Transaction Analysis Principles of Cost Analysis and Management

Terminal Learning Objective • Action: Demonstrate How Transactions Affect the Accounting Equation • Condition:

Lacy’s Lemonade Stand • Lacy Simmons receives a $200 transfer from the family to

What’s the Difference? • Consider the purchasing sequence: Plan Order Receive Pay Asset &

Review: Financial Position • The following equation represents financial position: • Assets = Liabilities

Review: Financial Activity • The following equation represents financial activity: Revenue – Cost =

Review: Three Ways to Measure • Cash Basis: Plan Order Receive Pay Consume •

The Accrual Basis of Accounting • Focuses on exchange of Economic Resources • Records

Revenue Comparison • Cash Basis: Plan Take Orders Complete Service or Ship Product Collect

The Accrual Basis of Accounting • “Matches” Revenues with Expenses • It take money

Terminology • How do expenses differ from costs? costs • Costs can be measured

Terminology • Expenses may be recorded before cash is paid, when cash is paid,

Terminology • How do expenses differ from expenditures? expenditures • Expenditures represent the using

Consider Office Supplies • Under Budgetary Accounting: Plan Commitment Order Obligation Receive Pay Consume

It’s ok, we bought this paper last year! © Dale R. Geiger 2011 23

Terminology • An account is a RECORD of the CHANGES in a particular asset,

Learning Check • Under the accrual basis of accounting, when is revenue recorded? •

The Accounting Equation Expanded Assets = Liabilities + Fin. Position ± Net Change =

Transactions and Financial Position Cash Liab Fin. Position Other Assets + Rev – Expense

Learning Check • What activity causes assets and financial position to increase? • What

Lacy’s Transactions • Receives $200 equity transfer Transaction Description Beginning Balances Cash + 0

Lacy’s Transactions • Receives $200 equity transfer Transaction Description Beginning Balances Receives $200 Equity

Lacy’s Transactions • Buys a pitcher, a juicer, and a table at a yard

Lacy’s Transactions • Has flyers printed for $10 Transaction Description Balance Forward Cash +

Lacy’s Transactions • Has flyers printed for $10 Transaction Description Cash + Other Assets

Lacy’s Transactions • Pays Bert $5 to pass out flyers Transaction Description Balance Forward

Lacy’s Transactions • Purchases supplies: cups, $15; napkins $5; lemons, $25; sugar, $10 and

Lacy’s Transactions • First day’s sales: $15 in cash and $20 in IOUs Transaction

Key Points • Each transaction must keep the equation in balance • Each transaction

Additional Transactions • Receives $5 cash toward the IOUs Transaction Description Balance Forward Cash

Additional Transactions • Opens a charge at the grocery store with a $50 limit

Additional Transactions • Purchases $40 in supplies on account at the grocery store Transaction

Additional Transactions • Makes cash sales of $50 Transaction Description Balance Forward Cash +

Additional Transactions • Makes cash sales of $50 Transaction Description Cash + Other Assets

Additional Transactions • Pays the grocery bill in full Transaction Description Balance Forward Cash

Additional Transactions • Pays the grocery bill in full Transaction Description Cash + Other

Learning Check • How does borrowing money from the bank to purchase equipment affect

Practical Exercise © Dale R. Geiger 2011 58

Transaction Worksheet Enter transaction data into the columns Balances will calculate automatically © Dale

Transaction Worksheet Out of Balance notification will appear if transaction does not balance ©

Practical Exercise © Dale R. Geiger 2011 61

Slides: 61

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Transaction Analysis Principles of Cost Analysis and Management © Dale R. Geiger 2011 1

Terminal Learning Objective • Action: Demonstrate How Transactions Affect the Accounting Equation • Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors. • Standard: With at least 80% accuracy: • Explain accounting terminology • Analyze transactions for effects on the accounting equation • Enter transactions into the accounting equation © Dale R. Geiger 2011 2

Lacy’s Lemonade Stand • Lacy Simmons receives a $200 transfer from the family to start a lemonade stand. • The lemonade stand will run as a revolving fund • User fees must cover costs • Uses Accrual Basis of Accounting • How will this be recorded in the Family’s financial equation? © Dale R. Geiger 2011 3

