Chapter 3 Analyzing Changes in Financial Position Business

Chapter 3 Analyzing Changes in Financial Position

Business Transactions l l On any given day, many events occur that cause the financial position of a business to change. Each of these events is called a business transaction. § For example, suppose the business buys a new truck for which it pays $20, 000 cash. This event is a transaction because it causes the financial position of the business to

Equation Analysis Sheet l Your next step in the study of accounting is to learn how various business transactions affect and change the financial position. § Example Figure 3. 1 & Figure 3. 2 on Page 53 l Balance Sheet vs. Equation Analysis Sheet l Assets = Liabilities + Owner’s Equity § $53, 300 = $20, 120 + $33, 180 l Try Transactions 1 to 7 from Page 54 to 59

Steps in Analyzing a Transaction l l l 1. Identify all items (assets & liabilities) that must be changed and make all necessary changes 2. See if the owner’s equity has changed 3. Make certain that at least two of the individual items have changed 4. Make sure that the equation is still in balance Remember the accounting equation: Assets = liabilities + owner’s equity

Assignment l In groups of 2, or individually, type up (in one file) and e-mail the following completed sections to me: l Section 3. 1 Review Questions (#1 -3) – Page 51 l Section 3. 2 Review Questions (#1 -5) – Page 60 l Section 3. 3 Review Questions (#1 -5) – Page 63 l Section 3. 4 Review Questions (#1 -7) – Page 65 l Section 3. 4 Exercises (#1 -3) – Page 65 -67

Section 3. 1 Review Questions – Page 51 1. What is a business transaction? • 2. Give an example of a transaction, other than the ones above. • 3. A business transaction in a financial event that causes a change in the financial position. A new office desk is purchased and paid for in cash. Give an example of an event in a business, other than the one above, that is not a transaction. • The owner examines some new computer equipment being demonstrated by a salesperson.

Section 3. 2 Review Questions – Page 60 1. Name the form used in this chapter for analyzing transactions. l 2. Explain how this form is related to the balance sheet. l 3. The equation analysis sheet is used for analyzing transactions in this chapter. All of the assets, liabilities, and the equity are shown in columns and are in a balanced state. Explain the mathematical way of telling if capital has increased after a business transaction. l After a transaction, recalculate the total assets, the total liabilities, and the equity. If the new equity figure is greater than the previous equity figure, the capital has increased.

Section 3. 2 Review Questions – Page 60 4. How do you know if the changes for a transaction recorded on an equation analysis sheet are balanced? l 5. After each transaction is recorded on the equation analysis sheet, new column totals can be calculated and these totals balanced according to the fundamental accounting equation. The totals balance, it can be assumed that the transaction was a balanced one. Does a transaction always change both sides of the balance sheet? How do you know? l A transaction does not always change both sides of the balance sheet. For example, a transaction might increase one asset and decrease another by the same amount. In this case, the liability side of the balance sheet would be totally unchanged. The balance sheet still balances after the sample transaction.

Section 3. 4 Review Questions – Page 65 1. Give the reasons why business papers are created within a business. § § 2. When in the business do business papers originate? § § 3. For proof of purchase For proof of payment For reference For a permanent record The purchasing department The sales department The receiving department and The accounting department What must happen to any business paper for which an accounting entry is necessary? l A copy of every business paper that requires an accounting entry must be forwarded to the accounting department.

Section 3. 4 Review Questions – Page 65 4. For accounting purposes, what are these business papers called? l 5. State and explain the objectivity principle. Give an example. l 6. The objectivity principle states that accounting records will be based on objective evidence. Source documents represent this objective evidence. Give some examples of source documents. l l 7. Source documents. Hydro bills Cheque copies Cash register summaries Credit card statements What happens to source documents after the accounting entries have been completed?

Section Exercises Try the following Exercises in Groups: l Question 1 on Page 60 & 61 l Question 2 on Page 61 l Question 3 on Page 62

Source Documents l A Source Document is a business paper, for example a bill. It is the original record of a transaction and it provides the information needed when accounting for the transaction l For example: Hydro Bills, telephone bills, Cheque copies, credit card statements, cash register summaries. All source documents must be kept on file for reference purposes and as proof of transactions l

Section Exercise - Question 1, Page 65 1. Who issued the bill? § 2. § July 22, 19 -0 6. No, the bill does not say when payment is due. 7. When the bill is paid, the receiver will decrease Bank $1, 712 and decrease Capital $1, 712. For what service was the bill issued? § Does the bill say when payment is due? § In your opinion, what accounting changes will be made by the receiver? Smokey Valley Ski Club When was the bill issued? § 4. Campbell & Associates Who received the bill? § 3. 5. Campbell and Associates audited the records of Smokey Valley Ski Club and also prepared financial statements for them. Does the bill represent good objective evidence? Why?

Chapter 3, Assignment #2 v Complete the following tasks in groups and submit one Word and one Excel file (named Chapter 3, Assignment 2). v Read Chapter Highlights – Page 73 v Exercise 1 on Page 73 v Exercise 2 on Page 74 v Exercise 6 on Page 74 v In Excel: Challenge Exercise #6, page 74 -75

Exercise 2 – Page 66 1. 2. 3. 4. 5. 6. 7. 8. 9. The Davey Company issued the bill Smokey Valley Ski Club received the bill The bill was issued December 5, 19 -0 The goods were delivered December 5, 19 -0 by CPX The bill is due for payment in 30 days from December 5, 19 -0, which would be January 4, 19 -1 The source document was issued as evidence of the transaction to be used in the accounting records of both the purchaser and the vendor The accounting changes for the purchaser will increase Supplies by $170. 20 and increase Accounts Payable – The Davey Company by $170. 20 No, this was not a cash sale transaction The bill comes from an independent source

Exercise 3 – Page 67 1. 2. 3. 4. 5. The source document is a cheque Smokey Valley Ski Club issued a cheque Mid-West Ski Lifts and Equipment received the cheque The source document is likely paying for ski lifts and/or other equipment B and C are both possible. B is more likely because this type of equipment would normally be first purchased on credit and paid for later.

Exercise 1 – Page 73 1. 2. 3. 4. 5. F. Vanweers paid a debt of $250 On credit, $150 worth of supplies were purchased from Norpaints B. Provost, the owner, put $300 cash into his business The business performed a service for C. Sulley, who has 30 days to make payment The debt to B. M. Co. was paid in full

Exercise 2 – Page 74 1. 2. 3. 4. 5. The business performed a service for L. Swan for $1800, of which $500 was paid in cash and $1300 is still owing The auto was sold to High Finance for $6500, paying off the debt of $5000 and leaving B. Lee with $1500 cash and a $500 loss on the sale of the auto A $20000 auto was bought with $1000 cash and a $19000 Bank Loan The owner withdrew $150 from his personal account Supplies worth $50 have been destroyed