Well, in theory, the CR system assumes that a party of four characters, all the same level, will be moderately challenged by an enemy with a CR equal to their level.
How accurate that system is is a topic of endless debate.
In your specific case, for 5 first level characters; small groups of creatures with CRs less than one should be fine. Generally, its better to have a few weak enemies than just one strong enemy. A fight with 3 skeletons would be more fun and interesting than having them fight just one CR 1 Hobgoblin or something.
It's tricky at first level because one lucky shot from an otherwise easy monster can drop someone into negative hp.
As for calculating xp, ignore the table showing rewards based on party size. Just add up all the xp values from the monster entries. At the end of the fight or the session or whenever you want to hand out xp, take that total and divide it by 5. That's each character's xp total.
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Well the first bit of advice I have is: expect to make a few mistakes. But if you're at least trying to follow the advice of the rulebooks (even if you don't fully understand it), it will be hard to make such a big mistake that you ruin the game.
In your goblin example, you aren't doing anything wrong (though the book tells us that five goblins would be CR 3, no matter how you slice it), but your assessment that the party won't break a sweat may be off - it depends on the specifics of the encounter.
Is one side ambushing the other? Are the goblins under-equipped or not diverse (as in, they all have short swords and shields, no ranged weapons). Is this the first challenge the PCs will face today? What is the terrain like, advantageous to goblins? None of those things will officially change the CR, but could mean the difference between a cakewalk and a workout - and it's how you turn 5 goblins (675 XP) into a CR 3 encounter. (If you have access to it, check out AP #1 Burnt Offerings. In that adventure, there is a goblin "stronghold" that gives a handful of goblins a serious advantage, making two or three goblins a serious challenge for 2nd/3rd level PCs.)
Your NPC gear question is addressed in the same section a little later. If they've spent their allotted cash, then even though one guy has padded armor and a dagger, he had to have bought something that can help him out (wand of something?) - so that means no CR adjustment. If it turns out he *is* under-equipped... well the book tells you what to do.
Hope that rambling helped.
Thanks all,
My answer to this is to roll play the encounters ahead of time with the specific setup I plan. Its difficult to get it exact as no one has rolled up their characters yet. I'm using the iconic characters as standins.
The 1st will be a goblin ambush of the party on a road escorting a supply wagon. The goblins will likely have surprise but will have a large open space to cross so the party won't get hit while flat footed. The goblins want the supply wagon, of course. They are armed with short swords and/or bows.
I started out with 5 goblins but the encounters only lasted 2 or 3 rounds. I now have it up to 16 goblins (5 bows & 11 melee) plus a 2nd level leader. I've playtested this 8 or 10 times and the party always wins with a character going down (but not dead) only once in a while. The goblins will make morale tests after losing their leader or half their number so a few will eventually flee. The difference is the cleric's ability to channel positive energy. Over the course of a fight the cleric can restore a party's HP 2 or 3 times depending on dice rolls. This will be less of a big deal as they go up in level but at low level its decisive against an enemy without magic.
I'm going to use this 1st encounter to calibrate the difficulty of my monsters.
The 2nd goblin encounter should be more fun. It takes place at night on a narrow path after the party has already been in an earlier fight that day. They will ambush a small group of goblins and if they pursue the survivors will fall into an ambush themselves. This time they will be no time to set up as the goblins will be on them as soon as they see them. I haven't playtested this one yet but will likely use less than 16 goblins.Tim
Just remember that most encounters are supposed to take 2 or 3 rounds. Consider that most battles are supposed to sap 1/4th of the party's resources. Design most esoteric non-boss battle fights with the idea in mind of, "Could the party fight this battle four more times today and still be able to take on the weaker, flavorful fights and the final boss battle?" If the answer is near "yes" then that's generally where you want to be in terms of design theory.