What’s the Difference? • Consider the purchasing sequence: Plan Order Receive Pay Asset & Liability Remove Liability Consume Expense Accrual accounting records an asset and a liability when the goods are received …and an expense when goods are consumed © Dale R. Geiger 2011 4

Review: Financial Position • The following equation represents financial position: • Assets = Liabilities + Financial Position • What is an asset? • Something owned that represents future benefit • What is a liability? • Something owed or a creditor’s claim against assets • Financial position can also be called equity, net assets, or fund balance © Dale R. Geiger 2011 5

Review: Financial Activity • The following equation represents financial activity: Revenue – Cost = Change in Financial Position • What is a revenue? • Represent earnings received in cash • Increase Assets and Increase Financial Position • What is a cost? • Represent cash payments for goods and services received • Decrease Assets and Decrease Financial Position © Dale R. Geiger 2011 9

Review: Financial Activity • The following equation represents financial activity: Revenue – Cost = Change in Financial Position • What is a revenue? • Represent earnings received in cash • Increase assets and increase financial position • What is a cost? • Represent cash payments for goods and services received • Decrease Assets and Decrease Financial Position © Dale R. Geiger 2011 11

Review: Financial Activity • The following equation represents financial activity: Revenue – Cost = Change in Financial Position • What is a revenue? • Represent earnings received in cash • Increase assets and increase financial position • What is a cost? • Represent cash payments for goods and services received • Decrease assets and decrease financial position © Dale R. Geiger 2011 12

Review: Three Ways to Measure • Cash Basis: Plan Order Receive Pay Consume • Budgetary Basis: • Accrual Basis: © Dale R. Geiger 2011 13

Review: Three Ways to Measure • Cash Basis: Plan Order Receive Pay Consume • Budgetary Basis: Plan Commitment Order Obligation Expenditure • Accrual Basis: © Dale R. Geiger 2011 14

Review: Three Ways to Measure • Cash Basis: Plan Order Receive Pay Consume • Budgetary Basis: Plan Commitment Order Obligation Expenditure • Accrual Basis: Plan Order Receive Asset & Liability Remove Liability © Dale R. Geiger 2011 Expense 15

The Accrual Basis of Accounting • Focuses on exchange of Economic Resources • Records Revenues in the period in which they are EARNED • Providing a service • Selling a product Plan Take Orders Complete Service or Ship Product Collect Cash Revenue & Non-Cash Asset © Dale R. Geiger 2011 16

Revenue Comparison • Cash Basis: Plan Take Orders Complete Service or Ship Product Collect Cash • Accrual Basis: Plan Take Orders Revenue & Non-Cash Asset © Dale R. Geiger 2011 17

The Accrual Basis of Accounting • “Matches” Revenues with Expenses • It take money to make money • Records Expenses in period INCURRED • Resources Consumed Plan Order Receive Pay Asset & Liability Remove Liability © Dale R. Geiger 2011 Consume Expense 18

Terminology • How do expenses differ from costs? costs • Costs can be measured in various ways, according to management’s use of the information • Expenses are measured according to generally accepted accounting principles © Dale R. Geiger 2011 19

Terminology • Expenses may be recorded before cash is paid, when cash is paid, or after cash is paid • Expense before cash: • Employees work two weeks at the end of September but will be paid in October • Expense after cash: • Insurance premium for one year is paid 30 -Sept and benefits the next fiscal year © Dale R. Geiger 2011 20

Terminology • How do expenses differ from expenditures? expenditures • Expenditures represent the using up of an appropriation, and are recorded in the period goods or services are received • Expenses are recorded in the period resources are consumed © Dale R. Geiger 2011 21

Consider Office Supplies • Under Budgetary Accounting: Plan Commitment Order Obligation Receive Pay Consume Expenditure • Under Accrual Accounting: Plan Order Receive Asset & Liability Remove Liability © Dale R. Geiger 2011 Expense 22

