: Paid $3,000 for rent | Expenses (Rent) | $3,000 | Assets (Cash) |
2. Overview of Total Assets, Liabilities, and Equity
- Total Assets: The total assets of the company include everything that the business owns, including cash, equipment, and any other resources with economic value. In the example, assets increase when cash is received from investors, when equipment is purchased, and when revenues are earned. However, assets decrease when cash is spent on wages or rent. The net value of assets shows how much value the company controls.
- Total Liabilities: Liabilities refer to obligations the company owes, including loans, debts, and accounts payable. In the example, liabilities include the amount owed for the..