It’s ok, we bought this paper last year! © Dale R. Geiger 2011 23

Terminology • An account is a RECORD of the CHANGES in a particular asset, liability, revenue, expense or element of financial position • A transaction represents an EXCHANGE of RESOURCES that affects two or more accounts • External transactions involve exchanging resources with parties outside the organization • Internal transactions involve exchanges within the organization © Dale R. Geiger 2011 24

Learning Check • Under the accrual basis of accounting, when is revenue recorded? • Where does the term “Double Entry Accounting” originate? © Dale R. Geiger 2011 28

The Accounting Equation Expanded Assets = Liabilities + Fin. Position ± Net Change = Revenue – Expense Therefore: Assets = Liab + Fin. Position + Rev – Expense Assets may be cash or other assets, so: Cash + Other Assets = Liab + Fin. Position + Rev – Expense © Dale R. Geiger 2011 29

Transactions and Financial Position Cash Liab Fin. Position Other Assets + Rev – Expense © Dale R. Geiger 2011 30

Learning Check • What activity causes assets and financial position to increase? • What is the effect on the accounting equation when the rent for the month is paid in cash? © Dale R. Geiger 2011 31

Lacy’s Transactions • Receives $200 equity transfer Transaction Description Beginning Balances Cash + 0 + Other Assets = 0 = + Financial + Position 0 + Liab © Dale R. Geiger 2011 Rev – Exp 0 – 0 32

Lacy’s Transactions • Receives $200 equity transfer Transaction Description Beginning Balances Receives $200 Equity Transfer New Balance Cash + Other Assets = Liab + Financial + Position Rev – 0 + 0 = 0 + 0 – +200 + = + +200 + – 200 + 0 = 0 + 200 + 0 – © Dale R. Geiger 2011 Exp 0 0 33

Lacy’s Transactions • Buys a pitcher, a juicer, and a table at a yard sale for $20 Transaction Description Balance Forward Cash + 200 + Other Assets = 0 = + Financial + Position 0 + 200 + Liab © Dale R. Geiger 2011 Rev – 0 – Exp 0 34

Lacy’s Transactions • Buys a pitcher, a juicer, and a table at a yard sale for $20 Transaction Description Cash + Other Assets = Liab + Financial + Position Rev – Balance Forward 200 + 0 = 0 + 200 + 0 – Buys pitcher, juicer & table at yard sale for $20 -20 + +20 = + + – New Balance 180 + 20 = 0 + 200 + 0 – © Dale R. Geiger 2011 Exp 0 0 35

Lacy’s Transactions • Has flyers printed for $10 Transaction Description Balance Forward Cash + 200 + Other Assets = 0 = + Financial + Position 0 + 200 + Liab © Dale R. Geiger 2011 Rev – Exp 0 – 0 36

Lacy’s Transactions • Has flyers printed for $10 Transaction Description Cash + Other Assets = Liab + Financial + Position Rev – Exp Balance Forward 180 + 20 = 0 + 200 + 0 – 0 Has flyers printed $10 -10 + = + + – +10 New Balance 170 + 20 = 0 + 200 + 0 – 10 © Dale R. Geiger 2011 37

Lacy’s Transactions • Pays Bert $5 to pass out flyers Transaction Description Balance Forward Cash + 170 + Other Assets = 20 = + Financial + Position 0 + 200 + Liab © Dale R. Geiger 2011 Rev – 0 – Exp 10 39

Lacy’s Transactions • Pays Bert $5 to pass out flyers Transaction Description Balance Forward Pays Bert $5 to pass out flyers New Balance Cash + Other Assets = Liab + Financial + Position Rev – Exp 170 + 20 = 0 + 200 + 0 – 10 -5 + = + + – +5 165 + 20 = 0 + 200 + 0 – 15 © Dale R. Geiger 2011 40

Lacy’s Transactions • Purchases supplies: cups, $15; napkins $5; lemons, $25; sugar, $10 and ice, $10 Transaction Description Balance Forward Cash + 165 + Other Assets = 20 = + Financial + Position 0 + 200 + Liab © Dale R. Geiger 2011 Rev – 0 – Exp 15 41

Lacy’s Transactions • Purchases supplies: cups, $15; napkins $5; lemons, $25; sugar, $10 and ice, $10 Transaction Description Cash + Other Assets = Liab + Financial + Position Rev – Balance Forward 165 + 20 = 0 + 200 + 0 – Purchases Supplies $65 -65 + +65 = + + – New Balance 100 + 85 = 0 + 200 + 0 – © Dale R. Geiger 2011 Exp 15 15 42

Lacy’s Transactions • First day’s sales: $15 in cash and $20 in IOUs Transaction Description Balance Forward Cash + 100 + Other Assets = 85 = + Financial + Position 0 + 200 + Liab © Dale R. Geiger 2011 Rev – 0 – Exp 15 43

Lacy’s Transactions • First day’s sales: $15 in cash and $20 in IOUs Transaction Description Cash + Other Assets = Liab + Financial + Position Rev – Balance Forward 100 + 85 = 0 + 200 + 0 – Sales $15 cash and $20 IOUs +15 + +20 = + + +35 – New Balance 115 + 105 = 0 + 200 + 35 – © Dale R. Geiger 2011 Exp 15 15 44

Key Points • Each transaction must keep the equation in balance • Each transaction affects at least two accounts • Which accounts are being affected? • What type of accounts are they? (Asset, Liability, Financial Position, Revenue, Expense) • Are the accounts increasing or decreasing? © Dale R. Geiger 2011 46

Additional Transactions • Receives $5 cash toward the IOUs Transaction Description Balance Forward Cash + 115 + Other Assets = 105 = + Financial + Position 0 + 200 + Liab © Dale R. Geiger 2011 Rev – 35 – Exp 15 47

Additional Transactions • Receives $5 cash toward the IOUs Transaction Description Balance Forward Cash + Other Assets = Liab + Financial + Position Rev – 115 + 105 = 0 + 200 + 35 – Receives $5 toward IOUs +5 + -5 = + + - New Balance 120 + 100 = 0 + 200 + 35 - © Dale R. Geiger 2011 Exp 15 15 48

Additional Transactions • Opens a charge at the grocery store with a $50 limit • This has no effect on the equation because no exchange of resources has yet taken place © Dale R. Geiger 2011 49

Additional Transactions • Purchases $40 in supplies on account at the grocery store Transaction Description Balance Forward Cash + 120 + Other Assets = 100 = + Financial + Position 0 + 200 + Liab © Dale R. Geiger 2011 Rev – 35 - Exp 15 50

Additional Transactions • Purchases $40 in supplies on account at the grocery store Transaction Description Balance Forward Buy Supplies on Account $40 New Balance Cash + Other Assets = Liab + Financial + Position Rev – 120 + 100 = 0 + 200 + 35 - + +40 = +40 + + - 120 + 140 = 40 + 200 + 35 - © Dale R. Geiger 2011 Exp 15 15 51

Additional Transactions • Makes cash sales of $50 Transaction Description Balance Forward Cash + 120 + Other Assets = 140 = + Financial + Position 40 + 200 + Liab © Dale R. Geiger 2011 Rev – 35 - Exp 15 52

Additional Transactions • Makes cash sales of $50 Transaction Description Cash + Other Assets = Liab + Financial + Position Rev – Balance Forward 120 + 140 = 40 + 200 + 35 - Cash Sales $50 + = + + +50 - New Balance 170 + 140 = 40 + 200 + 85 - © Dale R. Geiger 2011 Exp 15 15 53

Additional Transactions • Pays the grocery bill in full Transaction Description Balance Forward Cash + 170 + Other Assets = 140 = + Financial + Position 40 + 200 + Liab © Dale R. Geiger 2011 Rev – 85 - Exp 15 54

Additional Transactions • Pays the grocery bill in full Transaction Description Cash + Other Assets = Liab + Financial + Position 200 + 85 - 15 Balance Forward 170 + 140 = 40 + Pays Grocery Bill -40 + = -40 + New Balance 130 + 140 = 0 + © Dale R. Geiger 2011 Rev – Exp 55

Learning Check • How does borrowing money from the bank to purchase equipment affect the accounting equation? • How does providing services on account affect the accounting equation? © Dale R. Geiger 2011 57

Transaction Worksheet Enter transaction data into the columns Balances will calculate automatically © Dale R. Geiger 2011 59